New Economics Papers
on Computational Economics
Issue of 2011‒04‒09
fifteen papers chosen by

  1. Solution Software for CGE Modeling By Mark Horridge; Ken Pearson
  2. The Distributional Effects of the Hilmer Reforms on the Australian Gas Industry By George Verikios; Xiao-guang Zhang
  3. Expected Improvement in Efficient Global Optimization Through Bootstrapped Kriging - Replaces CentER DP 2010-62 By Kleijnen, Jack P.C.; Beers, W.C.M. van; Nieuwenhuyse, I. van
  4. Model Simulations for Trade Policy Analysis: the impact of potential trade agreements on Austria By Joseph Francois; Olga Pindyuk
  5. Towards Autonomic Market Management in Cloud Computing Infrastructures By Ivan Breskovic; Michael Maurer; Vincent C. Emeakaroha; Ivona Brandic; Jorn Altmann
  6. Dynamic efficiency of Extended Producer Responsibility (EPR) instruments in a simulation model of industrial dynamics By Eric BROUILLAT (GREThA, CNRS, UMR 5113); Vanessa OLTRA (GREThA, CNRS, UMR 5113)
  7. Multidimensional Quasi-Monte Carlo Malliavin Greeks By Nicola Cufaro Petroni; Piergiacomo Sabino
  8. A reduced basis for option pricing By Rama Cont; Nicolas Lantos; Olivier Pironneau
  9. Austrian Linkages to the European Economy and the Transmission Mechanisms of Economic Crisis By Joseph Francois; Mario Holzner; Olga Pindyuk
  10. Optimal Capital Structure for Finite Cash Flows By Ignacio Vélez Pareja; Felipe Mejia-Pelaez; James W. Kolari
  11. Spin models as microfoundation of macroscopic financial market models By Sebastian M. Krause; Stefan Bornholdt
  12. Simulating Heterogeneous Multinational Firms By Shawn ARITA; TANAKA Kiyoyasu
  13. The Effect of Divestitures in the German Electricity Market By Weigt, H.; Willems, Bert
  14. Arbitrage opportunities between NYSE and XETRA?: A comparison of simulation and high frequency data By Jörg Rieger; Kirsten Rüchardt; Bodo Vogt
  15. Modelling cognitive skills, ability and school quality to explain labour market earnings differentials By Cobus Burger; Servaas van der Berg

  1. By: Mark Horridge; Ken Pearson
    Abstract: We describe the progress of computable general equilibrium (CGE) modeling software since the 1980s and contrast the main systems used today: GAMS, MPSGE, and GEMPACK. The development of these general-purpose modeling systems has underpinned rapid growth in the use of CGE models and allowed models to be shared and their results replicated. We show how a very simple model may be implemented and solved in all 3 systems. We note that they produce the same numerical results but have different strengths. We conclude by considering some challenges for the future
    Keywords: CGE, software, GAMS, GEMPACK, MPSGE
    JEL: C63 C68 D58
    Date: 2011–03
  2. By: George Verikios; Xiao-guang Zhang
    Abstract: We analyse changes in the Australian gas industry during 1990s that were driven by the Hilmer Reforms. We estimate the direct and indirect effects on household income of these gas industry changes by combining a computable general equilibrium model with a microsimulation model in a two-stage simulation procedure. The changes lead to minor effects on household income in all regions due to the unimportance of the gas industry at that time. Some regions benefit from the changes and some lose. Income inequality is only slightly affected by the changes.
    Keywords: computable general equilibrium, gas, household income distribution, microeconomic reform, microsimulation
    JEL: C68 C69 L94 D31
    Date: 2011–01
  3. By: Kleijnen, Jack P.C.; Beers, W.C.M. van; Nieuwenhuyse, I. van (Tilburg University, Center for Economic Research)
    Abstract: This article uses a sequentialized experimental design to select simulation input com- binations for global optimization, based on Kriging (also called Gaussian process or spatial correlation modeling); this Kriging is used to analyze the input/output data of the simulation model (computer code). This design and analysis adapt the clas- sic "expected improvement" (EI) in "efficient global optimization" (EGO) through the introduction of an unbiased estimator of the Kriging predictor variance; this estimator uses parametric bootstrapping. Classic EI and bootstrapped EI are com- pared through various test functions, including the six-hump camel-back and several Hartmann functions. These empirical results demonstrate that in some applications bootstrapped EI finds the global optimum faster than classic EI does; in general, however, the classic EI may be considered to be a robust global optimizer.
    Keywords: Simulation;Optimization;Kriging;Bootstrap.
    JEL: C0 C1 C9 C15 C44 C61
    Date: 2011
  4. By: Joseph Francois; Olga Pindyuk
    Abstract: In this paper, we examine possible medium-term changes in EU trade policy, including the negotiation and implementation of Free Trade Agreements (FTAs) with regional entities like ASEAN and the NAFTA countries. We also examine the possible conclusion of the Doha Round of multilateral trade negotiations. Such changes in policy at the regional and global level imply changes in trade policy and industrial structure that affect Austria as part of the network of European industry. To accomplish this, we work with a computable general equilibrium model (CGE) of the Austrian economy and its major global trading partners. This model is benchmarked to 2020 macroeconomic projections. The modeling scenarios are based on a mix of tariff reductions for goods and non-tariff barriers (NTB) reductions for services. The services liberalization scenario is based on protection with an “actionability” assumption. The results include estimated changes in GDP, welfare, as well as in the value added contained in Austrian exports. The focus on value added provides important insight to the overall impact on the Austrian economy. In all policy cases examined, the striking messages is the importance of high technology services (ICT and other business services) to the total growth in Austrian exports, on a value added basis. This reflects both the high value added content of trade in this sector, and the apparent comparative advantage of Austria in this sector in the 2020 baseline.
    Keywords: trade agreements, ASEAN, NAFTA, Doha Round, Austria, CGE
    JEL: F15 F17 C68
    Date: 2011–04
  5. By: Ivan Breskovic; Michael Maurer; Vincent C. Emeakaroha; Ivona Brandic (Information Systems Institute, Vienna University of Technology); Jorn Altmann (Technology Management, Economics, and Policy Program (TEMEP), Seoul National University)
    Abstract: Cloud computing markets face challenges, such as a large variety of different resource types in the market. A large variety of resource types results in a low number of matches of ask and bids. Consequently, the market has a low liquidity, which is economically inefficient and can lead to market failure. To counteract this problem, SLA templates (i.e., templates for electronic contracts) have been introduced. However, until now, SLA templates were static, not able to reflect changes in users’ requirements. In this paper, we apply the adaptive SLA mapping approach for deriving public SLA templates from private SLA templates of users. To achieve the adaptation of SLA templates, we combine clustering algorithms with adaptation methods. The result is a set of new public SLA templates, which reflect the market situation more accurately. This way, we enable marketplaces to automatically adapt to observed changes of market conditions. For the simulation-based evaluation of our approach, we formalize a utility and cost model, calculate the overall net utility, and assess the scalability of the approach. Our results show that the use of clustering algorithms can significantly improve the performance of the adaptive SLA mapping approach.
    Keywords: Service Level Agreement, SLA management, electronic markets, autonomic computing.
    JEL: C02 C15 C61 C63 C80 C88 D86 L14 L15 L86 M21
    Date: 2011–04
  6. By: Eric BROUILLAT (GREThA, CNRS, UMR 5113); Vanessa OLTRA (GREThA, CNRS, UMR 5113)
    Abstract: This paper presents an original approach to the impact of extended producer responsibility instruments for waste prevention upon firms\' innovative strategies and market structure. Our analysis is based on a stylised framework of waste prevention developed in Brouillat (2009a, b). In this framework, products are modelled as multi-characteristic technologies whose evolution depends on firms\' innovation strategies and on the interactions with consumers and post-consumption activities (recycling). This model has been adapted to explore the impact of waste prevention instruments upon industrial dynamics, and more particularly upon firms\' innovative strategies and upon the evolution of products\' characteristics and market structure. We focus on two types of policy instruments: recycling fees and norms. For each instrument, we will consider different policy designs in order to study their effects on industrial dynamics. The main contribution of this paper is to show how this type of simulation model can be used to explore the impact of waste prevention policy instruments on the technological evolution of products, on innovation strategy and on the evolution of firms\' market shares. The introduction of policy instruments in a simulation agent-based model of industrial dynamics enables us to analyse more thoroughly how different policy designs can modify the dynamics of the system and, more particularly, how the incentives and the constraints linked to the policy instruments under consideration shape market selection.
    Keywords: waste prevention; industrial dynamics; environmental policy; simulation model; extended producer responsibility
    JEL: O33 D21 Q53
    Date: 2011
  7. By: Nicola Cufaro Petroni; Piergiacomo Sabino
    Abstract: We investigate the use of Malliavin calculus in order to calculate the Greeks of multidimensional complex path-dependent options by simulation. For this purpose, we extend the formulas employed by Montero and Kohatsu-Higa to the multidimensional case. The multidimensional setting shows the convenience of the Malliavin Calculus approach over different techniques that have been previously proposed. Indeed, these techniques may be computationally expensive and do not provide flexibility for variance reduction. In contrast, the Malliavin approach exhibits a higher flexibility by providing a class of functions that return the same expected value (the Greek) with different accuracies. This versatility for variance reduction is not possible without the use of the generalized integral by part formula of Malliavin Calculus. In the multidimensional context, we find convenient formulas that permit to improve the localization technique, introduced in Fourni\'e et al and reduce both the computational cost and the variance. Moreover, we show that the parameters employed for variance reduction can be obtained \textit{on the flight} in the simulation. We illustrate the efficiency of the proposed procedures, coupled with the enhanced version of Quasi-Monte Carlo simulations as discussed in Sabino, for the numerical estimation of the Deltas of call, digital Asian-style and Exotic basket options with a fixed and a floating strike price in a multidimensional Black-Scholes market.
    Date: 2011–03
  8. By: Rama Cont (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII); Nicolas Lantos (LJLL - Laboratoire Jacques-Louis Lions - CNRS : UMR7598 - Université Pierre et Marie Curie - Paris VI); Olivier Pironneau (LJLL - Laboratoire Jacques-Louis Lions - CNRS : UMR7598 - Université Pierre et Marie Curie - Paris VI)
    Abstract: We introduce a reduced basis method for the efficient numerical solution of partial integro-differential equations which arise in option pricing theory. Our method uses a basis of functions constructed from a sequence of Black-Scholes solutions with different volatilities. We show that this choice of basis leads to a sparse representation of option pricing functions, yielding an approximation whose precision is exponential in the number of basis functions. A Galerkin method using this basis for solving the pricing PDE is presented. Numerical tests based on the CEV diffusion model and the Merton jump diffusion model show that the method has better numerical performance relative to commonly used finite-difference and finite-element methods. We also compare our method with a numerical Proper Orthogonal Decomposition (POD). Finally, we show that this approach may be used advantageously for the calibration of local volatility functions.
    Date: 2011–03–21
  9. By: Joseph Francois; Mario Holzner; Olga Pindyuk
    Abstract: Like most of the global economy, Austria suffered from recession in 2008-2009. In this paper we deconstruct the pattern of recession, and the transmission of the global recession to Austria’s economy. We provide a new a new breakdown of the value added in Austrian exports, tracing both upstream and downstream linkages and their role in the recession. We also employ a multi-region computable general equilibrium (CGE) model, focused on Austria and its major trading partners. We estimate the combined impacts of the crisis, as implemented through stylized shocks to investment and household demand across major trading partners. These are based on the actual global demand shocks that occurred in 2008-2009. As we are focused on recession, we work with a short-run version of the model, where labor markers are modeled with unemployment and sticky wages, and where industry structure (number of varieties and allocation of capital stock across industries) is fixed. We introduce demand shocks (changes) to global investment demand calibrated from actual investment demand changes during the recession. We also calibrate output shocks based on actual changes in GDP in this period. The focus on backward and forward linkages provides new insight into the transmission channels for focused demand shocks at the border into more diffuse shocks within the broader Austrian economy. While the drop in global demand during the recent recession was focused on sectors producing heavy investment goods, the actual pressure this placed on the Austrian economy also hinged on the linkages of these sectors to other elements of the Austrian economy.
    Keywords: economic crisis, transmission mechanisms, Austria, Europe, CGE
    JEL: F14 F47 C68
    Date: 2011–04
  10. By: Ignacio Vélez Pareja; Felipe Mejia-Pelaez; James W. Kolari
    Abstract: This paper shows how to proceed to find the optimal capital structure and value with period-to-period constant and variable leverage, when the discount rate for tax shields is Ke, the cost of levered equity. Numerical procedures and recursive closed-form non-circular expressions for the finite-period and perpetuity cases are presented, which facilitate any kind of implementation including Montecarlo simulations.
    Date: 2011–03–30
  11. By: Sebastian M. Krause; Stefan Bornholdt
    Abstract: Macroscopic price evolution models are commonly used for investment strategies. There are first promising achievements in defining microscopic agent based models for the same purpose. Microscopic models allow a deeper understanding of mechanisms in the market than the purely phenomenological macroscopic models, and thus bear the chance for better models for market regulation. We exemplify this strategy in a case study, deducing a macroscopic Langevin equation from a microscopic spin market model closely related to the Ising model. The interplay of the microscopic and the macroscopic view allows for a better understanding of the microscopic model, as well, and may guide the construction of agent based market models as basis of macroscopic price models.
    Date: 2011–03
  12. By: Shawn ARITA; TANAKA Kiyoyasu
    Abstract: This paper develops a micro-simulation framework for multinational entry and sales activities across countries. The model is based on Eaton, Kortum, and Kramarz's (2010) quantitative trade model adapted towards multinational production. Using micro data on Japanese manufacturing firms, we illustrate the empirical regularities of multinational entry and sales activity and estimate the model's structural parameters with simulated method of moments. We demonstrate that our adapted model is able to replicate important dimensions of the in-sample moments conditioned in our estimation strategy and does a reasonable job in external model validation tests. We can replicate activity under an economic period with a far different level of FDI barriers than was conditioned upon in our estimation sample. Overall, we demonstrate the richness of the simulation framework as a quantitative tool for FDI policy analysis.
    Date: 2011–03
  13. By: Weigt, H.; Willems, Bert (Tilburg University, Center for Economic Research)
    Abstract: In the most liberalized electricity markets, abuse of market power is a concern related to oligopolistic market structures, flaws in market architecture, and the specific characteristics of electricity generation and demand. Several methods have been suggested to improve the competitiveness of the liberalized electricity markets and to reallocate rents from generators to consumers. In this paper we study to what extend divestitures can improve the competitiveness of the electricity market. We quantify the expected developments under different divestiture scenarios for the German market, using Cournot and Supply Function Equilibrium simulations. We find an overall welfare gain in both models and show that those gains are highest if the divested assets are sold to independent and small firms, preventing the formation of additional firms that set prices strategically.
    Keywords: Supply Function Equilibrium;Cournot competition;electricity markets;divestitures.
    JEL: L L13 C72 D43
    Date: 2011
  14. By: Jörg Rieger (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Kirsten Rüchardt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This paper investigates both the no-arbitrage condition and the efficiency of financial markets by comparing two stock markets: the New York Stock Exchange (NYSE) and the German Exchange Electronic Trading System (XETRA). We analyze German stocks that are traded simultaneously at both exchanges using high frequency data for XETRA, the NYSE, and the foreign exchange rates. Converting Euro-prices into Dollar-prices reveals possibilities to explore the efficiency as well as arbitrage opportunities of these two stock markets using the phenomenon of stock price clustering. We see the result of differing extents of clustering on both exchanges, thus violating the no-arbitrage condition. We propose a trading strategy that exploits these differences. Furthermore, we compare our empirical findings with the results we obtain from simulating financial markets and conclude that simulations based on the no-arbitrage condition are not consistent with our empirical observations.
    Keywords: financial markets, simulation, no-arbitrage condition, stochastic processes
    JEL: C00 D40 G12
    Date: 2011–03
  15. By: Cobus Burger (Department of Economics, University of Stellenbosch); Servaas van der Berg (Department of Economics, University of Stellenbosch)
    Abstract: Attempts to explain wage differences between race groups in South Africa are constrained by the fact that quality of education is known to differ greatly between groups, thus the unexplained portion of the wage gap may be much affected by such differences in education quality. Using a simulation model that utilises school-leaving (matric) examination results and educational attainment levels to generate estimates of education quality, we find that much of the wage gap can indeed be explained by differences in education quality. Thus the unexplained residual, often identified with labour market discrimination, usually greatly over-estimates such discrimination. This emphasises even more strongly the need for greater equity in educational outcomes, particularly in the often unobserved quality of education.
    Keywords: South Africa, education quality, wages, labour market, Oaxaca-Blinder decomposition, discrimination, economics of education
    JEL: J7 J24 J31
    Date: 2011

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