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preprint2017arXiv

Co-movements in financial fluctuations are anchored to economic fundamentals: A mesoscopic mapping

We demonstrate the existence of an empirical linkage between the nominal financial networks and the underlying economic fundamentals across countries. We construct the nominal return correlation networks from daily data to encapsulate sector-level dynamics and figure the relative importance of the sectors in the nominal network through a measure of centrality and clustering algorithms. The eigenvector centrality robustly identifies the backbone of the minimum spanning tree defined on the return networks as well as the primary cluster in the multidimensional scaling map. We show that the sectors that are relatively large in size, defined with the metrics market capitalization, revenue and number of employees, constitute the core of the return networks, whereas the periphery is mostly populated by relatively smaller sectors. Therefore, sector-level nominal return dynamics is anchored to the real size effect, which ultimately shapes the optimal portfolios for risk management. Our results are reasonably robust across 27 countries of varying degrees of prosperity and across periods of market turbulence (2008-09) as well as relative calmness (2015-16).

preprint2016arXiv

Regrets, learning and wisdom

This contribution discusses in what respect Econophysics may be able to contribute to the rebuilding of economics theory. It focuses on aggregation, individual vs collective learning and functional wisdom of the crowds.

preprint2016arXiv

Discrete hierarchy of sizes and performances in the exchange-traded fund universe

Using detailed statistical analyses of the size distribution of a universe of equity exchange-traded funds (ETFs), we discover a discrete hierarchy of sizes, which imprints a log-periodic structure on the probability distribution of ETF sizes that dominates the details of the asymptotic tail. This allows us to propose a classification of the studied universe of ETFs into seven size layers approximately organized according to a multiplicative ratio of 3.5 in their total market capitalization. Introducing a similarity metric generalising the Herfindhal index, we find that the largest ETFs exhibit a significantly stronger intra-layer and inter-layer similarity compared with the smaller ETFs. Comparing the performance across the seven discerned ETF size layers, we find an inverse size effect, namely large ETFs perform significantly better than the small ones both in 2014 and 2015.

preprint2016arXiv

Can an interdisciplinary field contribute to one of the parent disciplines from which it emerged?

In the light of contemporary discussions of inter and transdisciplinarity, this paper approaches econophysics and sociophysics to seek a response to the question -- whether these interdisciplinary fields could contribute to physics and economics. Drawing upon the literature on history and philosophy of science, the paper argues that the two way traffic between physics and economics has a long history and this is likely to continue in the future.

preprint2016arXiv

Population growth, interest rate, and housing tax in the transitional China

This paper combines and develops the models in Lastrapes (2002) and Mankiw & Weil (1989), which enables us to analyze the effects of interest rate and population growth shocks on housing price in one integrated framework. Based on this model, we carry out policy simulations to examine whether the housing (stock or flow) tax reduces the housing price fluctuations caused by interest rate or population growth shocks. Simulation results imply that the choice of housing tax tools depends on the kind of shock that housing market faces. In the situation where the housing price volatility is caused by the population growth shock, the flow tax can reduce the volatility of housing price while the stock tax makes no difference to it. If the shock is resulting from the interest rate, the policy maker should not impose any kind of the housing taxes. Furthermore, the effect of one kind of the housing tax can be strengthened by that of the other type of housing tax.

preprint2016arXiv

Quantifying Retail Agglomeration using Diverse Spatial Data

Newly available data on the spatial distribution of retail activities in cities makes it possible to build models formalized at the level of the single retailer. Current models tackle consumer location choices at an aggregate level and the opportunity new data offers for modeling at the retail unit level lacks a theoretical framework. The model we present here helps to address these issues. It is a particular case of the Cross-Nested Logit model, based on random utility theory built with the idea of quantifying the role of floor space and agglomeration in retail location choice. We test this model on the city of London: the results are consistent with a super linear scaling of a retailer's attractiveness with its floor space, and with an agglomeration effect approximated as the total retail floorspace within a $325m$ radius from each shop.

preprint2016arXiv

A Generalized Population Dynamics Model of a City and an Algorithm for Engineering Regime Shifts

Measures of wealth and production have been found to scale superlinearly with the population of a city. Therefore, it makes economic sense for humans to congregate together in dense settlements. A recent model of population dynamics showed that population growth can become superexponential due to the superlinear scaling of production with population in a city. Here, we generalize this population dynamics model and demonstrate the existence of multiple stable equilibrium points, showing how population growth can be stymied by a poor economic environment. This occurs when the goods and services produced by the city become less profitable due to a lack of diversification in the city's economy. Then, relying on critical slowing down signals related to the stability of an equilibrium point, we present an algorithm for engineering regime shifts such that a city at a stable equilibrium point may continue to grow again. The generality of the model and the algorithm used here implies that the model and algorithm need not be restricted to urban systems; they are easily applicable to other types of systems where the assumptions used are valid.

preprint2016arXiv

Understanding the Impacts of Dark Pools on Price Discovery

This paper investigates the impact of dark pools on price discovery (the efficiency of prices on stock exchanges to aggregate information). Assets are traded in either an exchange or a dark pool, with the dark pool offering better prices but lower execution rates. Informed traders receive noisy and heterogeneous signals about an asset's fundamental. We find that informed traders use dark pools to mitigate their information risk and there is a sorting effect: in equilibrium, traders with strong signals trade in exchanges, traders with moderate signals trade in dark pools, and traders with weak signals do not trade. As a result, dark pools have an amplification effect on price discovery. That is, when information precision is high (information risk is low), the majority of informed traders trade in the exchange hence adding a dark pool enhances price discovery, whereas when information precision is low (information risk is high), the majority of the informed traders trade in the dark pool hence adding a dark pool impairs price discovery. The paper reconciles the conflicting empirical evidence and produces novel empirical predictions. The paper also provides regulatory suggestions

preprint2016arXiv

Crisis' Heritage Management - New Business Opportunities Out of the Financial Collapse

This paper intends to present the opportunities emerging for the national economy, out of the financial crisis. In particular the management of those, which arise from the commercial real estate owned property sector, defined by the author as crisis heritage management. On one hand, as real estate property prices are subject of wide fluctuations, the longer possession of such assets can seriously impact the financial condition of the already shattered financial institutions, but on the on other - with the help of professional and proactive management, and the right kind of attitude by all the stakeholders, the heritage left out of the financial collapse, can not only help stabilize the system - bringing liquidity into it, but can also support its healthy corporate governance in the long-term. The properties themselves (business buildings, warehouses, retail-and-office spaces), being an object of optimization of maintenance costs, re-engineering, intensive marketing, as a result of the crisis, can serve as a solid base for number of new and profitable business and investment opportunities, described in the article, as a proof of the healing effect of the financial crisis and the sec

preprint2016arXiv

Agent-based Model for Spot and Balancing Electricity Markets

We present a simple, yet realistic, agent-based model of an electricity market. The proposed model combines the spot and balancing markets with a resolution of one minute, which enables a more accurate depiction of the physical properties of the power grid. As a test, we compare the results obtained from our simulation to data from Nord Pool.

preprint2016arXiv

Dynamic Modeling of Price Responsive Demand in Real-time Electricity Market: Empirical Analysis

In this paper, we study the price responsiveness of electricity consumption from empirical commercial and industrial load data obtained from Texas. Employing a dynamical system perspective, we show that price responsive demand can be modeled as a hybrid of a Hammerstein model with delay following a price surge, and a linear ARX model under moderate price changes. It is observed that electricity consumption therefore has unique characteristics including (1) qualitatively distinct response between moderate and extremely high prices; and (2) a time delay associated with the response to high prices. It is shown that these observed features may render traditional approaches to demand response and retail pricing based on classical economic theories ineffective. In particular, ultimate real-time retail pricing may be limitedly beneficial than as considered in classical economic theories.

preprint2016arXiv

The Blockchain: A Gentle Four Page Introduction

Blockchain is a distributed database that keeps a chronologically-growing list (chain) of records (blocks) secure from tampering and revision. While computerisation has changed the nature of a ledger from clay tables in the old days to digital records in modern days, blockchain technology is the first true innovation in record keeping that could potentially revolutionise the basic principles of information keeping. In this note, we provide a brief self-contained introduction to how the blockchain works.

preprint2016arXiv

Elasticity theory of structuring

Financial derivatives have often been criticized as casino-style betting instruments. It turns out that many naive ways of making them are indeed equivalent to gambling. Fortunately, this inadvertent effect can be understood and prevented. We present a theory of product design which achieves that.

preprint2016arXiv

Exploring the Uncharted Export: an Analysis of Tourism-Related Foreign Expenditure with International Spend Data

Tourism is one of the most important economic activities in the world: for many countries it represents the single largest product in their export basket. However, it is a product difficult to chart: "exporters" of tourism do not ship it abroad, but they welcome importers inside the country. Current research uses social accounting matrices and general equilibrium models, but the standard industry classifications they use make it hard to identify which domestic industries cater to foreign visitors. In this paper, we make use of open source data and of anonymized and aggregated transaction data giving us insights about the spend behavior of foreigners inside two countries, Colombia and the Netherlands, to inform our research. With this data, we are able to describe what constitutes the tourism sector, and to map the most attractive destinations for visitors. In particular, we find that countries might observe different geographical tourists' patterns -- concentration versus decentralization --; we show the importance of distance, a country's reported wealth and cultural affinity in informing tourism; and we show the potential of combining open source data and anonymiz

preprint2016arXiv

Predicting the rise of right-wing populism in response to unbalanced immigration

Among the central tenets of globalization is free migration of labor. Although much has been written about its benefits, little is known about the limitations of globalization, including how immigration affects the anti-globalist sentiment. Analyzing polls data, we find that over the last three years in a group of EU countries affected by the recent migrant crisis, the percentage of right-wing (RW) populist voters in a given country depends on the prevalence of immigrants in this country's population and the total immigration inflow into the entire EU. The latter is likely due to the EU resembling a supranational state, where the lack of inner borders causes that "somebody else's problem" easily turns into "my problem". We further find that the increase in the percentage of RW voters substantially surpasses the immigration inflow, implying that if this process continues, RW populism may democratically prevail and eventually lead to a demise of globalization. We present evidence for tipping points in relation to the rise of RW populism. Finally, we model these empirical findings using a complex network framework wherein the success of globalization largely re

preprint2016arXiv

Measuring and Analyzing the Shares of Economic Growth Sources in the Mining Sector of Iran: A Neoclassical Growth Accounting Approach

The purpose of this study is to measure the Total Factor Productivity (TFP) growth and determine the share of each of the economic growth sources in the mining sector of Iran. The time period of this study is 1355-1385 of the Solar Hijri calendar (roughly overlaying with the time period of 1976-2006 of the Gregorian calendar). In this paper, the shares of total factor productivity growth (TFPG) and factors' accumulations in the economic growth of the mining sector are estimated using a neoclassical growth accounting approach. Based on the estimated restricted Cobb-Douglas production function and the results obtained from the Solow residual equation, the annual growth rates of TFP were measured for each year. According to the findings, the average annual growth rate of TFP has been 2.94% during the time period of the present study. The other findings of this study indicate that the average contributions of TFPG, labor accumulation and capital accumulation in the economic growth of the mining sector have been 56%, 23%, and 21%, respectively, during the time period of the study. As such, it can be concluded that the policy of benefiting from available factors in the mining sector

preprint2016arXiv

Toward an integrated workforce planning framework using structured equations

Strategic Workforce Planning is a company process providing best in class, economically sound, workforce management policies and goals. Despite the abundance of literature on the subject, this is a notorious challenge in terms of implementation. Reasons span from the youth of the field itself to broader data integration concerns that arise from gathering information from financial, human resource and business excellence systems. This paper aims at setting the first stones to a simple yet robust quantitative framework for Strategic Workforce Planning exercises. First a method based on structured equations is detailed. It is then used to answer two main workforce related questions: how to optimally hire to keep labor costs flat? How to build an experience constrained workforce at a minimal cost?

preprint2016arXiv

A Model of Synchronization for Self-Organized Crowding Behavior

This paper proposes a general model for synchronized crowding behavior. An order parameter is introduced to quantify the level of synchronization which is shown a function of percentage of agents in reactive state. Further, synchronization is shown to be driven by the most active agents with the highest volatility. A tipping point is identified when crowd becomes self-amplifying and unstable. By applying this model, financial bubbles, market momentum and volatility patterns are simulated.

preprint2016arXiv

A Multifaceted Panel Data Gravity Model Analysis of Peru's Foreign Trade

Peru's abundant natural resources and friendly trade policies has made the country a major economic player in both South America and the global community. Consequently, exports are playing an increasingly important role in Peru's national economy. Indeed, growing from 13.1% as of 1994, exports now contribute approximately 21% of the GDP of Peru as of 2015. Given Peru's growing global influence, the time is ripe for a thorough analysis of the most important factors governing its export performance. Thus, within the framework of the augmented gravity model of trade, this paper examines Peru's export performance and attempts to identify the dominant economic factors that should be further developed to increase the value of exports. The analysis was conducted from three different aspects: (1) general economic parameters' effect on Peru's export value, (2) more specific analysis into a major specific trade good, copper, and (3) the impact that regional trade agreements have had on Peru's export performance. Our panel data analysis results for each dataset revealed interesting economic trends and were consistent with the theoretical expectations of the gravity

preprint2016arXiv

Rough paths in idealized financial markets

This paper considers possible price paths of a financial security in an idealized market. Its main result is that the variation index of typical price paths is at most 2, in this sense, typical price paths are not rougher than typical paths of Brownian motion. We do not make any stochastic assumptions and only assume that the price path is positive and right-continuous. The qualification "typical" means that there is a trading strategy (constructed explicitly in the proof) that risks only one monetary unit but brings infinite capital when the variation index of the realized price path exceeds 2. The paper also reviews some known results for continuous price paths and lists several open problems.

preprint2011arXiv

Pseudo Hermitian formulation of Black-Scholes equation

We show that the non Hermitian Black-Scholes Hamiltonian and its various generalizations are eta-pseudo Hermitian. The metric operator eta is explicitly constructed for this class of Hamitonians. It is also shown that the effective Black-Scholes Hamiltonian and its partner form a pseudo supersymmetric system.

preprint2013arXiv

Hedging Against the Interest-rate Risk by Measuring the Yield-curve Movement

By adopting the polynomial interpolation method, we propose an approach to hedge against the interest-rate risk of the default-free bonds by measuring the nonparallel movement of the yield-curve, such as the translation, the rotation and the twist. The empirical analysis shows that our hedging strategies are comparable to traditional duration-convexity strategy, or even better when we have more suitable hedging instruments on hand. The article shows that this strategy is flexible and robust to cope with the interest-rate risk and can help fine-tune a position as time changes.

preprint2012arXiv

Coherent Price Systems and Uncertainty-Neutral Valuation

We consider fundamental questions of arbitrage pricing arising when the uncertainty model is given by a set of possible mutually singular probability measures. With a single probability model, essential equivalence between the absence of arbitrage and the existence of an equivalent martingale measure is a folk theorem, see Harrison and Kreps (1979). We establish a microeconomic foundation of sublinear price systems and present an extension result. In this context we introduce a prior dependent notion of marketed spaces and viable price systems. We associate this extension with a canonically altered concept of equivalent symmetric martingale measure sets, in a dynamic trading framework under absence of prior depending arbitrage. We prove the existence of such sets when volatility uncertainty is modeled by a stochastic differential equation, driven by Peng's G-Brownian motions.

preprint2010arXiv

Inequality reversal: effects of the savings propensity and correlated returns

In the last decade, a large body of literature has been developed to explain the universal features of inequality in terms of income and wealth. By now, it is established that the distributions of income and wealth in various economies show a number of statistical regularities. There are several models to explain such static features of inequality in an unifying framework and the kinetic exchange models, in particular, provide one such framework. Here we focus on the dynamic features of inequality. In the process of development and growth, inequality in an economy in terms of income and wealth follows a particular pattern of rising in the initial stage followed by an eventual fall. This inverted U-shaped curve is known as the Kuznets Curve. We examine the possibilities of such behavior of an economy in the context of a generalized kinetic exchange model. It is shown that under some specific conditions, our model economy indeed shows inequality reversal.

438 works