1,720,988 research outputs found
Tinbergen Institute - complexity in economics seminars series
No full textWe investigate the role of heterogeneous expectations in a New-Keynesian framework. Agents choose expectation values for output and inflation from a distribution of values around the central bank targets: the output gap and the inflation target. Their choices depend on past performance and the level of anchoring is given by variance of this distribution, which may be different for both variables. We thus evaluate the role of heterogeneous anchoring with respect to the two targets of the central bank. Numerical simulations suggest that expectations unanchored from the central bank targets produce waves of optimism and pessimism. This result holds also when only inflation expectations are unanchored from the target. In addition, we find that introducing adaptive expectations reinforces the presence of waves of optimism and pessimism and may drive output and inflation away from the central bank targets permanentl
Quantitative Analyses on Non-Linearities in Financial Markets
No full text"The brief market plunge was just a small indicator of how
complex and chaotic, in the formal sense, these systems
have become. Our nancial system is so complicated and so
interactive [...]. What happened in the stock market is just
a little example of how things can cascade or how technology
can interact with market panic" (Ben Bernanke, IHT, May
17, 2010)
One of the most important issues in economics is modeling and fore-
casting the
uctuations that characterize both nancial and real mar-
kets, such as interest rates, commodities and stock prices, output
growth, unemployment, or exchange rate. There are mainly two op-
posite views concerning these economic
uctuations. According to
the rst one, which was the predominant thought in the 1930s, the
economic system is mainly linear and stable, only randomly hit by
exogenous shocks. Ragnar Frisch, Eugen Slutsky and Jan Tinbergen,
to cite a few, are important exponents of this view, and they demon-
strated that the
uctuations observed in the real business cycle may
be produced in a stable linear system subject to an external sequence
of random shocks. This view has been criticized starting from the
1940s and the 1950s, since it was not able to provide a strong eco-
nomic explanation of observed
uctuations. Richard Goodwin,John
Hicks and Nicholas Kaldor introduced a nonlinear view of the econ-
omy, showing that even in absence of external shocks,
uctuations
might arise. The economists then suggested an alternative within
the exogenous approach, at rst by using the stochastic real busi-
ness cycle models (Finn E. Kidland and Edward C. Prescott, 1982)
and, more recently, by the adoption of the New Keynesian Dynamic
Stochastic General Equilibrium (DSGE) models, very adopted from
the most important institutions and central banks. These models,
however, have also been criticized for the assumption of the rational-
ity of agents' behaviour, since rational expectations have been found
to be systematically wrong in the business cycle. Expectations are of
fundamental importance in economics and nance, since the agents'
decisions about the future depends upon their expectations and their
beliefs. It is in fact very unlikely that agents are perfect foresighters
with rational expectations in a complex world, characterized by an
irregular pattern of prices and quantities dealt in nancial markets,
in which sophisticated nancial instruments are widespread.
In the rst chapter of this dissertation, I will face the machine learn-
ing technique, which is a nonlinear tool used for a better tting, fore-
casting and clustering of dierent nancial time series and existing
information in nancial markets. In particular, I will present a collec-
tion of three dierent applications of these techniques, adapted from
three dierent joint works:
"Yield curve estimation under extreme conditions: do RBF net-
works perform better?, joint with Pier Giuseppe Giribone, Marco
Neelli, Marina Resta, published Anna Esposito, Marcos Faundez-
Zanuy, Carlo Francesco Morabito, Eros Pasero Edrs, Multidisci-
plinary Approaches to Neural Computing/Vol. 69/ WIRN 2017
and Chapter 22 in book "Neural Advances in Processing Non-
linear Dynamic Signals", Springer;
Interest rates term structure models and their impact on actuarial
forecasting, joint with Pier Giuseppe Giribone and Marina Resta,
presented at XVIII Quantitative Finance Workshop, University
of Roma 3, January 2018;
Applications of Kohonen Maps in financial markets: design of
an automatic system for the detection of pricing anomalies, joint
with Pier Giuseppe Giribone and published on Risk Management
Magazine, 3-2017.
In the second chapter, I will present the study A nancial market
model with conrmation bias, in which nonlinearity is present as a
result of the formation of heterogeneous expectations. This work is
joint with Fabio Tramontana and it has been presented during the
X MDEF (Dynamic Models in Economics and Finance) Workshop at
University of Urbino Carlo Bo.
Finally, the third chapter is a rielaboration of another joint paper,
"The eects of negative nominal risk rates on the pricing of American
Calls: some theoretical and numerical insights", with Pier Giuseppe
Giribone and Marina Resta, published on Modern Economy 8(7), July
2017, pp 878-887. The problem of quantifying the value of early ex-
ercise in an option written on equity is a complex mathematical issue
that deals with continuous optimal control. In order to solve the con-
tinuous dynamic optimization problem that involves high non linearity
in the state variables, we have adopted a discretization scheme based
on a stochastic trinomial tree. This methodology reveals a higher
reliability and
exibility than the traditional approaches based on approximated quasi-closed formulas in a context where financial markets
are characterized by strong anomalies such as negative interest rates
How robust is the natalist bias of pollution control?
No full textThis paper assesses the robustness of the ``natalist bias'' of pollution control in de la Croix and Gosseries (2012), according to which taxing emissions encourage agents to shift from production to procreation, further deteriorating the environment and gradually impoverishing the next generations. We relax the assumptions that human capital does not depend on environmental quality and that society does not allocate resources to pollution control. Using a similar Overlapping Generations (OLG) growth model, our findings indicate that taxation does not necessarily encourage agents to permanently shift away from production because living under better environmental conditions enhances productivity through human capital formation. As the government increases the emissions price, agents reduce consumption and education spending, hurting output in the short term. However, in the long run, the reduction in emissions that follows taxation more than compensates for the initial adverse effects, provided that the sensitivity of human capital accumulation to environmental degradation is strong enough. Furthermore, as we increase the coefficient capturing such pollution externality, a Neimark-Sacker bifurcation occurs, making the system compatible with persistent endogenous fluctuations
The effects of negative nominal rates on the pricing of American Calls: some theoretical and numerical insights
No full textThe article investigates the effects played on options pricing by negative risk-free rates when the underlying is an equity with null dividends. In such anomalous conditions, in fact, the fair value at early exercise of the American Call would not match the value of the European Call with the same financial features. We originally motivate this assumption with theoretical arguments. We then move to an empirical investigation where we put at work some quasi-closed formulas for pricing an American option and the stochastic trinomial trees algorithm. We then draw the conclusion that from a numerical viewpoint, the bias between the fair value of the American Call and the value of the corresponding. European Call is mainly due to approximation errors, which can be mitigated when Trinomial Stochastic Trees are used
Heterogeneous expectations and heterogeneous anchoring in a New-Keynesian framework
No full textClimate change is one of the most challenging topics of our generation, with profound implications for society, politics and also economics. The debate regarding the role of central banks and financial regulators in addressing climate-related policies has notably gained importance in recent years. Heterogeneity in the ecological thinking is another crucial aspect that affects households (Bliuc et al., 2015), firms (Leyva-de la Hiz et al., 2019), financial
regulators and central banks (Campiglio et al., 2018).
In this respect, Hommes and Lustenhouwer (2019) develop a dynamic stochastic general equilibrium (DSGE) model to examine the emergence of (almost) self-fulfilling waves of optimism and pessimism and self-fulfilling liquidity traps in a New Keynesian model with a continuum of heterogeneous expectations. Starting from their contribution, we develop a framework in which expectations are heterogeneous with respect to their level of anchorage around the targets of the central bank. We depart from the standard assumption in the literature under which the level of anchoring is homogeneous for both variables, such as in Hommes and Lustenhouwer (2019), evaluating the model under heterogeneous levels of anchoring around the targets of the central bank, and where brown firms’ expectations are less anchored due to the potential increase of costs derived from green policies. Our preliminary results show that only with anchored inflation expectations, waves are larger than in the case in which only the output gap is anchored, and weak responses to shocks in the brown sector may lead to waves of greenflation
Ponzi and zombies: The risk of over-indebtness of the private sector
No full textFinancial and economic crises are not always the same, and only some of
them have a radical and persistent impact on the economic system and on the
well-being of the community. For this reason it is important to understand
why only some episodes of crisis generate prolonged and systemic recessions.
In this respect, [2, 3] has introduced the idea that in periods of stability,
financial actors tend to increase their risk exposure, moving from a stable
hedge-dominated structure to an unstable one characterised by speculative
financial position and Ponzi: stability would be destabilising.
As a response of the Great Recession and of the most recent Covid-19 economic
crisis, several central banks opted for a liquidity injection as a stimulus
for the economy and to prevent systemic collapse. However, although not
with the same intensity, these non-conventional expansive monetary policies
had been pursued also during the period of “tranquility” between 2014 and
the beginning of 2020, facilitating the access to credit over a wide spectrum
of solvability degrees.
Starting from the three different relationships presented by Minsky (incomedebt-
hedge, speculative and Ponzi) for financial units, we develop a simple
partial equilibium agent-based model in which firms, the banking sector, the
real and the financial side of the economy interact. This theoretical framework
allows to extend the migratory microsimulation models based on the
E(ntry)-S(tay)-L(eave) scheme of [1] by considering the economic system, the
business cycle and by simulating the heterogeneity in firms’ creditwothiness
Financial fragility and credit risk: A simulation model
No full textFinancial and economic crises are not always the same. It is important to understand why some episodes of crisis generate prolonged and systemic recessions. Developing the Financial Instability Hypothesis, Hyman Minsky introduced the idea that in periods of stability, financial actors tend to increase their risk exposure, moving from a stable hedge-dominated structure to an unstable one, characterized by speculative and ultra-speculative (Ponzi) financial positions: hence, stability turns out being destabilizing. Starting from the three different relationships introduced by Minsky (income-debt-hedge, speculative and Ponzi) for financial units, we involve a simple partial equilibrium agent-based model in which firms, the banking sector, the real and financial sides of the economy, interact. This theoretic framework is used as computational laboratory to extend the migration rates open system modeling based on the E(ntry)-S(tay)-L(eave) processes by considering the economic system, the business cycle and with attention to so-called zombie-firms
The Effects of Negative Nominal Rates on the Pricing of American Calls: Some Theoretical and Numerical Insights
No full textThe article investigates the effects played on options pricing by negative risk-free rates when the underlying is an equity with null dividends. In such anomalous conditions, in fact, the fair value at early exercise of the American Call would not match the value of the European Call with the same financial features. We originally motivate this assumption with theoretical arguments. We then move to an empirical investigation where we put at work some quasi-closed formulas for pricing an American option and the stochastic trinomial trees algorithm. We then draw the conclusion that from a numerical viewpoint, the bias between the fair value of the American Call and the value of the corresponding. European Call is mainly due to approximation errors, which can be mitigated when Trinomial Stochastic Trees are used
A financial market model with confirmation bias
No full textWe develop a financial market model with heterogeneous agents who can be affected by confirmation bias. In particular we consider optimistic and pessimistic agents who adjust their beliefs giving more attention and consideration to evidences supporting their prior beliefs. These kinds of traders coexist with fundamentalists and chartists. We show that this psychological bias makes beliefs more and more distant as time passes, and permits to better explain some important stylized facts of financial markets
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