Antonio Palestrini

On the size distribution of firms: additional evidence from the G7 countries

We analyze the average size distribution of a pool of the G7 groups firms over the period 1987–2000. In particular, firm sizes are measured employing different proxies, and after conditioning on business cycle phases. We find that: (i) the empirical distributions are all consistent with a power law; (ii) point estimates suggest that only in limited cases the exponent is equal to −1, i.e., the resulting size distribution generally is not Zipf; (iii) regardless of the variable employed to measure firm sizes, firms are distributed more equally during recessions than during expansions.

Asset Price Dynamics among Heterogeneous Interacting Agents

In this paper, we investigate the presence of rationalherding on asset price dynamics during the intra-day trading withheterogeneous interacting agents, whose information set is notcomplete. In the model, individual probability measures offinancial investment strategies are defined using statisticalmechanics concepts. In addition, there is a learning processtoward the best strategy, implemented as a geneticalgorithm. Simulations show that imitative behavior can be arational strategy, since it allows an investor to gain excessreturns on an asset by exploiting information regarding pricedynamics not strictly contained in the fundamental solution. Herdbehavior is rational in the sense that it produces profits at theexpense of increasing the complexity of the system.

The Apprentice Wizard: Montetary Policy, Complexity And Learning

This paper investigates some central issues of monetary policy by offering a model in which a central bank tries to stabilize fluctuations in aggregate output and inflation in an adaptive complex economy. We resort to evolutionary algorithms to model the central bank behaviour under discretion, and confront the efficiency of discretion with the choice of full commitment to a fixed rule.

HERD BEHAVIOR AND NONFUNDAMENTAL ASSET PRICE FLUCTUATIONS IN FINANCIAL MARKETS

In this paper we investigate the effects of herding on asset price dynamics during continuous trading. We focus on the role of interaction among traders, and we investigate the dynamics emerging when we allow for a tendency to mimic the actions of other investors, that is, to engage in herd behavior. The model, built as a mean field in a binary setting (buy/sell decisions of a risky asset), is expressed by a three-dimensional discrete dynamical system describing the evolution of the asset price, its expected price, and its excess demand. We show that such dynamical system can be reduced to a unidirectionally coupled system. In line with the rational herd behavior literature [Bikhchandani, S., Sharma, S. (2000), Herd Behavior in Financial Markets: A Review. Working paper, IMF, WP/00/48], situations of multistability are observed, characterized by strong path dependence; that is, the dynamics of the system are strongly influenced by historical accidents. We describe the different kinds of dynamic behavior observed, and we characterize the bifurcations that mark the transitions between qualitatively different time evolutions. Some situations give rise to high sensitivity with respect to small changes of the parameters and/or initial conditions, including the possibility of invest or reject cascades (i.e., sudden uncontrolled increases or crashes of the prices).

Power laws and macroeconomic fluctuations

We study the duration distribution of recessions and recoveries occurred in a pool of industrialized countries during the last 120 years. We find that for recessions the duration is distributed according to a power law, and that the power exponent is virtually invariant as we split up the time span into sub-periods. The evidence regarding the duration of recoveries is mixed, however.

Agents’ Heterogeneity, Aggregation, and Economic Fluctuations

We study the implications of agents’ heterogeneity for business cycle analysis with the help of a two dimensional non-linear dynamical system derived from a New Keynesian macroeconomic model with imperfect capital markets. In order to analyze the interaction between real and financial variables, we have focussed on the degree of financial fragility of the economy, as proxied by the ratio of corporate net worth to the stock of capital, that is the equity ratio. Our approach allows to analyze both fluctuations due to the impulse-propagation mechanism and self-sustaining endogenous cycles. In the former case, shocks transmitted and amplified by a propagation mechanism, which depends on the degree of agents’ heterogeneity. In the latter case self sustained business cycles are generated by the evolution over time of the distribution of heterogeneous agents, classified by the degree of financial fragility.

CYCLICAL BEHAVIOR OF PRICES IN THE G7 COUNTRIES THROUGH WAVELET ANALYSIS

Our analysis, conducted using the GDP and the GDP deflator time series (OECD source; 1960–2001) for the G7 countries, shows the robustness of the negative covariance between the GDP and its deflator, but only over long run horizons. Through wavelet decomposition we evaluate the price–output relationship at different time scales, where most countries reveal similar patterns. More precisely, at short time scales a positive correlation seems to appear whereas, and consequently, a regime switch occurs at a time horizon of about two years leading to a negative relationship for higher horizons. These results seem to suggest that the negative or acyclical relationship usually found after the 1960s may be the composite effect of different time scale correlations, where the four-year-horizon component seems to have the greatest influence. In particular for Canada, France, and Italy we observe something like a rotation of the price–output relationship between the countercyclical and the procyclical relationship. Finally, our analysis shows that even the relationship between the two series does not seem to be very stable regarding the lead and lag structure also. The phase is nonlinear for all the countries and, consequently, the group delay (the lag) is not constant. In particular, looking at the time scale we observe an inversion of the local monotonicity at the frequency of about 0.3–0.35 for all G7 countries.

Economics with Heterogeneous Interacting Agents: A Practical Guide to Agent-Based Modeling

This book offers a practical guide to Agent Based economic modeling, adopting a learning by doing approach to help the reader master the fundamental tools needed to create and analyze Agent Based models. After providing them with a basic toolkit for Agent Based modeling, it present and discusses didactic models of real financial and economic systems in detail. While stressing the main features and advantages of the bottom-up perspective inherent to this approach, the book also highlights the logic and practical steps that characterize the model building procedure. A detailed description of the underlying codes, developed using RandC, is also provided. In addition, each didactic model is accompanied by exercises and applications designed to promote active learning on the part of the reader. Following the same approach, the book also presents several complementary tools required for the analysis and validation of the models, such as sensitivity experiments, calibration exercises, economic network and statistical distributions analysis. By the end of the book, the reader will have gained a deeper understanding of the Agent Based methodology and be prepared to use the fundamental techniques required to start developing their own economic models. Accordingly, Economics with Heterogeneous Interacting Agents will be of particular interest to graduate and postgraduate students, as well as to academic institutions and lecturers interested in including an overview of the AB approach to economic modeling in their courses.

SCALING LAWS IN THE MACROECONOMY

The practice of detecting power laws and scaling behaviors in economics and finance has gained momentum in the last few years, due to the increased use of concepts and methods first developed in statistical physics. Some disappointment has emerged in the economic profession, however, as regards the models proposed so far to theoretically explain these phenomena. In this paper we aim to address this criticism, showing that scaling behaviors can naturally emerge in a multiagent system with optimizing interacting units characterized by financial fragility.

Mean Field Effects and Interaction Cycles in Financial Markets

In this work, we investigated the effects of herding on assets price dynamics during the intra-day trading. The model — built as a mean-field in a binary setting (buy/sell decisions) — shows that when the interaction among individuals is low — i.e. there is few herding — the dynamics converges monotonically or with oscillations to the prior about the fundamental value of the asset (assumed constant and homogeneous across individuals). If agents give a larger weight to the action of the others fluctuations are amplified, until a Hopf bifurcation eventually occurs and limit cycles emerge. Simulations with gaussian noise on prices reproduce the same dynamics: rising either the strength of interaction or the intensity of choice the imitative behavior prevails on all other factors, and we have upward and downward rushes. For a wide range of “intermediate” values of parameters, some other interesting features emerge, such as excess kurtosis and clustering in the volatility of returns.