nep-cmp New Economics Papers
on Computational Economics
Issue of 2011‒01‒30
fourteen papers chosen by
Stan Miles
Thompson Rivers University

  1. One-node Quadrature Beats Monte Carlo: A Generalized Stochastic Simulation Algorithm By Kenneth Judd; Lilia Maliar; Serguei Maliar
  2. The Implementation of Scenarios using DSGE Models By Igor Vetlov; Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou; Lukas Reiss; Martin Schneider
  3. GPGPUs in computational finance: Massive parallel computing for American style options By Gilles Pag\`es; Benedikt Wilbertz
  4. Sensitivity analysis of the early exercise boundary for American style of Asian options By Daniel Sevcovic; Martin Takac
  5. The Distributional Effects of Value Added Tax in Ireland By Leahy, Eimear; Lyons, Seán; Tol, Richard S. J.
  6. On the Optimal Policy for the Single-product Inventory Problem with Set-up Cost and a Restricted Production Capacity By Wijngaard, J.; Foreest, N. D. van
  7. Hybrid Lateral Transshipments in a Multi-Location Inventory System By Glazebrook, K.; Paterson, Colin; Teunter, Ruud
  8. From IRAP to CBIT: tax distortions and redistributive effects By Manzo, Marco; Monteduro, Maria Teresa
  9. A unified theory of structural change By Chris Papageorgiou; Fidel Pérez Sebastián; María Dolores Guilló Fuentes
  10. Asymmetric Shocks, Long-term Bonds and Sovereign Default By Zhu, Junjun; Xie, Shiyu
  11. A note on the computation of Waring formula By Areski Cousin; Diana Dorobantu; Didier Rullière
  12. The Economic Transition and Growth of Philippine Regions By Mapa, Dennis S.; Sandoval, Monica Flerida B
  13. An Active Margin System and its Application in Chinese Margin Lending Market By Guanghui Huang; Jianping Wan; Cheng Chen
  14. The attractiveness of countries for FDI. A fuzzy approach By Marina Murat; Tommaso Pirotti

  1. By: Kenneth Judd; Lilia Maliar; Serguei Maliar
    Abstract: In conventional stochastic simulation algorithms, Monte Carlo integration and curve fitting are merged together and implemented by means of regression. We perform a decomposition of the solution error and show that regression does a good job in curve fitting but a poor job in integration, which leads to low accuracy of solutions. We propose a generalized notion of stochastic simulation approach in which integration and curve fitting are separated. We specifically allow for the use of deterministic (quadrature and monomial) integration methods which are more accurate than the conventional Monte Carlo method. We achieve accuracy of solutions that is orders of magnitude higher than that of the conventional stochastic simulation algorithms.
    JEL: C63
    Date: 2011–01
  2. By: Igor Vetlov (Bank of Lithuania); Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou (Central Bank of Cyprus); Lukas Reiss; Martin Schneider
    Abstract: The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the design of a broad range of scenarios and can tackle a large range of issues, while at the same time offering an appealing structural interpretation of the scenario specification and simulation results. This paper provides illustrations of some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, as well as treatment of monetary and fiscal policy rules.
    Keywords: Business fluctuations, monetary policy, fiscal policy, forecasting and simulation
    JEL: E32 E52 E62 E37
    Date: 2010–12
  3. By: Gilles Pag\`es (PMA); Benedikt Wilbertz (PMA)
    Abstract: The pricing of American style and multiple exercise options is a very challenging problem in mathematical finance. One usually employs a Least-Square Monte Carlo approach (Longstaff-Schwartz method) for the evaluation of conditional expectations which arise in the Backward Dynamic Programming principle for such optimal stopping or stochastic control problems in a Markovian framework. Unfortunately, these Least-Square Monte Carlo approaches are rather slow and allow, due to the dependency structure in the Backward Dynamic Programming principle, no parallel implementation; whether on the Monte Carlo levelnor on the time layer level of this problem. We therefore present in this paper a quantization method for the computation of the conditional expectations, that allows a straightforward parallelization on the Monte Carlo level. Moreover, we are able to develop for AR(1)-processes a further parallelization in the time domain, which makes use of faster memory structures and therefore maximizes parallel execution. Finally, we present numerical results for a CUDA implementation of this methods. It will turn out that such an implementation leads to an impressive speed-up compared to a serial CPU implementation.
    Date: 2011–01
  4. By: Daniel Sevcovic; Martin Takac
    Abstract: In this paper we analyze American style of floating strike Asian call options belonging to the class of financial derivatives whose payoff diagram depends not only on the underlying asset price but also on the path average of underlying asset prices over some predetermined time interval. The mathematical model for the option price leads to a free boundary problem for a parabolic partial differential equation. Applying fixed domain transformation and transformation of variables we develop an efficient numerical algorithm based on a solution to a non-local parabolic partial differential equation for the transformed variable representing the synthesized portfolio. For various types of averaging methods we investigate the dependence of the early exercise boundary on model parameters.
    Date: 2011–01
  5. By: Leahy, Eimear; Lyons, Seán; Tol, Richard S. J.
    Abstract: In this paper we examine the distributional effects of Value Added Tax (VAT) in Ireland. Using the 2004/2005 Household Budget Survey, we assess the amount of VAT that households pay as a proportion of weekly disposable income. We measure VAT payments by equivalised income decile, households of different composition and different household sizes. The current system is highly regressive. With the use of a micro-simulation model we also estimate the impact of changing the VAT rate on certain groups of items and the associated change in revenue. We also consider how the imposition of a flat rate across all goods and services would affect households in different categories. The Irish Government has recently announced that it proposes to increase the standard rate of VAT to 22% in 2013 and to 23% in 2014. We examine the distributional implications of such increases. The general pattern of results shows that those hardest hit are households in the first income decile, households in rural areas, 6 person households and households containing a single adult with children.
    Keywords: taxes/Ireland/Household budget/children
    Date: 2010–12
  6. By: Wijngaard, J.; Foreest, N. D. van (Groningen University)
    Abstract: The single-product, stationary inventory problem with set-up cost is one of the classical problems in stochastic operations research. Theories have been developed to cope with finite production capacity in periodic review systems, and it has been proved that optimal policies for these cases are not of the (modified) (s, S)-type in general, but more complex. In this paper we consider a production system such that the production rate is constrained, rather than the amount as is common in periodic review models. Thus, in our case the production rate is positive and finite when the system is on and zero when off, while a cost is incurred to switching on or off. We prove that a long-run optimal stationary policy exists for this single-item continuous review inventory problem with non-zero switching cost and finite production rate, and that this optimal policy has an (s,S)-structure. We also provide an efficient numerical procedure to compute the parameters of the optimal policy.
    Date: 2010
  7. By: Glazebrook, K.; Paterson, Colin; Teunter, Ruud (Groningen University)
    Abstract: In managing networks of stock holding locations, two approaches to the pooling of inventory have been proposed. Reactive transshipm nts respond to stockouts at a location by moving inventory from elsewhere within the network, while proactive redistribution of stock seeks to minimise the chance of future shocks. This paper is the first to propose a hybrid approach in which transshipments are viewed as an opportunity for stock redistribution. We adopt a quasi-myopic approach to the development of a strongly performing hybrid transshipment policy. Numerical studies which utilise dynamic programming and simulation testify to the benefits of using transshipments proactively. In comparison to a purely reactive approach to transshipment, service levels are improved while a reduction in safety stock levels is achieved. The aggregate costs incurred in managing the system are significantly reduced, especially so for large networks facing high levels of demand.
    Date: 2010
  8. By: Manzo, Marco; Monteduro, Maria Teresa
    Abstract: The paper explores the differences between IRAP (the Regional Tax on Productive Activities) and CBIT (the Comprehensive Business Income Tax), which approximately corresponds to allow the deduction of labor cost from the taxable base of IRAP. By developing a DSGE model that ncorporates business taxes, like IRAP or CBIT, we find that tax distortions due to IRAP are more contractionary than those caused by the presence of CBIT. Empirically, tax revenues and redistributive effects are more carefully analyzed. We implement a microsimulation model (MSM) based on a dataset of more than 150,000 incorporated firms. We show that small incorporated firms are particularly harmed by IRAP, especially when business run a loss instead of a profit. This is due to the fact that IRAP is a business tax on value added, which does not allow for the deduction of labor cost. For this purpose, we focus on the introduction of a reform based on the CBIT principle. Our result is that CBIT is particularly costly and more able to enhance the profitability for larger enterprises. Moreover, the tax design of CBIT is more regressive compared to the IRAP including tax allowances. Consequently, an efficiency-equity trade-off between IRAP and CBIT might be emphasized
    Keywords: business cycles; tax distortions; micro-simulations models; distributive effects; Italy.
    JEL: E62 E32 H25 H32
    Date: 2010–08
  9. By: Chris Papageorgiou (Louisiana State University); Fidel Pérez Sebastián (Universidad de Alicante); María Dolores Guilló Fuentes (Universidad de Alicante)
    Abstract: This paper uses dynamic general equilibrium and computational methods, inspired by the multi-sector growth model structure in Stephen Turnovsky’s previous and more recent work, to develop a theory that unifies two of the traditional explanations of structural change: sector-biased technical change and non-homothetic preferences. More specifically, we build a multisector overlapping generations growth model with endogenous technical-change and non-homothetic preferences based on an expanding-variety setup with two different R&D technologies; one for agriculture, and another for non-agriculture. Results give additional support to the biased technical-change hypothesis as an important determinant of the structural transformation. The paper also explores where this bias might come from. Our findings suggest that production-side specific factors, such as asymmetries in cross-sector knowledge spillovers could be behind it, and therefore be important to fully explain the process of structural change.
    Keywords: multi-sector growth model, structural change, agriculture and non-agriculture, R&D, directed innovation, hon-homothetic preferences.
    JEL: O13 O14 O41
    Date: 2010–01
  10. By: Zhu, Junjun; Xie, Shiyu
    Abstract: We present a sovereign default model with asymmetric shocks and long-term bonds, and solve the model using discrete state dynamic programming. As result, our model matches the Argentinean economy over period 1993Q1-2001Q4 quite well. We show that our model can match high default frequency, high debt/output ratio and other cyclical features, such as countercyclical interest rate and trade balance in emerging countries. Moreover, with asymmetric shocks we are able to match high sovereign spread level and low spread volatility simultaneously in one model, which is till now not well solved. As another contribution of our paper, we propose a simulation-based approach to approximate transition function of output shocks between finite states, which is an indispensable step in discrete state dynamic programming. Comparing to Tauchen’s method, our approach is very flexible in transforming various econometric models to finite state transition function, so that our approach can be widely used in simulating different kinds of discrete state shocks.
    Keywords: Sovereign Default; Asymmetric Shocks; Transition Function; Long-term Bonds
    JEL: F34 E44
    Date: 2011–01–18
  11. By: Areski Cousin (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Diana Dorobantu (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Didier Rullière (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: We present in this paper the Waring formula, which is used in several fields, like life-insurance or credit risk. We show that some problems can occur when using this formula, and propose alternative recursions in order to improve the complexity of the calculations, and to cope with the numerical instability of the formula.
    Date: 2011–01–19
  12. By: Mapa, Dennis S.; Sandoval, Monica Flerida B
    Abstract: The paper applies the economic transition models and econometric convergence tests proposed by Phillips and Sul (2006) using data on per capita Gross Regional Domestic Product (1988-2008) to determine if 14 Philippine regional economies converge to a steady state path over a period of time. The paper explores modeling and analyzing the economic transition behavior of the regions. Regional relative transition paths are investigated to generate a graphical overview of the behavior of the regional economies. The log t convergence test, which is constructed from a transition differential decay model, is used to establish if a region converges to a steady state path or diverges from a steady state path. The test basically provides the basis for a stepwise clustering algorithm in finding convergence clusters and analyzing transition behavior between clusters. The paper identifies convergence clubs and determines divergent regional economies using a recursive procedure that revolves around the log t convergence test.
    Keywords: log t convergence test; convergence clubs
    JEL: R58 R11
    Date: 2011–01
  13. By: Guanghui Huang; Jianping Wan; Cheng Chen
    Abstract: In order to protect brokers from customer defaults in a volatile market, an active margin system is proposed for the transactions of margin lending in China. The probability of negative return under the condition that collaterals are liquidated in a falling market is used to measure the risk associated with margin loans, and a recursive algorithm is proposed to calculate this probability under a Markov chain model. The optimal maintenance margin ratio can be given under the constraint of the proposed risk measurement for a specified amount of initial margin. An example of such a margin system is constructed and applied to $26,800$ margin loans of 134 stocks traded on the Shanghai Stock Exchange. The empirical results indicate that the proposed method is an operational method for brokers to set margin system with a clearly specified target of risk control.
    Date: 2011–01
  14. By: Marina Murat; Tommaso Pirotti
    Abstract: This paper presents a new method for measuring the attractiveness of countries for FDI. A ranking is built using a fuzzy expert system whereby the function producing the final evaluation is not necessarily linear and the weights of the variables, usually defined numerically, are replaced by linguistic rules. More precisely, weights derive from expert opinions and from econometric tests on the determinants of countries’ FDI. As a second step, the view-point of investors from two different investing economies, the UK and Italy, are taken into account. Country-specific factors, such as the geographic, cultural and institutional distances existing between the investing and the partner economies are included in the analysis. This shows how the base ranking changes with the investor’s perspective.
    Keywords: foreign direct investments; fuzzy expert systems; attractiveness
    JEL: C53 F17 F21
    Date: 2010–11

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