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arXiv2010

Inferring Fundamental Value and Crash Nonlinearity from Bubble Calibration

Identifying unambiguously the presence of a bubble in an asset price remains an unsolved problem in standard econometric and financial economic approaches. A large part of the problem is that the fundamental value of an asset is, in general, not directly observable and it is poorly constrained to calculate. Further, it is not possible to distinguish between an exponentially growing fundamental price and an exponentially growing bubble price. We present a series of new models based on the Johansen-Ledoit-Sornette (JLS) model, which is a flexible tool to detect bubbles and predict changes of regime in financial markets. Our new models identify the fundamental value of an asset price and crash nonlinearity from a bubble calibration. In addition to forecasting the time of the end of a bubble, the new models can also estimate the fundamental value and the crash nonlinearity. Besides, the crash nonlinearity obtained in the new models presents a new approach to possibly identify the dynamics of a crash after a bubble. We test the models using data from three historical bubbles ending in crashes from different markets. They are: the Hong Kong Hang Seng index 1997 crash, the S&P 500 index 1987 crash and the Shanghai Composite index 2009 crash. All results suggest that the new models perform very well in describing bubbles, forecasting their ending times and estimating fundamental value and the crash nonlinearity. The performance of the new models is tested under both the Gaussian and non-Gaussian residual assumption. Under the Gaussian residual assumption, nested hypotheses with the Wilks statistics are used and the p-values suggest that models with more parameters are necessary. Under non-Gaussian residual assumption, we use a bootstrap method to get type I and II errors of the hypotheses. All tests confirm that the generalized JLS models provide useful improvements over the standard JLS model.

q-fin.GN↗

arXiv2010

Cost objective PLM and CE

Concurrent engineering taking into account product life-cycle factors seems to be one of the industrial challenges of the next years. Cost estimation and management are two main strategic tasks that imply the possibility of managing costs at the earliest stages of product development. This is why it is indispensable to let people from economics and from industrial engineering collaborates in order to find the best solution for enterprise progress for economical factors mastering. The objective of this paper is to present who we try to adapt costing methods in a PLM and CE point of view to the new industrial context and configuration in order to give pertinent decision aid for product and process choices. A very important factor is related to cost management problems when developing new products. A case study is introduced that presents how product development actors have referenced elements to product life-cycle costs and impacts, how they have an idea bout economical indicators when taking decisions during the progression of the project of product development.

physics.gen-ph↗

arXiv2010

Quotation for the Value Added Assessment during Product Development and Production Processes

This communication is based on an original approach linking economical factors to technical and methodological ones. This work is applied to the decision process for mix production. This approach is relevant for costing driving systems. The main interesting point is that the quotation factors (linked to time indicators for each step of the industrial process) allow the complete evaluation and control of, on the one hand, the global balance of the company for a six-month period and, on the other hand, the reference values for each step of the process cycle of the parts. This approach is based on a complete numerical traceability and control of the processes (design and manufacturing of the parts and tools, mass production). This is possible due to numerical models and to feedback loops for cost indicator analysis at design and production levels. Quotation is also the base for the design requirements and for the choice and the configuration of the production process. The reference values of the quotation generate the base reference parameters of the process steps and operations. The traceability of real values (real time consuming, real consumable) is mainly used for a statistic feedback to the quotation application. The industrial environment is a steel sand casting company with a wide mix product and the application concerns both design and manufacturing. The production system is fully automated and integrates different products at the same time.

physics.gen-ph↗

arXiv2010

Costs Models in Design and Manufacturing of Sand Casting Products

In the early phases of the product life cycle, the costs controls became a major decision tool in the competitiveness of the companies due to the world competition. After defining the problems related to this control difficulties, we will present an approach using a concept of cost entity related to the design and realization activities of the product. We will try to apply this approach to the fields of the sand casting foundry. This work will highlight the enterprise modelling difficulties (limits of a global cost modelling) and some specifics limitations of the tool used for this development. Finally we will discuss on the limits of a generic approach.

physics.gen-ph↗

arXiv2013

Limit Order Books

Limit order books (LOBs) match buyers and sellers in more than half of the world's financial markets. This survey highlights the insights that have emerged from the wealth of empirical and theoretical studies of LOBs. We examine the findings reported by statistical analyses of historical LOB data and discuss how several LOB models provide insight into certain aspects of the mechanism. We also illustrate that many such models poorly resemble real LOBs and that several well-established empirical facts have yet to be reproduced satisfactorily. Finally, we identify several key unresolved questions about LOBs.

q-fin.TR↗

arXiv2011

Equilibrium notions and framing effects

Experimental economics has repeatedly demonstrated that the Nash equilibrium makes inaccurate predictions for a vast set of games. Instead, several alternative theoretical concepts predict behavior that is much more in tune with observed data, with the quantal response equilibrium as the most prominent example. However, here we show that this equilibrium notion itself, like any other concept that varies smoothly with the payoffs, is necessarily subject to framing effects: If the same economic problem is represented in a different but equivalent way, the predicted results will differ. As a consequence, we argue that tools and methods that are successful in explaining human behavior in laboratory experiments may be unsuitable for doing theory.

q-fin.GN↗

arXiv2010

Log-Periodic Oscillation Analysis and Possible Burst of the "Gold Bubble" in April - June 2011

This working paper analyzes the gold price dynamics on the basis of methodology developed by Didier Sornette. Our calculations indicate that this dynamics is close to the one of the "bubbles" studied by Sornette and that the most probable timing of the "burst of the gold bubble" is April - June 2011. The obtained result has been additionally checked with two different methods. First of all, we have compared the pattern of changes of the forecasted timing of the gold bubble crash with the retrospective changes of forecasts of the oil bubble crash (that took place in July 2008). This comparison indicates that the period when the timing of the crash tended to change is close to the end, and the burst of the gold bubble is the most probable in May or June 2011. Secondly, we used the estimates of critical time for the hyperbolic trend (that has been shown in our previous publications to be typical for many socioeconomic processes). Our calculations with this method also indicate May - June 2011 as the most probable time of the burst of the gold bubble. Naturally, this forecast should not be regarded as an exact prediction as this implies the stability of the finance policies of the USA, European Union, and China, whereas a significant intervention of giant players (like the Federal Reserve System, or the Central Bank of China) could affect the course of the exchange game in a rather significant way. We also analyze possible consequences of the burst of the "gold bubble".

q-fin.ST↗

arXiv2010

Fundamental and Real-World Challenges in Economics

In the same way as the Hilbert Program was a response to the foundational crisis of mathematics, this article tries to formulate a research program for the socio-economic sciences. The aim of this contribution is to stimulate research in order to close serious knowledge gaps in mainstream economics that the recent financial and economic crisis has revealed. By identifying weak points of conventional approaches in economics, we identify the scientific problems which need to be addressed. We expect that solving these questions will bring scientists in a position to give better decision support and policy advice. We also indicate, what kinds of insights can be contributed by scientists from other research fields such as physics, biology, computer and social science. In order to make a quick progress and gain a systemic understanding of the whole interconnected socio-economic-environmental system, using the data, information and computer systems available today and in the near future, we suggest a multi-disciplinary collaboration as most promising research approach.

q-fin.GN↗

arXiv2012

On the Existence of Bertrand-Nash Equilibrium Prices Under Logit Demand

This article presents a proof of the existence of Bertrand-Nash equilibrium prices with multi-product firms and under the Logit model of demand that does not rely on restrictive assumptions on product characteristics, firm homogeneity or symmetry, product costs, or linearity of the utility function. The proof is based on conditions for the indirect utility function, fixed-point equations derived from the first-order conditions, and a direct analysis of the second-order conditions resulting in the uniqueness of profit-maximizing prices. Several subsequent results also demonstrate that price equilibrium under the Logit model of demand cannot adequately describe multi-product pricing.

q-fin.GN↗

arXiv2010

Punctuated Equilibrium and Power Law in Economic Dynamics

An interesting toy model has recently been proposed on Schumpeterian economic dynamics by Thurner {\it et al.} following the idea of economist Joseph Schumpeter. Punctuated equilibrium dynamics is shown to emerge from this model and some detail analyses of the time series indicate SOC kind of behaviours. The focus in the present work is to toss the idea whether the dynamics can really be like a self organized critical (SOC) type. This study indicates that it is necessary to incorporate the concepts of 'fitness' and 'selection' in such a model in the line of the biological evolutionary model by Bak and Sneppen in order to obtain power law and thus SOC behaviour.

q-fin.GN↗

arXiv2010

Market-consistent valuation of insurance liabilities by cost of capital

This paper investigates market-consistent valuation of insurance liabilities in the context of, for instance, Solvency II and to some extent IFRS 4. We propose an explicit and consistent framework for the valuation of insurance liabilities which incorporates the Solvency II approach as a special case. The proposed framework is based on dynamic replication over multiple (one-year) time periods by a portfolio of assets with reliable market prices, allowing for "limited liability" in the sense that the replication can in general not always be continued. The asset portfolio consist of two parts: (1) assets whose market price defines the value of the insurance liabilities, and (2) capital funds used to cover risk which cannot be replicated. The capital funds give rise to capital costs; the main exogenous input of the framework is the condition on when the investment of the capital funds is acceptable. We investigate existence of the value and show that the exact calculation of the value has to be done recursively backwards in time, starting at the end of the lifetime of the insurance liabilities. The main question only partially considered in this paper is the uniqueness of the value. We derive upper bounds on the value and, for the special case of replication by risk-free one-year zero-coupon bonds, explicit recursive formulas for calculating the value. Valuation in Solvency II and IFRS 4 is based on representing the value as a sum of a "best estimate" and a "risk margin". In our framework, it turns out that this split is not natural. Nonetheless, we show that a split can be constructed as a simplification, and that it provides an upper bound on the value under suitable conditions. We illustrate the general results by explicitly calculating the value for a simple example.

q-fin.PR↗

arXiv2011

A Mispricing Model of Stocks Under Asymmetric Information

We extend the theory of asymmetric information in mispricing models for stocks following geometric Brownian motion to constant relative risk averse investors. Mispricing follows a continuous mean--reverting Ornstein--Uhlenbeck process. Optimal portfolios and maximum expected log--linear utilities from terminal wealth for informed and uninformed investors are derived. We obtain analogous but more general results which nests those of Guasoni (2006) as a special case of the relative risk aversion approaching one.

q-fin.GN↗

arXiv2020

Leverage efficiency

Peters (2011a) defined an optimal leverage which maximizes the time-average growth rate of an investment held at constant leverage. It was hypothesized that this optimal leverage is attracted to 1, such that, e.g., leveraging an investment in the market portfolio cannot yield long-term outperformance. This places a strong constraint on the stochastic properties of prices of traded assets, which we call "leverage efficiency." Market conditions that deviate from leverage efficiency are unstable and may create leverage-driven bubbles. Here we expand on the hypothesis and its implications. These include a theory of noise that explains how systemic stability rules out smooth price changes at any pricing frequency; a resolution of the so-called equity premium puzzle; a protocol for central bank interest rate setting to avoid leverage-driven price instabilities; and a method for detecting fraudulent investment schemes by exploiting differences between the stochastic properties of their prices and those of legitimately-traded assets. To submit the hypothesis to a rigorous test we choose price data from different assets: the S&P500 index, Bitcoin, Berkshire Hathaway Inc., and Bernard L. Madoff Investment Securities LLC. Analysis of these data supports the hypothesis.

q-fin.GN↗

arXiv2011

Macrostate Parameter and Investment Risk Diagrams for 2008 and 2009

In this paper are made some considerations of the application of phenomenological thermodynamics in risk analysis for the transaction on financial markets, using the concept of economic entropy and the macrostate parameter introduced by us in a previous works [15,16]. The investment risk diagrams for a number of Romanian listed companies in 2008 and 2009 years were calculed. Also, the evolution of the macrostate parameter during financial and economic crisis in Romania are studied.

q-fin.GN↗

arXiv2011

Econophysical Approaches for the Direct Foreign Investments

In this paper will be applied some principles and methods from econophysics in the case of the direct foreign investitions (D.F.I.), particularised for the Greenfield type, and mixed firms of trade and industrial production (Joint Ventures). To this aim will be used some similarities and parallelisms between the mentioned economic domains and some phenomena and processes from physics, especially from thermodynamics, solid state physics (the grow of crystals and thin policrystalline layers etc.), electromagnetism etc.

q-fin.GN↗

arXiv2011

An Econophysics Model for the Stock-Markets' Analysis and Diagnosis

In this paper we present an econophysic model for the description of shares transactions in a capital market. For introducing the fundamentals of this model we used an analogy between the electrical field produced by a system of charges and the overall of economic and financial information of the shares transactions from the stock-markets. An energetic approach of the rate variation for the shares traded on the financial markets was proposed and studied.

q-fin.GN↗

arXiv2011

Dynamics of a Service Economy Driven by Random Transactions

Agents buy and sell services. All services are of equal quality. Buyers choose sellers at random. Monetary and fiscal policies are imposed by a central bank and a central government. Credit is supplied by a commercial banking system. Propensities to buy, sell, and lend depend on account balances, interest rates, tax rates and loan default rates. Computer simulations track weekly sales, loans, account balances, commercial bank profits, solvency and compliance with reserve requirements, and government debt. The model of this economy is fully specified by a computer program. The program allows the user to explore the effects of parameter changes. Monetary and fiscal policies are implemented by choices of parameters such as interest rates and reserve requirements, and government tax and spending rates. Credit supply, consumer confidence, and loan default rates strongly affect the behavior of the economy in terms of sales.

q-fin.GN↗

arXiv2011

Gaussian Noise Effects on the Evolution of Wealth in a Closed System of n-Economies

Based on the stochastic model proposed by Patriarca-Kaski-Chakraborti that describes the exchange of wealth between $n$ economic agents, we analyze the evolution of the corresponding economies under the assumption of a Gaussian background, modeling the exchange parameter $ε$. We demonstrate, that within Gaussian noise, the variance of the resulting wealth distribution will significantly decrease, and the equilibrium state is reached faster than in the case of a uniform distributed $ε$ parameter. Also, we show that the system with Gaussian noise strongly resembles a deterministic system which is solved by means of a Z-Transform based technique.

q-fin.GN↗