nep-cmp New Economics Papers
on Computational Economics
Issue of 2011‒09‒05
six papers chosen by
Stan Miles
Thompson Rivers University

  1. The Effect of Interventions to Reduce Fertility on Economic Growth By Quamrul H. Ashraf; David N. Weil; Joshua Wilde
  2. Taxes, Wages and Working Hours By Ericson, Peter; Flood, Lennart
  3. An efficient lattice algorithm for the libor market model By Tim, Xiao
  4. Pricing Chinese rain: a multi-site multi-period equilibrium pricing model for rainfall derivatives By Wolfgang Härdle; Maria Osipenko
  5. Need Singapore Fear Floating? A DSGE-VAR Approach By Hwee Kwan Chow; Paul D. McNelis
  6. A Mean-Reverting SDE on Correlation matrices By Abdelkoddousse Ahdida; Aurélien Alfonsi

  1. By: Quamrul H. Ashraf; David N. Weil; Joshua Wilde
    Abstract: We assess quantitatively the effect of exogenous reductions in fertility on output per capita. Our simulation model allows for effects that run through schooling, the size and age structure of the population, capital accumulation, parental time input into child-rearing, and crowding of fixed natural resources. The model is parameterized using a combination of microeconomic estimates, data on demographics and natural resource income in developing countries, and standard components of quantitative macroeconomic theory. We apply the model to examine the effect of an intervention that immediately reduces TFR by 1.0, using current Nigerian vital rates as a baseline. For a base case set of parameters, we find that an immediate decline in the TFR of 1.0 will raise output per capita by approximately 13.2 percent at a horizon of 20 years, and by 25.4 percent at a horizon of 50 years.
    JEL: E17 J11 J13 J18 O11
    Date: 2011–08
  2. By: Ericson, Peter (Empirica); Flood, Lennart (Göteborg University)
    Abstract: This paper presents estimates of individuals' responses in hourly wages to changes in marginal tax rates. Estimates based on register panel data of Swedish households covering the period 1992 to 2007 produce significant but relatively small net-of-tax rate elasticities. The results vary with family type, with the largest elasticities obtained for single males and the smallest for married/cohabitant females. Despite these seemingly small elasticities, evaluation of the effects of a reduced state tax using a microsimulation model shows that the effort effect matters. The largest effect is due to changes in number of working hours yet including the effort effect results in an almost self-financed reform. As a reference to the earlier literature we also estimate taxable income elasticities. As expected, these are larger than for the hourly wage rates. However, both specifications produce significantly and positive income effects.
    Keywords: income taxation, hourly wage rates, work effort, micro simulation
    JEL: C8 D31 H24 J22 J31
    Date: 2011–08
  3. By: Tim, Xiao
    Abstract: The LIBOR Market Model (LMM or BGM) has become one of the most popular models for pricing interest rate products. It is commonly believed that Monte-Carlo simulation is the only viable method available for the LIBOR Market Model. In this article, however, we propose a lattice approach to price interest rate products within the LIBOR Market Model by introducing a shifted forward measure and several novel fast drift approximation methods. This model should achieve the best performance without losing much accuracy. Moreover, the calibration is almost automatic and it is simple and easy to implement. Adding this model to the valuation toolkit is actually quite useful; especially for risk management or in the case there is a need for a quick turnaround.
    Keywords: LIBOR Market Model; LMM; BGM; lattice model; tree model; shifted forward measure; drift approximation; risk management; calibration; callable exotics; callable bond; callable capped floater swap; callable inverse floater swap; callable range accrual swap
    JEL: C6 D4 G13
    Date: 2011–06–18
  4. By: Wolfgang Härdle; Maria Osipenko
    Abstract: Many industries are exposed to weather risk which they can transfer on financial markets via weather derivatives. Equilibrium models based on partial market clearing became a useful tool for pricing such kind of financial instruments. In a multi-period equilibrium pricing model agents rebalance their portfolio of weather bonds and a risk free asset in each period such that they maximize the expected utility of their incomes constituted by possibly weather dependent profits and payoffs of portfolio positions. We extend the model to a multisite version and apply it to pricing rainfall derivatives for Chinese provinces. By simulating realistic market conditions with two agent types, farmers with profits highly exposed to weather risk and a financial investor diversifying her financial portfolio, we obtain equilibrium prices for weather derivatives on cumulative monthly rainfall. Dynamic portfolio optimization under market clearing and utility indifference of these representative agents determines equilibrium quantity and price for rainfall derivatives.
    Keywords: rainfall derivatives, equilibrium pricing, space-time Markov model
    JEL: C22 C51 G13
    Date: 2011–08
  5. By: Hwee Kwan Chow (School of Economics, Singapore Management University); Paul D. McNelis (SDepartment of Finance, Graduate School of Business Administration, Fordham University)
    Abstract: This paper uses a DSGE-VAR model to examine the managed exchange-rate system at work in Singapore and asks if the country has any reason to fear floating the exchange rate with a Taylor rule inflation-targeting mechanism that uses the short term interest rate instead of the exchange rate as the benchmark monetary policy instrument. Our simulation results show that the use of a more flexible exchange rate system will reduce volatility in inflation and investment but consumption volatility will increase. Overall, there are neither signi…ficant welfare gains or losses in the regime shift. Given the highly open and trade dependent nature of the Singapore economy where the policy preference is for exchange rate stability, there is no impetus to abandon the present monetary regime.
    JEL: E52 E62 F41
    Date: 2010–12
  6. By: Abdelkoddousse Ahdida (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Ecole des Ponts ParisTech); Aurélien Alfonsi (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Ecole des Ponts ParisTech)
    Abstract: We introduce a mean-reverting SDE whose solution is naturally defined on the space of correlation matrices. This SDE can be seen as an extension of the well-known Wright-Fisher diffusion. We provide conditions that ensure weak and strong uniqueness of the SDE, and describe its ergodic limit. We also shed light on a useful connection with Wishart processes that makes understand how we get the full SDE. Last, we focus on the simulation of this diffusion and present discretization schemes that achieve a second-order weak convergence.
    Date: 2011–08–26

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