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on Central and Western Asia |
| By: | Martin Gremm; Mark B. Wise |
| Abstract: | Social Security and other public policies can be viewed as a series of cash in and outflows that depend on parameters such as the age distribution of the population and the retirement age. Given forecasts of these parameters, policies can be designed to be financially stable, i.e., to terminate with a zero balance. If reality deviates from the forecasts, policies normally terminate with a surplus or a deficit. We derive constraints on the cash flows of robust policies that terminate with zero balance even in the presence of forecasting errors. Social Security and most similar policies are not robust. We show that non-trivial robust policies exist and provide a recipe for constructing robust extensions of non-robust policies. An example illustrates our results. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1201.6340&r=cwa |
| By: | Jo\~ao P. da Cruz; Pedro G. Lind |
| Abstract: | The study of heavy-tailed distributions in economic and financial systems has been widely addressed since financial time series has become a research subject.After the eighties, several "highly improbable" market drops were observed (e.g. the 1987 stock market drop known as "Black Monday" and on even more recent ones, already in the 21st century) that produce heavy losses that were unexplainable in a GN environment. The losses incurred in these large market drop events did not change significantly the market practices or the way regulation is done but drove some attention back to the study of heavy-tails and their underlying mechanisms. Some recent findings in these context is the scope of this manuscript. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0142&r=cwa |
| By: | Miklos Rasonyi; Andrea Rodrigues |
| Abstract: | The aim of this work consists in the study of the optimal investment strategy for a behavioural investor, whose preference towards risk is described by both a probability distortion and an S-shaped utility function. Within a continuous-time financial market framework and assuming that asset prices are modelled by semimartingales, we derive sufficient and necessary conditions for the well-posedness of the optimisation problem in the case of piecewise-power probability distortion and utility functions. Finally, under straightforwardly verifiable conditions, we further demonstrate the existence of an optimal strategy. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0628&r=cwa |
| By: | Dario Caldara; Jesús Fernández-Villaverde; Juan F. Rubio-Ramírez; Yao Wen |
| Abstract: | This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with recursive preferences such as those in Epstein and Zin (1989 and 1991) and stochastic volatility. Models with these two features have recently become popular, but we know little about the best ways to implement them numerically. To fill this gap, we solve the stochastic neoclassical growth model with recursive preferences and stochastic volatility using four different approaches: second- and third-order perturbation, Chebyshev polynomials, and value function iteration. We document the performance of the methods in terms of computing time, implementation complexity, and accuracy. Our main finding is that perturbations are competitive in terms of accuracy with Chebyshev polynomials and value function iteration while being several orders of magnitude faster to run. Therefore, we conclude that perturbation methods are an attractive approach for computing this class of problems. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-04&r=cwa |
| By: | Jeroen V.K. Rombouts (HEC Montréal, CIRANO, CIRPEE and Université catholique de Louvain, CORE); Lars Stentoft (HEC Montréal, CIRANO, CIRPEÉ, and CREATES); Francesco Violante (Maastricht University and Université catholique de Louvain, CORE) |
| Abstract: | We assess the predictive accuracy of a large number of multivariate volatility models in terms of pricing options on the Dow Jones Industrial Average. We measure the value of model sophistication in terms of dollar losses by considering a set 248 multivariate models that differ in their specification of the conditional variance, conditional correlation, and innovation distribution. All models belong to the dynamic conditional correlation class which is particularly suited because it allows to consistently estimate the risk neutral dynamics with a manageable computational effort in relatively large scale problems. It turns out that the most important gain in pricing accuracy comes from increasing the sophistication in the marginal variance processes (i.e. nonlinearity, asymmetry and component structure). Enriching the model with more complex correlation models, and relaxing a Gaussian innovation for a Laplace innovation assumption improves the pricing in a smaller way. Apart from investigating directly the value of model sophistication in terms of dollar losses, we also use the model confidence set approach to statistically infer the set of models that delivers the best pricing performance. |
| Keywords: | Option pricing, Economic Loss, Forecasting, Multivariate GARCH, Model Confidence Set |
| JEL: | C10 C32 C51 C52 C53 G10 |
| Date: | 2012–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2012-04&r=cwa |
| By: | Ribin Lye; James Peng Lung Tan; Siew Ann Cheong |
| Abstract: | We describe a bottom-up framework, based on the identification of appropriate order parameters and determination of phase diagrams, for understanding progressively refined agent-based models and simulations of financial markets. We illustrate this framework by starting with a deterministic toy model, whereby $N$ independent traders buy and sell $M$ stocks through an order book that acts as a clearing house. The price of a stock increases whenever it is bought and decreases whenever it is sold. Price changes are updated by the order book before the next transaction takes place. In this deterministic model, all traders based their buy decisions on a call utility function, and all their sell decisions on a put utility function. We then make the agent-based model more realistic, by either having a fraction $f_b$ of traders buy a random stock on offer, or a fraction $f_s$ of traders sell a random stock in their portfolio. Based on our simulations, we find that it is possible to identify useful order parameters from the steady-state price distributions of all three models. Using these order parameters as a guide, we find three phases: (i) the dead market; (ii) the boom market; and (iii) the jammed market in the the phase diagram of the deterministic model. Comparing the phase diagrams of the stochastic models against that of the deterministic model, we realize that the primary effect of stochasticity is to eliminate the dead market phase. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0606&r=cwa |
| By: | Mikio Ito; Akihiko Noda |
| Abstract: | Focusing on market efficiency varying with time, we examine whether the U.S. stock market has been evolved or not. We find that (1) the U.S. stock market evolves over time and (2) the market efficiency in the U.S. stock market has a cyclical fluctuation with very long periodicity, from 30 to 40 years. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0100&r=cwa |
| By: | J. Shen; B. Zheng |
| Abstract: | With the daily and minutely data of the German DAX and Chinese indices, we investigate how the return-volatility correlation originates in financial dynamics. Based on a retarded volatility model, we may eliminate or generate the return-volatility correlation of the time series, while other characteristics, such as the probability distribution of returns and long-range time-correlation of volatilities etc., remain essentially unchanged. This suggests that the leverage effect or anti-leverage effect in financial markets arises from a kind of feedback return-volatility interactions, rather than the long-range time-correlation of volatilities and asymmetric probability distribution of returns. Further, we show that large volatilities dominate the return-volatility correlation in financial dynamics. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0342&r=cwa |
| By: | J. Shen; B. Zheng |
| Abstract: | To investigate the universal structure of interactions in financial dynamics, we analyze the cross-correlation matrix C of price returns of the Chinese stock market, in comparison with those of the American and Indian stock markets. As an important emerging market, the Chinese market exhibits much stronger correlations than the developed markets. In the Chinese market, the interactions between the stocks in a same business sector are weak, while extra interactions in unusual sectors are detected. Using a variation of the two-factor model, we simulate the interactions in financial markets. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0344&r=cwa |
| By: | Anca Gheorghiu; Ion Spanulescu |
| Abstract: | Knowing and modelling the migration phenomena and especially the social and economic consequences have a theoretical and practical importance, being related to their consequences for development, economic progress (or as appropriate, regression), environmental influences etc. One of the causes of migration, especially of the interregional and why not intercontinental, is that resources are unevenly distributed, and from the human perspective there are differences in culture, education, mentality, collective aspirations etc. This study proposes a new econophysics model for the migration phenomena. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.0996&r=cwa |
| By: | Jason M. Fletcher (Yale University and Columbia University); Stephen L. Ross (University of Connecticut) |
| Abstract: | This paper estimates the effects of friends’ health behaviors, smoking and drinking, on own health behaviors for adolescents while controlling for the effects of correlated unobservables between those friends. Specifically, the effect of friends’ health behaviors is identified by comparing similar individuals who have the same friendship opportunities because they attend the same school and make similar friendship choices, under the assumption that the friendship choice reveals information about an individual’s unobservables. We combine this identification strategy with a cross-cohort, within school design so that the model is identified based on across grade differences in the clustering of health behaviors within specific friendship patterns. Finally, we use the estimated information on correlated unobservables to examine longitudinal data on the on-set of health behaviors, where the opportunity for reverse causality should be minimal. Our estimates for both behavior and on-set are very robust to bias from correlated unobservables. |
| Keywords: | Peer Effects, Friendship Networks, Adolescent Health, Smoking, Drinking, Cohort Study |
| JEL: | D85 I19 I21 J13 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-26&r=cwa |