Quantitative Finance

Inspired by Adam Smith and Friedrich Hayek, many economists have postulated the existence of invisible forces that drive economic markets. These market forces interact in complex ways making it difficult to visualize or understand the interactions in every detail. Here I show how these forces can transcend a zero-sum game and become a win-win business interaction, thanks to emergent social synergies triggered by division of labor. Computer simulations with the model Sociodynamica show here the detailed dynamics underlying this phenomenon in a simple virtual economy. In these simulations, independent agents act in an economy exploiting and trading two different goods in a heterogeneous environment. All and each of the various forces and individuals were tracked continuously, allowing to unveil a synergistic effect on economic output produced by the division of labor between agents. Running simulations in a homogeneous environment, for example, eliminated all benefits of division of labor. The simulations showed that the synergies unleashed by division of labor arise if: Economies work in a heterogeneous environment; agents engage in complementary activities whose optimization processes diverge; agents have means to synchronize their activities. This insight, although trivial if viewed a posteriori, improve our understanding of the source and nature of synergies in real economic markets and might render economic and natural sciences more consilient.

Taking agent-based models (ABM) closer to the data is an open challenge. This paper explicitly tackles parameter space exploration and calibration of ABMs combining supervised machine-learning and intelligent sampling to build a surrogate meta-model. The proposed approach provides a fast and accurate approximation of model behaviour, dramatically reducing computation time. In that, our machine-learning surrogate facilitates large scale explorations of the parameter-space, while providing a powerful filter to gain insights into the complex functioning of agent-based models. The algorithm introduced in this paper merges model simulation and output analysis into a surrogate meta-model, which substantially ease ABM calibration. We successfully apply our approach to the Brock and Hommes (1998) asset pricing model and to the "Island" endogenous growth model (Fagiolo and Dosi, 2003). Performance is evaluated against a relatively large out-of-sample set of parameter combinations, while employing different user-defined statistical tests for output analysis. The results demonstrate the capacity of machine learning surrogates to facilitate fast and precise exploration of agent-based models' behaviour over their often rugged parameter spaces.

It is well-known that for a group of time-consistent decision makers their collective time preferences may become time-inconsistent. Jackson and Yariv (2014) demonstrated that the result of aggregation of exponential discount functions always exhibits present bias. We show that when preferences satisfy the axioms of Fishburn and Rubinstein (1982), present bias is equivalent to decreasing impatience (DI). Applying the notion of comparative DI introduced by Prelec (2004), we generalize the result of Jackson and Yariv (2014). We prove that the aggregation of distinct discount functions from comparable DI classes results in the collective discount function which is strictly more DI than the least DI of the functions being aggregated. We also prove an analogue of Weitzman's (1998) result, for hyperbolic rather than exponential discount functions. We show that if a decision maker is uncertain about her hyperbolic discount rate, then long-term costs and benefits will be discounted at a rate which is the probability-weighted harmonic mean of the possible hyperbolic discount rates.

The Competitive Industrial Performance index (developed by experts of the UNIDO) is designed as a measure of national competitiveness. Index is an aggregate of eight observable variables, representing different dimensions of competitive industrial performance.

We study a large economy in which firms cannot compute exact solutions to the non-linear equations that characterize the equilibrium price at which they can sell future output. Instead, firms use polynomial expansions to approximate prices. The precision with which they can compute prices is endogenous and depends on the overall level of supply. At the same time, firms' individual supplies, and thus aggregate supply, depend on the precision with which they approximate prices. This interrelation between supply and price forecast induces multiple equilibria, with inefficiently low output, in economies that otherwise have a unique, efficient equilibrium. Moreover, exogenous parameter changes, which would increase output were there no computational frictions, can diminish agents' ability to approximate future prices, and reduce output. Our model therefore accommodates the intuition that interventions, such as unprecedented quantitative easing, can put agents into "uncharted territory".

This paper proposes a target zones exchange rate model with a terminal condition of entering a currency zone. It is assumed that the exchange rate is a function of the fundamental and time. Another essential assumptions of the model is that the fundamental process is bounded inside a band and that terminal condition for the exchange rate holds. The fundamental is specified in two ways: as a regulated Brownian motion and Ornstein-Uhlenbeck processes. For the case of the Brownian motion process the closed form solution of the problem is obtained, whereas for the Ornstein-Uhlenbeck process the closed form solution does not exist, therefore we had to use numerical method for solving of the problem. Both specifications are compared numerically.

Credit risk rating is shown to be a relevant determinant in order to estimate good corporate governance and to self-optimize capital structure. The conclusion is argued from a study on a selected (and justified) sample of (182) companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange and which use the same Shanghai Brilliance Credit Rating & Investors Service Company assessment criteria, for their credit ratings, from 2010 to 2015. Practically, 3 debt ratios are examined in terms of 11 characteristic variables. Moreover, any relationship between credit rating and corporate governance can be thought to be an interesting finding. The relationship between credit rating and leverage is not as evident as that found by other researchers from different countries; it is significantly positively related to the outside director, firm size, tangible assets and firm age, and CEO and chairman office plurality. However, leverage is found to be negatively correlated with board size, profitability, growth opportunity, and non-debt tax shield. Credit rating is positively associated with leverage, but in a less significant way. CEO-Board chairship duality is insignificantly related to leverage. The non-debt tax shield is significantly correlated with leverage. The correlation coefficient between CEO duality and auditor is positive but weakly significant, but seems not consistent with expectations. Finally, profitability cause could be regarded as an interesting finding. Indeed, there is an inverse correlation between profitability and total debt (Notice that the result supports the pecking order theory). In conclusion, it appears that credit rating has less effect on the so listed large Chinese companies than in other countries. Nevertheless, the perspective of assessing credit risk rating by relevant agencies is indubitably a recommended time dependent leverage determinant.

The energy and material processing industries are traditionally characterized by very large-scale physical capital that is custom-built with long lead times and long lifetimes. However, recent technological advancement in low-cost automation has made possible the parallel operation of large numbers of small-scale and modular production units. Amenable to mass-production, these units can be more rapidly deployed but they are also likely to have a much quicker turnover. Such a paradigm shift motivates the analysis of the combined effect of lead time and lifetime on infrastructure investment decisions. In order to value the underlying real option, we introduce an optimal multiple stopping approach that accounts for operational flexibility, delay induced by lead time, and multiple (finite/infinite) future investment opportunities. We provide an analytical characterization of the firm's value function and optimal stopping rule. This leads us to develop an iterative numerical scheme, and examine how the investment decisions depend on lead time and lifetime, as well as other parameters. Furthermore, our model can be used to analyze the critical investment cost that makes small-scale (short lead time, short lifetime) alternatives competitive with traditional large-scale infrastructure.

In this paper, we provide an integrated systems modeling approach to analyzing global externalities from a microeconomic perspective. Various forms of policy (fiscal, monetary, etc.) have addressed flaws and market failures in models, but few have been able to successfully eliminate modern externalities that remain an environmental and human threat. We assess three primary global industries (pollution, agriculture, and energy) with respect to non-OECD entities through both qualitative and quantitative studies. By combining key mutual points of specific externalities present within each respective industry, we are able to propose an alternative and optimized solution to internalizing them via incentives and cooperative behavior rather than by traditional Pigouvian taxes and subsidies.

As a result of the climate change the situation in Arctic area leads to several important consequences. On the one hand, oil and gas resources can be exploited much easier than before. Thus, one can already observe discussions on disputed shelf zones where the deposits are located. On the other hand, oil and gas excavation leads to serious potential threats to fishing by changing natural habitats which in turn can create serious damage to the economies of some countries in the region. Another set of problems arises due to the extension of navigable season for Arctic Shipping Routes.