New Economics Papers
on Computational Economics
Issue of 2009‒07‒03
thirteen papers chosen by

  1. Economic Modeling Using Evolutionary Algorithms: The Effect of a Binary Encoding of Strategies By Waltman, L.R.; Eck, N.J.P. van; Dekker, R.; Kaymak, U.
  2. The number and size of nations revisited: Endogenous border formation with non-uniform population distributions By Radax, Wolfgang
  3. Advanced Monte Carlo methods for barrier and related exotic options By Emmanuel Gobet
  4. A fuzzy expert system for solving real-option decision processes By Carlo Alberto Magni
  5. a cross-entropy based multiagentapproach for multimodal activity chainmodeling and simulation By Tai-Yu Ma; Jean-Patrick Lebacque
  6. The Distributional Effects of Tax-benefit Policies under New Labour - A Shapley Decomposition By Olivier Bargain
  7. Predictability of equity models By Pereira, Pedro L. Valls
  8. Separation and Volatility of Locational Marginal Prices in Restructured Wholesale Power Markets By Li, Hongyan; Sun, Junjie; Tesfatsion, Leigh S.
  9. "Business Cycle Implications of Internal Consumption Habit for New Keynesian Models" By Takashi Kano; James M. Nason
  10. Mutual funds flows and the "Sheriff of Nottingham" effect By Lucia Milone; Paolo Pellizzari
  11. Behavior of Investors on a Multi-Asset Market By Steinbacher, Matjaz
  12. Coordination problems and the role of institutions: multi-agent simulations with learning By A. Arrighetti; S. Curatolo
  13. Smoking and Health Investments: Impacts of Health Adaptation and Damage Reversibility By Carbone, Jared; Kverndokk, Snorre; Røgeberg, Ole-Jørgen

  1. By: Waltman, L.R.; Eck, N.J.P. van; Dekker, R.; Kaymak, U. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We are concerned with evolutionary algorithms that are employed for economic modeling purposes. We focus in particular on evolutionary algorithms that use a binary encoding of strategies. These algorithms, commonly referred to as genetic algorithms, are popular in agent-based computational economics research. In many studies, however, there is no clear reason for the use of a binary encoding of strategies. We therefore examine to what extent the use of such an encoding may influence the results produced by an evolutionary algorithm. It turns out that the use of a binary encoding can have quite significant effects. Since these effects do not have a meaningful economic interpretation, they should be regarded as artifacts. Our findings indicate that in general the use of a binary encoding is undesirable. They also highlight the importance of employing evolutionary algorithms with a sensible economic interpretation.
    Keywords: agent-based computational economics;evolutionary algorithm;genetic algorithm;binary encoding;premature convergence
    Date: 2009–05–20
  2. By: Radax, Wolfgang
    Abstract: The endogenous border formation model of Alesina and Spolaore (1997) has received a lot of attention in the economics community. One of its central messages is that in a democratic world in equilibrium there is an ineciently large number of nation states. However, this result is obtained under very specic assumptions like a uniform population distribution and no population mobility. In this paper, I generalize the model of Alesina and Spolaore allowing for population distributions other than the uniform distribution. Since this generalization is accompanied by the loss of tractability in closed form, I calculate the equilibria by means of numerical computation. It turns out that the above-mentioned central result is highly sensitive to the choice of population distribution and that the model shows four different regimes depending on the chosen distribution. Furthermore, the behaviour implied by the Alesina and Spolaore model with uniform population distribution is the exception, not the rule.
    Keywords: Size of Nations; Endogenous Border Formation; Computational Economics
    JEL: F50 H40
    Date: 2009–06–17
  3. By: Emmanuel Gobet (LJK - Laboratoire Jean Kuntzmann - CNRS : UMR5224 - Université Joseph Fourier - Grenoble I - Université Pierre Mendès-France - Grenoble II - Institut Polytechnique de Grenoble)
    Abstract: In this work, we present advanced Monte Carlo techniques applied to the pricing of barrier options and other related exotic contracts. It covers in particular the Brownian bridge approaches, the barrier shifting techniques (BAST) and their extensions as well. We leverage the link between discrete and continuous monitoring to design efficient schemes, which can be applied to the Black-Scholes model but also to stochastic volatility or Merton's jump models. This is supported by theoretical results and numerical experiments.
    Date: 2009
  4. By: Carlo Alberto Magni
    Abstract: This paper presents a new approach to real options. The current options-based models have provided new insights into capital-budgeting decisions. Unfortunately they are not widely used by corporate managers and practitioners as they are formally complex, rather difficult to understand and rest on strong implicit assumptions that considerably limit their scope of application. We propose a possible alternative by using a fuzzy expert system, on the basis of Mastroleo, Facchinetti and Magni (2001). We draw up a decision tree with multiple uncertain variables affecting the value of an investment opportunity, consisting of a defer option, a growth option, an abandonment option. Some simulations are conducted to test the economic soundness of the model as well as its consistency with the current models in the literature. A rather refined study can be accomplished by showing how inputs and outputs of the model interrelate one another.
    Date: 2009–06–19
  5. By: Tai-Yu Ma (LET - Laboratoire d'économie des transports - CNRS : UMR5593 - Université Lumière - Lyon II - Ecole Nationale des Travaux Publics de l'Etat); Jean-Patrick Lebacque (Génie des Réseaux de Transport et Informatique Avancée - INRETS)
    Abstract: This paper suggests a dynamic activity chaining model and proposes an arc-based Cross Entropy (CE) approach to approximate activity-chain-based dynamic user equilibrium. A multiagent approach is proposed for complex activity chaining behavior modeling and simulation on a multimodal road network. Each agent is considered as a rational expected utility maximizing user aiming to, at each activity location, maximizing total expected utility gain for not yet implemented activities in his/her activity program. The complex activity-chain-based dynamical user equilibrium condition is formulated by applying dynamic programming approach. By applying the proposed arc-based CE approach, an approximate of activity-chain-based dynamic user equilibrium can be achieved.
    Keywords: activity-chaining model, multimodal transport system, Cross-Entropy approach, multi-agent system
    Date: 2009–06–15
  6. By: Olivier Bargain (University College Dublin)
    Abstract: Using counterfactual microsimulations, Shapley decompositions of time change in inequality and poverty indices make it possible to disentangle and quantify the relative effect of tax-benefit policy changes, compared to all other effects including shifts in the distribution of market income. Using this approach also helps to clarify the different issues underlying the distributional evaluation of policy reforms. An application to the UK (1998-2001) confirms previous findings that inequality and depth of poverty would have increased under the first New Labour government, had important reforms like the extensions of income support and tax credits not been implemented. These reforms have also contributed to substantially reduce poverty among families with children and pensioners.
    Keywords: Tax-benefit policy; inequality; poverty; Shapley decomposition; microsimulation
    JEL: H23 H53 I32
    Date: 2009–02–06
  7. By: Pereira, Pedro L. Valls
    Abstract: In this study, we verify the existence of predictability in the Brazilian equity market. Unlike other studies in the same sense, which evaluate original series for each stock, we evaluate synthetic series created on the basis of linear models of stocks. Following Burgess (1999), we use the “stepwise regression†model for the formation of models of each stock. We then use the variance ratio profile together with a Monte Carlo simulation for the selection of models with potential predictability. Unlike Burgess (1999), we carry out White’s Reality Check (2000) in order to verify the existence of positive returns for the period outside the sample. We use the strategies proposed by Sullivan, Timmermann & White (1999) and Hsu & Kuan (2005) amounting to 26,410 simulated strategies. Finally, using the bootstrap methodology, with 1,000 simulations, we find strong evidence of predictability in the models, including transaction costs.
    Date: 2009–01–27
  8. By: Li, Hongyan; Sun, Junjie; Tesfatsion, Leigh S.
    Abstract: This study uses an agent-based test bed ("AMES") to investigate separation and volatility of locational marginal prices (LMPs) in an ISO-managed restructured wholesale power market operating over an AC transmission grid. Particular attention is focused on the dynamic and cross-sectional response of LMPs to systematic changes in demand-bid price sensitivities and supply-offer price cap levels under varied learning specifications for the generation companies. Also explored is the extent to which the supply offers of the marginal (price-determining) generation companies induce correlations among neighboring LMPs. Related work can be accessed at: SMarketHome.htm
    Keywords: Restructured wholesale power markets, agent-based modeling, locational marginal prices (LMPs), LMP separation, LMP volatility, multi-agent learning, demand-bid price sensitivity, supply-offer price caps, AMES Wholesale Power Market Test Bed
    JEL: B4 C0 C6 D4 D43 L1 L13 L5 Q4
    Date: 2009–06–09
  9. By: Takashi Kano (Faculty of Economics, University of Tokyo); James M. Nason (Research Department, Federal Reserve Bank of Atlanta)
    Abstract: This paper studies the implications of internal consumption habit for propagation and monetary transmission in new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian methods are employed to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to the nominal rigidity, to the choice of monetary policy rule, to the frequencies used for evaluation, and to spectra identified by permanent productivity shocks.
    Date: 2009–06
  10. By: Lucia Milone (Department of Applied Mathematics, University of Venice); Paolo Pellizzari (Department of Applied Mathematics and SSAV, University of Venice)
    Abstract: Investors in mutual funds appear to reward disproportionately the best performing funds with large inflows while, at the same time, avoid to withdraw similar amounts from the poorly managed funds. We show that this peculiar flat-convex shape of the flow-performance curve for mutual funds can be generally explained by a model where profit chasing customers punish the bad funds by switching a fraction of their wealth to the best ones ("Sheriff of Nottingham" effect). In the absence of external flows, the model provably produces a constant curve when the standard deviation of excess returns is much larger than the level of the returns. This for the most part explains the apparent insensitivity of flows to below-average returns. The introduction of exogenous injections of money invested in the top funds completes the model and provides a realistic increase in the flows of the funds yielding above-average returns. We finally show by simulation that our results are robust to variations in the values of the parameters of the model.
    Keywords: Funds’flows, flow-performance curve, agent based models
    JEL: G11 G23 C63
    Date: 2009–06
  11. By: Steinbacher, Matjaz
    Abstract: This paper analyzes the field of investors’ decision-making on a multi-asset market. It does it through a simulation games on a social network framework. It has been demonstrated that more stocks there are in the game and more changing alternatives investors have available to choose from, tougher it is for them to make decisions. Despite in most simulations the safest alternative was dominant, many investors opt for portfolio of the safest and the riskiest stock, by which they back the risk they take with some safe stocks. Non-omniscient investors behave chaotically. In all the cases, liquidity agents proved to be decisive elements of the games, though not always able to deliver the information of all the alternatives when too many alternatives are available.
    Keywords: social networks; behavioral finance; portfolio analysis; multi-asset game; chaos
    JEL: G11 Z13 D83 C73
    Date: 2009–06
  12. By: A. Arrighetti; S. Curatolo
    Abstract: The paper develops an agent-based coordination game in which agents seek, try out and maintain coordination in the presence of positive search and coordination costs. Agents are perfectly rational in the sense that they optimise their individual payoff through coordination. They are moreover perfectly loyal, since they do not abandon coordination unless it becomes collectively impossible to maintain it and they share equally both the net advantage of coordination and the net loss of failure. Our findings appear to confirm that in context of ontological uncertainty, learning and coordination costs, cooperation often fails in terms of process and final outcome. The absence of opportunism thus do not ensure that agents will cooperate extensively. Moreover learning on one hand optimises search costs and makes the artificial world of the experiment more realistic. On the other hand, it leads agents to more prudent and conservative behaviour. Agents’ loyalty makes superfluous regulatory institutions preventing individual opportunism, but it gives them significant scope for intervention in context of coordination failure. As players involved in the game, rather than arbitrators or regulators, catalyst institutions accelerate coordination and induce cooperation equilibria higher than those single agents autonomously are able to reach.
    Date: 2009
  13. By: Carbone, Jared (Economics Department); Kverndokk, Snorre (Ragnar Frisch Centre for Economic Research); Røgeberg, Ole-Jørgen (Ragnar Frisch Centre for Economic Research)
    Abstract: In the present paper we examine how different sets of beliefs about the health effects of smoking would influence a rational smoker. By embedding the rational addiction theory in a Grossman model of health investment modified to take account of psychological adaptation effects, we present a model of a rational addict that allows us to explicitly specify beliefs about a direct and indirect effect on both death risk and utility. This allows us to study how a rational addict would smoke with different beliefs of cancer risks, and with or without the well-documented ability to adapt to health changes. Numerical simulation results illustrate a number of different incentives that influence the smoking paths and health investments under the various beliefs, and suggests that beliefs have different impacts at different ages, providing a richer set of dynamics than might initially be expected.
    Keywords: Rational addiction; Demand for health; Adaptation; Risk; Life extension
    JEL: C61 D91 I12
    Date: 2009–06–21

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