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Transition Probability, Dynamic Regimes, and the Critical Point of Financial Crisis

2017年7月27日 没有评论
By Yinan Tanga, 1 and Ping Chenb, 2
aCenter for Corporate Finance and Financial Market,
Fudan University, Shanghai 200433, China
bCenter for New Political Economy,
Fudan University, Shanghai 200433, China
Physica A (2015, to appear)

Abstract:An empirical and theoretical analysis of financial crises is conducted based on statistical mechanics in non-equilibrium physics. The transition probability provides a new tool for diagnosing a changing market. Both calm and turbulent markets can be described by the birth-death process for price movements driven by identical agents. The transition probability in a time window can be estimated from stock market indexes. Positive and negative feedback trading behaviors can be revealed by the upper and lower curves in transition probability. Three dynamic regimes are discovered from two time periods including linear, quasi-linear, and nonlinear patterns. There is a clear link between liberalization policy and market nonlinearity.Numerical estimation of a market turning point is close to the historical event of the U.S. 2008 financial crisis.

TangChenTransitionCrisisPysicaA15


			
分类: Complex Economics 标签:

Zeroth Law of Thermodynamics and Transitivity of Simultaneity

2017年7月27日 没有评论
Zhao Zheng 1 and Ping Chen 2
Received November 22, 1996
There are two important laws of transitivity in physics (Zhao, 1991).One is the zeroth law of thermodynamics, which states the transitivity of
thermal equilibrium. The other is the law of the transitivity of simultaneity in general relativity (Landau and Lifshitz, 1975), which says that one can
synchronize coordinate clocks placed along a closed path to a simultaneous moment if and only if the reference frame is time-orthogonal.
In this paper, we will give a fundamental and intrinsic relationship between the two laws on transitivity in physics. The transitivity of thermal
equilibrium is equivalent to the transitivity of clock rate synchronization.In Section 2 we show the relationship between the transitivity of thermal
equilibrium and the transitivity of clock rate synchronization by means of the thermal Green function. In Section 3 we discuss "clock synchronization"
and "clock rate synchronization" in general relativity, and give a condition on "clock rate synchronization" which is different from that given by Landau
and Lifshitz. We present a conclusion and discussion in Section 4.
ZhaoChenZerothLawThermodynamics97


			
分类: Complex Economics 标签:

Alternative Policies after the Financial Crisis: New Thinking from Complex Evolutionary Economics

2017年2月25日 没有评论
分类: Complex Economics 标签:

Transition Probability, Dynamic Regimes, and the Critical Point of Financial Crisis

2017年2月21日 没有评论

Abstract

An empirical and theoretical analysis of financial crises is conducted based on statistical mechanics in non-equilibrium physics. The transition probability provides a new tool for diagnosing a changing market. Both calm and turbulent markets can be described by the birth-death process for price movements driven by identical agents. The transition probability in a time window can be estimated from stock market indexes. Positive and negative feedback trading behaviors can be revealed by the upper and lower curves in transition probability. Three dynamic regimes are discovered from two time periods including linear, quasi-linear, and nonlinear patterns. There is a clear link between liberalization policy and market nonlinearity. Numerical estimation of a market turning point is close to the historical event of the U.S. 2008 financial crisis.

Transition Probability Dynamic Regimes and the Critical Point of Financial Crisis

 

 

 

 

 

 

分类: Complex Economics 标签:

Mathematical Representation in Economics and Finance: Philosophical Preference, Mathematical Simplicity, and Empirical Relevance

2017年2月21日 没有评论

Abstract As Keynes pointed out, classical economics was similar to Euclidean geometry, but the reality is non-Euclidean. Now we have abundant evidence that market movements are nonlinear, non-equilibrium, and economic behavior is collective in nature. But mainstream economics and econometrics are still dominated by linear, equilibrium models of representative agent. A critical issue in economics is the selection criteria among competing math models. Economists may choose the preferred math representation by philosophical preference; or by mathematical beauty or computational simplicity. From historical lessons in physics, we choose the proper math by its empirical relevance, even at the costs of increasing mathematical dimensionality and computational complexity. Math representations can be judged by empirical features and historical implications. Recent historical events of financial crisis reveal the comparative advantage of the advanced math representation. Technology progress facilitates future advancements in mathematical representation and philosophical change in economic thinking.

Mathematical Representation in Economics and Finance Philosophical Preference Mathematical Simplicity and Empirical Relevance
分类: Complex Economics 标签:

Metabolic Growth Theory: Market-Share Competition, Learning Uncertainty, and Technology Wavelets

2014年3月13日 没有评论

Abstract

Both exogenous and endogenous growth theories in neoclassical economics ignore the resource constraints and wavelike patterns in technology development. The logistic growth and species competition model in population dynamics provides an evolutionary framework of economic growth driven by technology wavelets in market-share competition. Learning by doing and knowledge accumulation ignores the interruptive nature of technology advancement. Creative destruction can be understood by using knowledge metabolism. Policies and institutions co-evolve during different stages of technology cycles. Division of labor is limited by the market extent, numbers of resources, and environment fluctuations. There is a trade-off between the stability and complexity of an ecological-industrial system. Diversified patterns in development strategy are shaped by culture and environment when facing learning uncertainty. The Western mode of division of labor is characterized by labor-saving and resource-intensive technology, while the Asian and Chinese modes feature resource-saving and labor-intensive technology. Nonlinear population dynamics provides a unified evolutionary theory from Smith, Malthus, to Schumpeter in economic growth and technology development.

Key words: growth theory, market-share competition, technology wavelet, learning uncertainty, knowledge metabolism.

EL Classification: C30, E37, D83, L50, O00

Metabolic Growth Theory-1

Metabolic Growth Theory-2

分类: Complex Economics 标签:

Time Varying Moments, Regime Switch, and Crisis Warning: The Birth-Death Process with Changing Transition Probability

2014年3月4日 没有评论

Abstract:The sub-prime crisis in the U.S. reveals the limitation of diversificationstrategy based on mean-variance analysis. A regime switch and a turning point can be observed using a high moment representation andtime-dependent transition probability. Up-down price movements are induced by interactions among agents, which can be described by thebirth-death (BD) process. Financial instability is visible by dramatically increasing 3rd to 5th moments one-quarter before and during the crisis.The sudden rising high moments provide effective warning signals of a regime-switch or a coming crisis. The critical condition of a marketbreakdown can be identified from nonlinear stochastic dynamics. The master equation approach of population dynamics provides a unified theory of a calm and turbulent market.

Key Words: high moments, birth-death process, transition probability,regime switch, crisis warning

PACS: 89.65.Gh, 05.45.Tp, 05.10.Gg, 89.75.-k

Time varying moments regime switch and crisis warning The birth–death process with changing transition probability

 

 

 

分类: Complex Economics 标签:

The Frisch model of business cycles – A spurious doctrine, but a mysterious success

2013年9月22日 没有评论
分类: Complex Economics 标签:

From an efficient market to a viable market: new thinking on reforming the international financial market

2013年9月22日 没有评论

Abstract

The US-made grand financial crisis is a natural experiment. We have witnessed the grand failure of the linear equilibrium theory of the efficient market and the emergence of the non-linear evolutionary theory of the viable market. Four observations reveal where the equilibrium theory of asset pricing and business cycles went wrong: the exchange rate resonance driven by US business cycles, the mesofoundation of macro-fluctuations, the endogenous nature of persistent cycles in financial and macro-indexes, and the trend collapse and higher moment risk in the derivatives market. The new perspective, which is analogous to the theory of nonlinear population dynamics in continuous time, provides a better alternative for understanding complex causes of the grand crisis, including systematic failure in the mortgage security market, unprecedented concentration in financial markets,unfettered speculation in commodity and currency markets, deregulation and liberalisation of financial markets. A new international financial order can be achieved if a robust international antitrust law is developed and applied. and a Tobin tax on foreign exchange transactions can be established through global fforts.American disease of financial power, China puzzle of high savings and China’s constructive role in developing Asian dollar market, Pacific Union, and new international order are discussed. An overhaul of financial theory is needed to develop a viable financial market to support sustainable economies.

From an efficient market to a viable market: new thinking on reforming the international financial market

分类: Else 标签:

WEA Interview with Ping Chen

2013年9月22日 没有评论

…the two-level model of a micro-macro economy is over-simplified for modern economies. We propose a three-level model of a micro-meso-macro economy since the finance sector and industry structure at the meso-economy level is the key to generating innova-tion, instability, business cycles, and crisis.

Power and conflicts are the price of industrialization. That is why we study political economy and social economics. If the Coase theory is valid, there would be no power, no conflicts, no war, no government, and no regulations. This is not true in the history of industrialization.

READ MORE ——PingChenInterviewWEAaug2013

分类: Current Economic Affairs 标签:

Origin of Division of Labor and Stochastic Mechanism of Differentiation

2012年3月2日 没有评论

Nonlinear models are introduced to describe the nonequilibrium dynamics of social evolution. The difference between Western and Oriental culture,
and their roles in the origin in the division of labor, are described by a behavioral model in information diffusion and learning competition. It shows a trade-off between stability and diversity. The stochastic mechanism of social differentiation and the empirical evidence for this is discussed in a stochastic model of multistaged development. It shows that the break-down of the Gaussian distribution during a transition. Finally, an ideal model of social bifurcation is given.

Origin of Division of Labor and Stochastic Mechanism of Differentiation.pdf

分类: Complex Economics 标签:

Meso Foundation of Business Cycles and Market Vitality for Macro Policy

2012年2月29日 没有评论

New science of complexity provides more advanced tools in analyzing macro and financial indexes. Two discoveries changed current view of macro and financial economics. First, major source of business fluctuations lies in the meso level (financial intermediates and industrial organization) with little contribution from micro foundations (households or firms). Second, financial market is more stable in frequency domain rather than in price level domain. Business cycles are more like biological clock with endogenous instability and systematic resilience (the Schumpeter””s view). We develop a new framework of economy with three layers and new policy target in business cycle management. A general theory of collective movement in financial market could explain complex features in option pricing and financial crisis.

Meso Foundation of Business Cycles and Market Vitality for Macro Policy.pdf

分类: Complex Economics 标签:

China Approach in a Changing World

2012年2月29日 没有评论

The Washington Consensus failed to recognize the need of the developing world and the limits of the western mode of industrialization. In last three decades, China experiments a new approach with self-determination, open-minded learning, decentralized experiments, and dual-track reform to simultaneously achieve high speed growth, social stability, and international partnership in peaceful evelopment.

China Approach in a Changing World.pdf

分类: China's issue 标签:

Equilibrium Illusion, Economic Complexity and Evolutionary Foundation in Economic Analysis

2012年2月29日 没有评论

It is widely believed that an equilibrium framework based on simple models, such as the representative agent and bilateral bargaining, in a frictionless economy provides a consistent framework in micro, macro, finance, and institutional economics. However, equilibrium believes in self-stabilizing market and institutional convergence broken down when inherent instability and non-predictable uncertainty emerge under nonlinear and social interactions.Equilibrium illusions in economics and econometrics are pretty in math modeling but dangerous in policy decision. Known examples are the Frisch model of noise-driven cycles,the Lucas model of microfoundations, and the Coasian world of zero transactions. These models not only violate basic laws in science but also lack evidence in economic history.Their common problem is associated with linear Hamiltonian economics with symmetric information without history. Economies are dissipative systems in nature, characterized by symmetry breaking, information flow, a time arrow, and history. The many-body problem is fundamentally different from the one-body and two-body problem in mathematics. Both computational and natural experiments, such as a stock market crash and a transitional depression, reveal the severe limitations of equilibrium thinking and structural changes from evolutionary dynamics. The new science of complexity offers new tools of nonlinear dynamics and non-stationary time series analysis. Existing puzzles in equilibrium economics, such as persistent cycles, interruptive crises, market resilience, social movements, and organizational diversity, can be better understood by nonlinear dynamic models. Like the paradigm shift after Einstein in physics, the evolutionary perspective provides a general framework, while equilibrium models serve as its special cases, since the equilibrium picture is an approximation of economic complexity in a short-time window taken from a long-term historical current.

Equilibrium Illusion, Economic Complexity and Evolutionary Foundation in Economic Analysis.pdf

分类: Complex Economics 标签:

Coase Fantasy of Zero Transaction Costs And Asymmetric Bargaining in Social Conflicts

2012年2月29日 没有评论

Coase constructed a fantasy world with zero transaction costs.Implicitly, he proposes three hypothesis in his market solution of social conflicts: transaction costs are measurable in cost and benefit analysis of economic institution; optimal institution can be achieved without government regulation since transaction costs are driven down by market competition; social conflicts can be solved by bilateral bargaining when transaction costs are insignificant. His central argument is symmetry between demand and supply or symmetry between consumption and investment in equilibrium perspective. Coase approach is contrary to the laws of physics and historical trends in division of labor. Symmetry breaking is an essential feature for origin of division of labor and root of social conflicts. Sustainable market can be maintained by asymmetric compensation in protecting disadvantaged groups and innovative forces.

Coase Fantasy of Zero Transaction Costs And Asymmetric Bargaining in Social Conflicts.pdf

分类: Complex Economics 标签: