nep-cmp New Economics Papers
on Computational Economics
Issue of 2015‒04‒19
fifteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Using genetic algorithm in dynamic model of speculative attack By Bogna Gawronska-Nowak; Wojciech Grabowski
  2. Convex Incentives in Financial Markets: an Agent-Based Analysis By Annalisa Fabretti; Tommy Gärling; Stefano Herzel; Martin Holmen
  3. A generic approach to investment modelling in recursive dynamic CGE models By Hom M Pant
  4. A Solution Approach for the Joint Order Batching and Picker Routing Problem in a Two-Block Layout By Gerhard Wäscher; André Scholz
  5. Pricing and Risk Management with High-Dimensional Quasi Monte Carlo and Global Sensitivity Analysis By Marco Bianchetti; Sergei Kucherenko; Stefano Scoleri
  6. A dynamic aggregate supply and aggregate demand model with Matlab By José M. Gaspar
  7. Can trade liberalisation bring benefits to the war affected regions and create economic stability in post-war Sri Lanka? By Athula Naranpanawa; Jayathileka S Bandara
  8. Computing trading strategies based on financial sentiment data using evolutionary optimization By Ronald Hochreiter
  9. Stock Market Dynamics, Leveraged Network-Based Financial Accelerator and Monetary Policy By Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  10. Investigating Fiscal and Social Costs of Recovery Policy: A Dynamic General Equilibrium Analysis of a Compound Disaster in Northern Taiwan By Michael C. Huang; Nobuhiro Hosoe
  11. Applying UrbanSim to Transportation Issues in Cities By Foti, Fletcher
  12. Relevant Market Delineation and Horizontal Merger Simulation: A Unified Approach By Eduardo P. S. Fiuza
  13. Immigration as a Policy Tool for the Double Burden Problem of Prefunding Pay-as-you-go Social Security System By Hisahiro Naito
  14. Dynastic Inequality, Mobility and Equality of Opportunity By Kanbur, Ravi; Stiglitz, Joseph E
  15. Informality, Saving and Wealth Inequality in Colombia By Catalina Granda; Franz Hamann

  1. By: Bogna Gawronska-Nowak (Chair of Economics Lazarski University); Wojciech Grabowski (University of Lodz)
    Abstract: Evolution of speculative attack models show certain progress in developing idea of the role of expectations in the crisis mechanism. Obstfeld (1996) defined expectations as fully exogenous. Morris and Shin (1998) endogenised the expectations with respect to noise leaving information significance away. Dynamic approach proposed by Angeletos, Hellwig and Pavan (2006) operates under more sophisticated assumption about learning process that tries to reflect time-variant and complex nature of information in the currency market much better. But this model ignores many important details like a Central Bank cost function. Genetic algorithm allows to avoid problems connected with incorporating information and expectations into agent decision making process to an extent. There are some similarities between the evolution in Nature and currency market performance. In our paper an assumption about rational agent behaviour in the efficient market is criticised and we present our version of the dynamic model of a speculative attack, in which we use a genetic algorithm to define decision-making process of the currency market agents. The results of our simulation seem to be in line with the theory and intuition. An advantage of our model is that it reflects reality in quite complex way, i.e. level of noise changes in time (decreasing), there are different states of fundamentals (with “more sensitive” upper part of the scale), number of inflowing agents can be low or high (due to different globalization phases, different capital flow phases, different uncertainty levels).
    Keywords: currency crisis, dynamic model, genetic algorithms
    JEL: C6 F3 E5
    Date: 2015–04
  2. By: Annalisa Fabretti (DEF, University of Rome Tor Vergata); Tommy Gärling (University of Gothenburg); Stefano Herzel (DEF and CEIS, University of Rome Tor Vergata); Martin Holmen (University of Gothenburg)
    Abstract: This paper uses agent-based simulation to analyze how financial markets are affected by market participants with convex incentives, e.g. option-like compensation. We document that convex incentives are associated with (i) higher prices, (ii) larger variations of prices, and (iii) larger bid-ask spreads. We conclude that convex incentives may lead to decreased stability of financial markets. Our analysis suggests that the decreased stability is driven by the fact that convex incentives pushes agents towards more extreme decisions. Furthermore, while risk preferences affect agent behavior if they have linear incentives, the effect of risk preferences vanishes with convex incentives.
    Keywords: incentives, market instability, agent-based simulations.
    JEL: G10 D40 D53
    Date: 2015–04–08
  3. By: Hom M Pant
    Abstract: It is a common practice in recursively dynamic CGE models to maintain static expectations. Consequently, investors take current rates of return as expected future rates of return. The vexing problem with this approach is that no matter how we allocate investments across sectors and regions in the current period, it is not possible to bring the expected rates of return to equality once the equilibrium is displaced. To deal with this problem all recursively dynamic CGE models have resorted to some complex mechanisms to allocate investments across sectors and regions. By drawing on the inverse relationship between the future capital stock and its marginal productivity, this paper establishes an inverse relationship between the expected future rates of return and current investment levels and this approach has been applied to the static GTAP model (version 6.2). By doing so this paper provides an alternative to the GTAP-Dyn model.
    Keywords: recursive dynamic CGE model, static expectation, expected rates of return, investment allocation
    JEL: C58
    Date: 2015
  4. By: Gerhard Wäscher (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); André Scholz (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Order Batching and Picker Routing Problems arise in warehouses when articles have to be retrieved from their storage location in order to satisfy a given demand specified by customer orders. The Order Batching Problem includes the grouping of a given set of customer orders into feasible picking orders such that the total length of all picker tours is minimized. The problem of determining the sequence according to which articles have to be picked is known as the Picker Routing Problem. Although these problems occur at the same planning level, it is common to solve these problems not simultaneously, but separately and in sequence. As for the batching problem it is usually assumed that the order pickers, when making their ways through the warehouse, follow a certain, simple routing strategy. Based on this routing strategy, the customer orders are grouped into picking orders. The advantage of this approach can be seen in the fact that – in particular for single-block warehouse layouts – the corresponding order picker tours are very straightforward and can be memorized easily by the order pickers. This advantage diminishes, however, when more complex, multi-block layouts have to be dealt with. Furthermore, in such case, the approach may result in picker tours that can be far from optimal. Therefore, for multi-block layouts, we develop a new approach, namely an iterated local search algorithm into which different routing algorithms have been integrated and which allows for solving the Order Batching Problem and the Picker Routing Problem simultaneously. By means of numerical experiments it is shown that this approach results in a substantial improvement of the solution quality without increasing computing times.
    Keywords: Order Picking, Order Batching, Picker Routing, Iterated Local Search
    Date: 2015–04
  5. By: Marco Bianchetti; Sergei Kucherenko; Stefano Scoleri
    Abstract: We review and apply Quasi Monte Carlo (QMC) and Global Sensitivity Analysis (GSA) techniques to pricing and risk management (greeks) of representative financial instruments of increasing complexity. We compare QMC vs standard Monte Carlo (MC) results in great detail, using high-dimensional Sobol' low discrepancy sequences, different discretization methods, and specific analyses of convergence, performance, speed up, stability, and error optimization for finite differences greeks. We find that our QMC outperforms MC in most cases, including the highest-dimensional simulations and greeks calculations, showing faster and more stable convergence to exact or almost exact results. Using GSA, we are able to fully explain our findings in terms of reduced effective dimension of our QMC simulation, allowed in most cases, but not always, by Brownian bridge discretization. We conclude that, beyond pricing, QMC is a very promising technique also for computing risk figures, greeks in particular, as it allows to reduce the computational effort of high-dimensional Monte Carlo simulations typical of modern risk management.
    Date: 2015–04
  6. By: José M. Gaspar (Rua Dr. Roberto Frias, 4200-464 Porto PORTUGAL)
    Abstract: We use the framework implicit in the model of inflation by Shone (1997) to address the analytical properties of a simple dynamic aggregate supply and aggregate demand (AS-AD) model and solve it numerically. The model undergoes a bifurcation as its steady state smoothly interchanges stability depending on the relation between the sensitivity of the demand for liquidity to variations in the interest rate and the way expectations on inflation are formed based on real output fluctuations. Using code embedded into a unique function in Matlab, we plot the numerical solutions of the model and simulate different dynamic adjustments using different parameter values. The same function also accommodates for the implementation of different policy shocks: monetary policy shocks through changes in the growth rate of money supply, fiscal policy shocks due to variations in public spending and in the exogenous tax rate, and supply side shocks as given by changes in the level of natural output.
    Keywords: business cycles; local dynamics; computational economics; policy shocks
    JEL: C62 C63 E32
    Date: 2015–04
  7. By: Athula Naranpanawa; Jayathileka S Bandara
    Keywords: trade liberalisation, regional disparities, computable general equilibrium model, post-war reconstruction, South Asia, Sri Lanka
    JEL: R13 F14 C68
    Date: 2015–02
  8. By: Ronald Hochreiter
    Abstract: In this paper we apply evolutionary optimization techniques to compute optimal rule-based trading strategies based on financial sentiment data. The sentiment data was extracted from the social media service StockTwits to accommodate the level of bullishness or bearishness of the online trading community towards certain stocks. Numerical results for all stocks from the Dow Jones Industrial Average (DJIA) index are presented and a comparison to classical risk-return portfolio selection is provided.
    Date: 2015–04
  9. By: Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: In this paper we build an agent-based model based on a threefold financial accelerator: (i) leverage accelerator - negative shocks on firms' output make banks less willing to loan funds, and firms less willing to make investments, hence a credit reduction follows further reducing the output; (ii) stock market accelerator - due to lower profit, firms' capitalization on the stock market decreases, thus the distance-to-default (DD) diminishes and it reinforces the leverage accelerator; (iii) network-based accelerator - the network structure may propagate the initial shock possibly resulting in an avalanche of bankruptcies. In this framework, we find that stock market volatility may damage the real economy if the stock market is too relevant. In particular, an increase of volatility worsens the economic performance through the stock market accelerator effect. Moreover, our findings have relevant implications for monetary policy.
    Keywords: Agent-based modeling; stock market; leverage; network; volatility; fnancial accelerator; monetary policy.
    JEL: C52 C63 E32 G01
    Date: 2015–04
  10. By: Michael C. Huang (National Graduate Institute for Policy Studies); Nobuhiro Hosoe (National Graduate Institute for Policy Studies)
    Abstract: We investigate a long-run impact of a compound disaster in northern Taiwan by describing a recovery process from the disaster with a dynamic computable general equilibrium model. After simulating losses of capital and labor in combination with a nuclear power shutdown, we conduct policy experiments that are aimed at recovery of Taiwan’s major industries by subsidizing their output or capital use. We found that the semiconductor industry could recover but need a huge amount of subsidies while the electronic equipment sector could almost recover even without subsidies. Capital-use subsidies would cost less than output subsidies. When we use two-year longer duration for a recovery program of semiconductors, we could save the subsidy costs by 7–10%.
    Date: 2015–04
  11. By: Foti, Fletcher
    Abstract: UrbanSim(link is external) is a software-based simulation system for supporting planning and analysis of urban development, incorporating the interactions between land use, transportation, the economy, and the environment. It is the result of over 15 years of active research, and has been applied to planning processes of over a dozen regional governments and large cities. Recent improvements to UrbanSim include an accessibility engine to compute walking-scale accessibility metrics over a metropolitan area in less than a second, and the ability to run real estate pro formas on the complete set of parcels in a region to understand real estate development feasibility the way a developer might. The new methodology has also received interest from the travel modeling community, and a consortium of regions has funded a pilot to create an activity-based travel model using the same core framework. Synthicity(link is external) will be releasing UrbanCanvas publicly in spring 2015. UrbanCanvas is a 3D urban design platform that allows the editing of proposed developments which can be used to create scenario inputs to UrbanSim, as well as to view UrbanSim outputs as prototypical buildings. Synthicity hopes that UrbanCanvas can become a transformative technology that allows planners and citizens to weigh in on proposed developments early enough in the process to positively affect social, economic, environmental, and aesthetic outcomes of future population and economic growth.
    Keywords: Engineering, UrbanSim, Synthicity, UrbanCanvas
    Date: 2015–03–13
  12. By: Eduardo P. S. Fiuza
    Abstract: While often times the Hypothetical Monopolist Test (HMT) utilized in relevant market delineation is implemented with uniform price increases throughout all the goods in the candidate relevant market, since 1984 the versions of the U.S. Merger Guidelines have emphasized that these small but significant and non-transitory increase in prices (SSNIP) should be profit-maximizing, what would result in uniform increases only under very particular conditions. Such increases could then be analyzed–sufficient data existing for such–in the same manner as the simulations of unilateral effects of mergers, introduced in the 1980s and further developed in the 1990s. Thus, in this article, building on structural models of demand and supply and on recent contributions to the literature, we propose a unified framework for merger simulations and for the so-called HMT in its diversity of versions implemented in various countries along the years, and we better detail their differences. To illustrate those differences, we report the results of a Monte Carlo experiment using three demand specifications: isoelastic, linear and linearized Almost Ideal Demand System (AIDS), all of them in a two-stage budget setting. We conclude that the choice of the test version and of the demand specification may affect significantly the size of the relevant market found, depending on the distribution and magnitude of cross and own price elasticities in the potential market.
    Date: 2015–01
  13. By: Hisahiro Naito
    Abstract: The eect of accepting more immigrants on welfare in the presence of a pay-asyou-go social security system is analyzed theoretically and quantitatively in this study. First, it is shown that if intergenerational government transfers initially exist from the young to the old, the government can lead an economy to the (modied) golden rule level within a nite time in a Pareto-improving way by increasing the percentage of immigrants to natives (PITN). Second, by using the computational overlapping generation model, I calculate both the welfare gain of increasing the PITN from 15.5 percent to 25.5 percent in 80 years and the years needed to reach the (modied) golden rule level in a Pareto-improving way in a model economy. The simulation results show that the present discounted value of the Pareto-improving welfare gain of increasing the PITN is 23 percent of initial GDP. It takes 112 years for the model economy to reach the golden rule level in a Pareto-improving way.
    Date: 2015–04
  14. By: Kanbur, Ravi; Stiglitz, Joseph E
    Abstract: One often heard counter to the concern on rising income and wealth inequality is that it is wrong to focus on inequality of outcomes in a “snapshot.” Intergenerational mobility and “equality of opportunity”, so the argument goes, is what matters for normative evaluation. In response to this counter, we ask what pattern of intergenerational mobility leads to lower inequality not between individuals but between the dynasties to which they belong? And how does this pattern in turn relate to commonly held views on what constitutes equality of opportunity? We revive and revisit here our earlier contributions which were in the form of working papers (Kanbur and Stiglitz (1982, 1986) in order to engage with the current debate. Focusing on bistochastic transition matrices in order to hold constant the steady state snapshot income distribution, we develop an explicit partial ordering which ranks matrices on the criterion of inequality between infinitely lived dynasties. A general interpretation of our result is that when comparing two transition matrices, if one matrix is “further away” from the identity matrix then it will lead to lower dynastic inequality. More specifically, the result presents a computational procedure to check if one matrix dominates another on dynastic inequality. We can also assess “equality of opportunity”, defined as identical prospects irrespective of starting position. We find that this is not necessarily the mobility pattern which minimizes dynastic inequality.
    Keywords: Dynastic Inequality; Equality of Opportunity; Inequality; Mobility
    JEL: D31 D63
    Date: 2015–04
  15. By: Catalina Granda; Franz Hamann
    Abstract: The informal sector is an extensive phenomenon in developing countries. While some of its implications have drawn considerable attention in the literature, one relatively unexplored aspect has to do with the saving patterns of workers and firms and how these might influence aggregate savings and wealth inequality. This paper aims to fill that gap by examining both entrepreneurs' and workers' choices regarding whether to perform informally and regarding asset accumulation. Specifically, the paper builds an occupational choice model wherein saving is primarily motivated by precautionary considerations. The model features labor and capital market segmentation, and it is calibrated to replicate the saving rates, wealth inequality and composition of occupations across the formal and informal sectors of Colombia. Computational experiments additionally make it possible to analyze the effects of highly debated formalization policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative frameworks are finally considered.
    Keywords: Income, Consumption & Saving, Wealth inequality, Informality, Wealth inequality, Saving, Occupational choice models
    Date: 2015–02

This nep-cmp issue is ©2015 by Stan Miles. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.