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on Computational Economics |
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Issue of 2005‒06‒14
23 papers chosen by |
| By: | Luca Grilli; Angelo Sfrecola |
| Abstract: | In this paper we consider financial time series from U.S. Fixed Income Market, S&P500, Exchange Market and Oil Market. It is well known that financial time series reveal some anomalies as regards the Efficient Market Hypotesis and some scaling behavior is evident such as fat tails and clustered volatility. This suggests to consider financial time serie as "pseudo"-random time series. For this kind of time series the power of prediction of neural networks has been shown to be appreciable. We first consider the financial time serie from the Minority Game point of view and than we apply a neural network with learning algorithm in order to analyze its prediction power. We show that Fixed Income Market presents many differences from other markets in terms of predictability as a measure of market efficiency. |
| Keywords: | Minority Game, Learning Algorithms, Neural Networks, Financial Time Series, Efficient Market Hypotesis |
| JEL: | C45 C70 C22 G14 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ufg:qdsems:14-2005&r=cmp |
| By: | Luca Grilli; Angelo Sfrecola |
| Abstract: | The Minority Game comes from the so-called "El Farol bar" problem by W.B. Arthur. The underlying idea is competition for limited resources and it can be applied to different fields such as: stock markets, alternative roads between two locations and in general problems in which the players in the "minority" win. Players in this game use a window of the global history for making their decisions, we propose a neural networks approach with learning algorithms in order to determine players strategies. We use three different algorithms to generate the sequence of minority decisions and consider the prediction power of the neural network associated to that algorithm. The case of sequences generated randomly is also studied. |
| Keywords: | Minority Game, Learning Algorithms, Neural Networks. |
| JEL: | C45 C70 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ufg:qdsems:13-2005&r=cmp |
| By: | Pavel Okunev (LBNL & UC Berkeley) |
| Abstract: | We propose a fast algorithm for computing the expected tranche loss in the Gaussian factor model. We test it on a 125 name portfolio with a single factor Gaussian model and show that the algorithm gives accurate results. We choose a 125 name portfolio for our tests because this is the size of the standard DJCDX.NA.HY portfolio. The algorithm proposed here is intended as an alternative to the much slower Moody's FT method. |
| Keywords: | Moody's Fourier Transform method, portfolio loss distribution, DJCDX, CDS portfolio, CDS, expected tranche loss |
| Date: | 2005–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpri:0506002&r=cmp |
| By: | Marco LiCalzi (Dept. of Applied Mathematics - University Ca' Foscari Venice); Paolo Pellizzari (Dept. of Applied Mathematics - University Ca' Foscari Venice) |
| Abstract: | This paper studies an order-driven stock market where agents have heterogeneous estimates of the fundamental value of the risky asset. The agents are budget-constrained and follow a value-based trading strategy which buys or sells depending on whether the price of the asset is below or above its risk-adjusted fundamental value. This environment generates returns that are remarkably leptokurtic and fat-tailed. By extending the study over a grid of different parameters for the fundamentalist trading strategy, we exhibit the existence of monotone relationships between the bid-ask spread demanded by the agents and several statistics of the returns. We conjecture that this effect, coupled with positive dependence of the risk premium on the volatility, generates positive feedbacks that might explain volatility bursts. |
| Keywords: | price dynamics, statistical properties of returns, market microstructure, agent-based simulations |
| JEL: | C8 |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpco:0506001&r=cmp |
| By: | Farmer, Roger E A |
| Abstract: | Most dynamic stochastic general equilibrium models (DSGE) of the macroeconomy assume that labour is traded in a spot market. Two exceptions (Andolfatto [3], Merz [11]) combine the two-sided search model of Mortenson and Pissarides, [14], [13], [15] with a one-sector real business cycle model. These hybrid models are successful, in some dimensions, but they cannot account for observed volatility in unemployment and vacancies. Following a suggestion by Hall, [4] [5], building on work by Shimer [18], this Paper shows that a relatively standard DSGE model with sticky wages can account for these facts. Using a second-order approximation to the policy function I simulate moments of an artificial economy with and without sticky wages. I compute the welfare costs of the sticky wage equilibrium and find them to be small. |
| JEL: | E24 E32 J63 J64 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4825&r=cmp |
| By: | Ivaldi, Marc; Vibes, Catherine |
| Abstract: | The objective of the paper is to elaborate a simulation model to analyse inter and intra-modal competition in the transport industry, based on game theory models. In our setting, consumers choose a transport mode and an operator to travel on a given city-pair; operators strategically decide on prices for the types of service they provide. We derive the market equilibrium and simulate potential scenarios. In particular we measure the impact of entry by a low cost train operator and the effect of a kerosene tax. Hence our framework could serve as a tool to measure the effectiveness of competition on a relevant market or to design marketing strategies. More generally it can be applied in cases of oligopolistic competition when detailed data are not available. |
| Keywords: | product differentiation; relevant transport market; simulation model |
| JEL: | C35 C81 L11 L13 L92 L93 L98 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5004&r=cmp |
| By: | Christopher D. Carroll |
| Abstract: | This paper introduces a method for solving numerical dynamic stochastic optimization problems that avoids rootfinding operations. The idea is applicable to many microeconomic and macroeconomic problems, including life cycle, buffer-stock, and stochastic growth problems. Software is provided. |
| JEL: | C6 D9 E2 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberte:0309&r=cmp |
| By: | Desmet, Raphael; Jousten, Alain; Perelman, Sergio |
| Abstract: | The pool of early retirees is characterized by a large heterogeneity along several criteria. The present paper focuses on the key distinction between those in forced early retirement and those who retire early by individual choice. We start by estimating a retirement probit model for older workers in Belgium. Based on these estimates, we then perform micro-simulations relating to a hypothetical actuarial reform of a pension system, i.e., a reform imposing on average actuarial neutrality with respect to the time of retirement. We explore two scenarios, one where the entire population is subjected to the actuarial system, and one where a duly screened sub-sample of the unemployed is shielded against these actuarial adjustment factors, a group we call the truly unemployed. We evaluate the impact on the average retirement age, the pension budgets as well as indicators of redistribution within the group of the elderly. We find that the extra budgetary gain of exposing this subgroup to the full-blown reform is modest, while the distributional cost is rather high. Our results thus comfort the idea that the budgetary cost of a focused unemployment system are moderate, and that returning the unemployment insurance to its primary role might be a desirable strategy. |
| Keywords: | inequality; older worker; retirement |
| JEL: | H31 I30 J14 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5077&r=cmp |
| By: | Manjira Datta (W. P. Carey School of Business Department of Economics); Leonard Mirman (University of Virginia); Olivier Morand (University of Connecticut); Kevin Reffett (W. P. Carey School of Business Department of Economics) |
| Abstract: | <P>This paper uses lattice programming methods along with the extension of Tarski's fixed point theorem due to Veinott (1992) and Zhou (1994) to establish sufficient conditions for existence of sequential symmetric Markov equilibrium in a large class of dynamic games. Our method is constructive and we provide specific algorithms for computing equilibrium. These results are applied to the classic fishwar game in the context of a finite horizon. JEL Classification: C62, C63, C73, D90 |
| URL: | http://d.repec.org/n?u=RePEc:asu:wpaper:2179545&r=cmp |
| By: | Keith Coble (Mississippi State Department of Agricultural Economics); Robert Dismukes (U.S. Department of Agriculture); Joseph Glauber (U.S. Department of Agriculture) |
| Abstract: | This research investigates the strategic behavior of private crop insurance firms reinsured by the USDA through the Standard Reinsurance Agreement. This arrangement allows the private firm to strategically allocate individual policies into different risk sharing arrangements. Thus, firm earnings are conditioned upon accurately forecasting policy loss experience. Our analysis begins with models investigating the characteristics explaining the placement of policies into the assigned risk fund. Then a simulation model of the SRA is used to compare the post-SRA returns of actual firm allocations to two alternative allocation strategies based on aggregate models and a policy-level econometric forecasting model. |
| Keywords: | Risk, insurance, reinsurance, logit, policy |
| JEL: | Q18 |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpri:0506003&r=cmp |
| By: | Radim Bohacek; Michal Kejak |
| Abstract: | In this paper we develop a general methodology for solving models with heterogeneous agents by projection methods. Our approach is solely based on the functional forms of agents’ optimal policy rules and on a functional condition on the endogenous stationary distribution. Solving simultaneously the optimal policy rules and the distribution, this paper provides a new methodology for computing equilibria in which the distribution of wealth and income is a part of a social planner’s optimization problem. We do not impose any additional restrictions or assumptions on the equilibrium allocations. Compared to other computational methods, it does not suffer from the curse of dimensionality and provides an efficient tool for computing models of economies with a continuum of heterogeneous agents with several endogenous and exogenous state variables. We illustrate the algorithm on a standard model with uninsurable idiosyncratic risk from labor income. The approximate solution is highly accurate, especially for the distribution function. This method can be used to compute equilibria in economies with heterogeneous agents in which the distribution of wealth and income is a part of a government’s optimization problem. |
| JEL: | C61 C68 D30 D58 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp258&r=cmp |
| By: | Laroque, Guy; Salanié, Bernard |
| Abstract: | We attempt here to evaluate the sensitivity of fertility to financial incentives in France. We discuss and implement several estimation strategies; our main focus is on a structural model of female participation and fertility based on a microsimulation model of the tax-benefit system. We estimate this model on individual data from the Labor Force Survey. Our results suggest that financial incentives play a sizable role in determining fertility decisions in France. |
| Keywords: | benefits; fertility; incentives; population |
| JEL: | H53 J13 J22 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5007&r=cmp |
| By: | Fershtman, Chaim; Pakes, Ariel |
| Abstract: | We present a framework for the applied analysis of dynamic games with asymmetric information. The framework consists of a definition of equilibrium, and an algorithm to compute it. Our definition of Applied Markov Perfect equilibrium is an extension of the definition of Markov Perfect equilibrium for games with asymmetric information; an extension chosen for its usefulness to applied research. Each agent conditions its strategy on the payoff or informationally relevant variables that are observed by that particular agent. The strategies are optimal given the beliefs on the evolution of these observed variables, and the rules governing the evolution of the observables are consistent with the equilibrium strategies. We then provide a simple algorithm for computing this equilibrium. The algorithm is easy to program and does not require computation of posterior distributions, explicit integration over possible future states, or information from all possible points in the state space. For specificity, we present our results in the context of a dynamic oligopoly game with collusion in which the outcome of firms’ investments are random and only observed by the investing agent. We then use this example to illustrate the computational properties of the algorithm. |
| Keywords: | cartels; collusive behaviour; dynamic games; numerical analysis |
| JEL: | C63 C73 L13 L40 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5024&r=cmp |
| By: | Bovenberg, A Lans; Jacobs, Bas |
| Abstract: | This paper analyzes optimal linear taxes on capital and labour incomes in a life-cycle model of human capital investment, financial savings, and labour supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labour income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labour tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labour income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labour income. |
| Keywords: | capital income taxation; education subsidies; human capital; labour income taxation; life cycle |
| JEL: | H2 H5 I2 J2 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5047&r=cmp |
| By: | Rose, Andrew K; Spiegel, Mark |
| Abstract: | This paper analyses the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behaviour in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbours, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth. |
| Keywords: | asset; competitive; cross-section; data; empirical; haven; money; tax; theory |
| JEL: | F23 F36 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5081&r=cmp |
| By: | Ben R. Craig; Guillaume Rocheteau |
| Abstract: | This paper investigates the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which price stability is optimal and a condition under which positive inflation is desirable. We relate these conditions to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for all our numerical examples. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0504&r=cmp |
| By: | Michael Rosholm (University of Aarhus, AKF and IZA Bonn); Ott Toomet (University of Aarhus and AKF) |
| Abstract: | Discouragement is a process occurring during an unemployment spell. As the spell prolongs, an individual gradually realises that the returns to search can no longer outweigh search costs, and hence she may eventually leave the labour force. This is analysed theoretically in a framework of unemployed search. We construct a search model, which is stationary from the point of view of the individual, but which has nonstationary features. Namely, the unemployed worker is occasionally hit by shocks leading to a decline in job offer arrival rates. These shocks can be due to stigmatisation or to psychological consequences of unemployement affecting search effectiveness. This model enables us to analyse the issue of discouragement, as the returns to search will gradually decline. Even so, the model is actually stationary from the point of view of the individual, which implies that many interesting theoretical results may be derived. Moreover, from the point of view of the researcher, the model exhibits negative duration dependence in the hazard rate into employment and positive duration dependence in the hazard rate into non-participation, features which correspond well to real data. We use the model to analyse theoretically the impact of changes in unemployment insurance and social assistance benefits, and we conduct some simulation exercises based on a calibrated model. |
| Keywords: | labour supply, search theory, discouragement |
| JEL: | J21 J64 J65 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1633&r=cmp |
| By: | Dennis Fredriksen, Kim Massey Heide, Erling Holmøy and Ingeborg Foldøy Solli (Statistics Norway) |
| Abstract: | Ageing combined with generous welfare state schemes makes the present fiscal policy in Norway unsustainable, despite large government petroleum revenues. We estimate to what extent two suggested reforms of the public pension system improve fiscal sustainability and stimulate employment, two main objectives of the reforms. To this end we apply two large models iteratively: 1) a detailed dynamic micro simulation model to estimate government pension expenditures; 2) a large CGE-model to estimate general equilibrium effects on all tax bases and employment, i.e. macroeconomic effects. We find that the reform proposals have much larger effects than typically found for reforms of the tax and trade policy. Whereas maintaining the present system implies that the payroll tax rate must be increased from about 13 percent today to 25 percent in 2050, both proposals imply that taxes can be reduced from the present level in all years up to 2050. Most of this reduction can be attributed to higher employment. |
| Keywords: | Population ageing; Fiscal sustainability; Pension reforms; Computable general equilibrium model; Dynamic micro simulation |
| JEL: | H30 H55 H62 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:417&r=cmp |
| By: | Dennis Fredriksen and Nils Martin Stølen (Statistics Norway) |
| Abstract: | A much higher old-age dependency ratio together with more generous pension benefits will lead to a substantial increase in the future pension burden in Norway. The challenges of financing the increasing pension expenditures depend on the development in demographic characteristics like fertility, mortality and immigration, as well as characteristics affecting supply of labour, like education, disability, retirement age, participation rates and part time work (especially for women), and the design of the pension system. By use of a dynamic micro simulation model the paper analyses and projects how these factors will affect the expenditures and financing of the Norwegian National Insurance Scheme. The model also allows analyses of distributional effects of pension reforms. |
| Keywords: | Social security; pension expenditures; demographic forecasts; retirement |
| JEL: | H53 H55 J11 J14 J26 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:418&r=cmp |
| By: | Véronique Bessière (CREGO - Université Montpellier 2); Michael Kaestner (GESEM - Université Montpellier 1) |
| Abstract: | Cet article présente une méthodologie d’évaluation des licences UMTS en utilisant un modèle d’options réelles. L’acquisition d’une licence est perçue comme donnant droit à entreprendre les investissements d’infrastructure du réseau, que la firme peut différer dans le temps. La valeur de la licence correspond alors à l’option d’investissement. Les investissements sont supposés réalisés en une fois, et les cash-flows futurs qui en résultent sont incertains. L’incertitude sur les cash- flows peut inciter la firme à attendre avant de réaliser l’investissement, même si la VAN espérée est positive. Nous déterminons la valeur de la licence UMTS et spécifions le seuil de cash-flows pour lequel la VAN dévient égale à la valeur de l’option et auquel il devient optimal de réaliser l’investissement. Nous discutons l’impact des différents paramètres (volatilité et taux de croissance des cash-flows, coût de l’investissement, …) sur la décision d’investissement. Abstract: This article describes a methodology for evaluating UMTS licenses using a real options approach. The acquisition of the license is viewed as the right to undertake the infrastructure investments that the firm can defer. The value of this license equals the value of the investment opportunity. The investment is assumed to be instantaneous and the cash flows associated with the investment are uncertain. This uncertainty of future cash flows might make it attractive to wait before investing even if the expected NPV is positive. The solution specifies the cash flow threshold, where NPV equals the option value and when it the investment should be undertaken. We simulate the impact of different variables (volatility, expected growth rate of cash flows, investment cost, ...) on the investment rule. |
| Keywords: | UMTS, real options, simulation |
| JEL: | G |
| Date: | 2005–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506001&r=cmp |
| By: | Millan L. B. Mulraine (University of Toronto) |
| Abstract: | This paper re-examines the behavioral responses of key macroeconomic variables in Canada to exogenous shocks to the relative price of investment goods. It does so by developing a stylized two-sector real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can qualitatively and quantitatively replicate the dynamic features of the Canadian economy, and thus shocks to investment-specific technology can be considered an important propagation mechanism for studying and understanding modern macroeconomic dynamics in small open economies. |
| Keywords: | Endogenous rate of time preference, International real business cycle, Investment-specific shocks, Relative price of investment goods, Small open economy |
| JEL: | E32 E37 F41 |
| Date: | 2005–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506009&r=cmp |
| By: | Alessandro Ragazzoni (Alma Mater Studiorum-Università di Bologna); Maurizio Canavari (Alma Mater Studiorum-Università di Bologna) |
| Abstract: | This paper is concerned with analyzing the CAP policies involving environmental issues and simulating probable results at a farm level of the adoption of agri-environmental measures. |
| JEL: | P Q Z |
| Date: | 2005–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506001&r=cmp |
| By: | Eduardo L. Gimenez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.); Jose M. Martin-Moreno (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) |
| Abstract: | This paper examines the consequences of introducing a cash-in-advance constraint in a small open economy business cycle model for the Spanish economy. A business cycle model is built extending Correia, Neves and Rebelo (1995) small open economy framework and Cooley and Hansen (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparation with Spanish data shows that the model is able to mimic the real dimension of the business cycle. In particular the high volatility of compsumtion for the Spanish economy is greatly reproduced. Some features of the nominal dimension are also reproduced. As a negative result the high correlation between money and output, and labor market relations are not reproduced. |
| Keywords: | Business Cycle, Cash-in-Advance Constraint, Small Open Economy |
| URL: | http://d.repec.org/n?u=RePEc:edg:anecon:0012&r=cmp |