complexity and the character of stock returns empirical evidence and a model of asset prices based on complex investor learning empirical evidence on the distributional characteristics of common stock returns indicates 1 a power law tail index close to three describes the behavior of the positive tail of the survivor function of returns pr r x x a reflection of fat tails 2 general linear and nonlinear dependencies exist in the time series of returns 3 the time series return process is characterized by short run dependence short memory in both returns as well as their volatility the latter usually characterized in the form of autoregressive conditional heteroskedasticity and 4 the time series return process probably does not exhibit long memory but the squared returns process does exhibit long memory we propose a model of complex self referential learning and reasoning amongst economic agents that jointly produces security returns consistent with these general observed facts and which are supported here by empirical results presented for a benchmark sample of 50 stocks traded on the new york stock exchange the market we postulate is populated by traders who reason inductively while compressing information into a few fuzzy notions that they can in turn process and analyze with fuzzy logic we analyze the implications of such behavior for the returns on risky securities within the context of an artificial stock market model dynamic simulation experiments of the market are conducted from which market clearing prices emerge allowing us to then compute realized returns we test the effects of varying values of the parameters of the model on the character of the simulated returns the results indicate that the model proposed in this paper can jointly account for the presence of a power law characterization of the positive tail of the survivor function of returns with exponent on the order of three for autoregressive conditional heteroskedasticity for long memory in volatility and for general nonlinear dependencies in returns

does it pay to pay performance fees empirical evidence from dutch pension funds abstract we analyze the relation between investment returns and performance fees for 218 dutch occupational pension funds with an average total of 1090 billion euro in assets under management from 2012 to 2017 our dataset is free from self reporting biases and includes total return excess return and performance fees for six major asset classes we find no statistical evidence that the returns of pension funds that pay performance fees to asset managers for active investing are significantly higher or lower than the returns of pension funds that do not pay performance fees this is true for most asset classes and robust if we correct for risk we also document that large and more specialized pension funds pay less performance fees for a given level of excess return in alternative asset classes such as hedge funds and private equity this is possibly the result of better negotiation power due to their larger scale or higher level of expertise

altruistic versus egoistic behavior in a public good game this paper analyzes an evolutionary version of the public good game in which boundedly rational agents can use imitation and best reply decision rules several possibilities for both decision rules to be present in the population are considered i show that altruistic behavior might survive if switching between the decision rules occurs less often than the probabilities of errors in choosing a strategy and if local neighborhoods are not too small or too large

rational behavior and economic theory abstract nowadays it seems almost universally presumed that the fundamental characteristic of homo oeconomicus is his rationality we analyze the role played by the concept of rationality in economic theory and demonstrate that it is necessarily constrained to be an essentially contentless notion we show that the main body of economic theory is firmly grounded and that some contrasting approaches to rationality although leading to heated debates and vivid confusion have no fundamental significance for economics with a refereshed view on the essence of economics we argue that the principles of economic theory form an essential methodological guide for the emergent line of research based on the use of so called evolutive models

strategies and evolution in the minority game a multi round strategy experiment abstract minority games are a stylized description of strategic situations with both coordination and competition these games are widely studied using either simulations or laboratory experiments simulations can show the dynamics of aggregate behavior but the results of such simulations depend on the type of strategies used so far experiments provided little guidance on the type of strategies people use because the set of possible strategies is very large we therefore use a multi round strategy method experiment to directly elicit people s strategies between rounds participants can adjust their strategy and test the performance of possible new strategies against strategies from the previous round strategies gathered in the experiment are subjected to an evolutionary competition the strategies people use are very heterogeneous although aggregate outcomes resemble the symmetric nash equilibrium the strategies that survive evolutionary competition achieve much higher levels of coordination

reinforcement learning in the el farol model abstract the paper applies the approach of reinforcement learning to arthur s american economic review 84 1994a 406 el farol problem where repeatedly a population of agents decides to go to a bar or stay home and going is enjoyable if and only if the bar is not crowded the numerical simulations show that the learning process is fairly efficient in that attendances tend to fluctuate around the bar s capacity on the other hand the shape of the long run equilibrium frequency distribution is usually quite distinct from the nash equilibrium solutions and furthermore rather sensitive to some of the model s specification details

nash equilibria of repeated games with observable payoff vectors abstract we study a model of repeated games with imperfect monitoring where the payoff vector is observable in this situation any profitable deviation is detectable by all the players but the identity of the deviator may be unknown we design collective punishments directed against the set of potential deviators a particular class of signals is studied for which a characterization of the set of equilibrium payoffs is obtained journal of economic literature classification numbers c73

an overview of energy status and development in pakistan abstract energy is the basic necessity for life and a key factor to excel a country s economy pakistan despite being richly blessed with natural energy resources is dependent on foreign sources and is currently facing severe energy deficiency at the time of its independence in 1947 pakistan inherited 60 mw of power the energy sector had made some progress in the beginning but unfortunately the growth in positive curve couldn t last long the dilemma of the ever increasing gap between demand and supply has rendered pakistan an energy deficient country where most the people have none or limited access to electricity this paper gives an overview of the energy status of pakistan in this paper i have discussed a major aspects of energy sector of pakistan its establishment history and accomplishments b various institutions for energy generation and distribution c total installed and generation capacity d current energy reserves in the country such as coal oil natural gas nuclear energy as well as the renewable energy resources which include wind energy biogas hydel energy geothermal energy solar energy tidal and wave energy e current energy crisis in the power sector discussing the key issues leading to the origin causes and consequences of the problem the paper also presents f possible solutions to overcome this crisis which is becoming hazardous for the country s economy the various government semi government and private organizations and their efforts to resolve the situation of energy deficit and g renewable energy can provide an alternative form of energy why and how it can provide better replacement of other forms of energy barriers that halt progress in this area and various renewable energy projects have also been illustrated the goals principles and impacts of the national power policy 2013 is also mentioned in this paper

introduction to the special issue on agent based computational economics abstract a brief overview of agent based computational economics ace is given followed by a synopsis of the articles included in this special issue on ace and in a companion special issue on ace scheduled to appear in computational economics

market impact costs of institutional equity trades this article analyzes market impact costs of equity trading by one of the world s largest pension funds we find that on average these costs are small in terms of market disruption but substantial in terms of costs for the pension fund average market impact costs equal 20 basis points for buys and 30 basis points for sells furthermore we show that momentum and volatility have considerable influence on market impact costs other important determinants of these costs are trade type agency single or principal trade size trading strategy trading venue and industry sector additionally we find that the timing of trades plays a substantial role in explaining trading costs moreover we also establish a cost risk trade off the longer it takes to execute a trade the lower the expected market impact costs but the higher the volatility of these costs

evolution of transformer health index in the form of mathematical equation energy is a basic necessity in every country the worldwide demand for energy will rise due to the developments of power generation in industrial service and residential sectors a healthy power system is therefore very important to guarantee continuous electricity supply to the end users and this can be achieved through asset management a proper asset management will allow asset managers to conduct quality assessment of conditions and to develop future management strategies of the electrical assets such as transformers the execution of transformer asset management involves an investigation of the transformer s condition by employing transformer s health index thi mathematical equation algorithm or expert judgment has been investigated by many previous studies as one of the technique to determine health index hi some of the established methods of hi determination such as scoring and ranking method tier method matrices and multi feature assessment model have led to the different interpretations of the final condition of a transformer this paper critically examines and explores the previous studies related to transformer health index by using mathematical equation algorithm or expert judgment the concept of hi and its formulation are presented in this study generally there are three parts of hi formulation which are input algorithm for hi and the output of hi the application of hi is discussed in terms of the performance of in service transformer the limitations of the available methods are also discussed and future works to overcome the problems are suggested

a folk theorem for minority games we study a particular case of repeated games with public signals in the stage game an odd number of players have to choose simultaneously one of two rooms the players who choose the less crowded room receive a reward of one euro whence the name minority game the players in the same room do not recognize each other and between the stages only the current majority room is publicly announced we show that in the infinitely repeated game any feasible payoff can be achieved as a uniform equilibrium payoff and as an almost sure equilibrium payoff in particular we construct an inefficient equilibrium where with probability one all players choose the same room at almost all stages this equilibrium is sustained by punishment phases which use in an unusual way the pure actions that were played before the start of the punishment

globalizing carbon lock in this paper extends the arguments surrounding carbon lock in elaborated in unruh energy policy 28 2000 817 30 2002 317 to countries currently undergoing industrialization it argues that for numerous reasons industrializing countries are unlikely to leapfrog carbon intensive energy development on the contrary carbon lock in may be globalizing and could further constrain climate change mitigation options it is then argued that many policy recommendations ignore carbon lock in possibly limiting their potential for successful implementation the paper then discusses four policy approaches that appear to have advantages given lock in conditions it is recognized however that relative ease of implementation does not necessarily equate with superiority instead it is merely a path dependent outcome of past development decisions pursuing policies on the basis of relative implementation ease may help address the issue of climate change but could also result in sub optimal outcomes along other dimensions of sustainable development

a global game with strategic substitutes and complements abstract we study a global game in which actions are strategic complements over some region and strategic substitutes over another region an agent s payoff depends on a market fundamental and the actions of other agents if the degree of congestion is sufficiently large agents strategies are non monotonic in their signal about the market fundamental in this case a signal that makes them believe that the market fundamental is more favorable for an action may make them less likely to take the action because of the risk of overcrowding

inter pattern speculation beyond minority majority and games abstract a new simple model of financial market is proposed based on the sequential and inter temporal nature of trader trader interaction and on a new simple trading strategy space in this pattern based speculation model the traders open hold and close their positions explicitly information ecology is strikingly similar to that of the minority game which suggest to reinterpret the latter as a model of synchronisation of predictability exploitation naive and sophisticated agents are shown to give rise to very different phenomenology

living in an imaginary world that looks real abstract in the paper we show using standard approaches general equilibrium modeling and the assumption of complete rationality that the macroeconomic environment is endogenous and is indeterminate specifically it is argued without resorting to sunspot type arguments that microeconomic fundamentals do not suffice to characterize the economy at the macro level in particular we show how perceptions of rational agents of the workings of the economy a shape the environment b affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not as a by product we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise finally we show that systematic errors can persist indefinitely under rationality

on fragility of bubbles in equilibrium asset pricing models of lucas type abstract in this paper we study the existence of bubbles for pricing equilibria in a pure exchange economy a la lucas with infinitely lived homogeneous agents the model is analyzed under fairly general assumptions no restrictions either on the stochastic process governing dividends distribution or on the utilities possibly unbounded are required we prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion a generic uniqueness result is also given regardless of agent s preferences a few pathological examples of economies exhibiting pricing equilibria with bubble components are constructed finally a possible relationship between our approach and the theory developed by santos and woodford on ambiguous bubbles is investigated the whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models journal of economic literature classification numbers c61 c62 d51 g12

handbook of game theory with economic applications volume 3 this is the second of three volumes surveying the state of the art in game theory and its applications to many and varied fields in particular to economics the chapters in the present volume are contributed by outstanding authorities and provide comprehensive coverage and precise statements of the main results in each area the applications include empirical evidence the following topics are covered communication and correlated equilibria coalitional games and coalition structures utility and subjective probability common knowledge bargaining zero sum games differential games and applications of game theory to signalling moral hazard search evolutionary biology international relations voting procedures social choice public economics politics and cost allocation this handbook will be of interest to scholars in economics political science psychology mathematics and biology handbook of game theory with economic applications vol i

how vulnerable is the emissions market to transaction costs an abms approach abstract the impact of transaction costs on the early emissions trading market is examined by applying an agent based model and simulation abms approach for a realistic model set up bounded rationality stochastic characteristics and learning by doing are considered in our search processes marginal abatement cost parameters are obtained from yoo et al 2010 which is an experimental study on the emissions trading in the korean power sector sensitivity analyses are performed on market performance indices with regard to transaction cost parameters which represent scales and the learning elasticities of transaction costs a total of 960 simulations were run in this sensitivity analysis sensitivity analysis results consistently show that higher transaction costs worsen market performance the most remarkable finding in these results is that welfare performance of all the transactions decreases by up to 50 as the scale parameters of transaction costs increase implying that welfare gain from introducing emissions trading disappears significantly however with learning curve effect welfare performance could be regained by up to 26 in sum although transaction costs significantly encroach upon trade gains at the early stage based on our simulation results the welfare loss by way of transaction costs is lessened as the knowledge of market participants progresses

what determines corporate pension fund risk taking strategy abstract corporate sponsors of defined benefit pension plans generally assume low investment risk when they have low funding ratios and high default risk consistent with the risk management hypothesis however for financially distressed sponsors and sponsors that freeze terminate or convert defined benefit to defined contribution plans the risk shifting incentive moral hazard dominates pension fund risk taking is also affected by labor unionization and sponsor incentives to maximize tax benefits restore financial slack and justify the accounting choices of pension assumptions sponsors shift toward an aggressive risk strategy when their pension plans emerge from underfunding bankruptcy risk is reduced or marginal tax rate decreases overall we show that corporate sponsors adopt a dynamic risk taking strategy in their pension fund investments

coordination through social learning in a general equilibrium model this paper analyses coordination through social learning in a general equilibrium model we use a fully decentralized economy in which households and firms exchange labour and consumption goods in the corresponding markets with potential rationing their strategies are updated through an evolutionary learning process based on imitation and random experimenting this learning process induces substantial coordination failures especially between firms which lead almost systematically to below equilibrium output levels and social welfare losses the main underlying mechanism is a self reinforcing uneven distribution of households income which results in a lack of aggregate demand

fuzzy inductive reasoning expectation formation and the behavior of security prices abstract this paper extends the santa fe artificial stock market model sfasm studied by lebaron arthur and palmer 1999 journal of economic dynamics and control 23 1487 1516 in two important directions first some might question whether it is reasonable to assume that traders are capable of handling a large number of rules each with numerous conditions as is assumed in the sfasm we demonstrate that similar results can be obtained even after severely limiting the reasoning process we show this by allowing agents the ability to compress information into a few fuzzy notions which they can in turn process and analyze with fuzzy logic second lebaron et al have reported that the kurtosis of their simulated stock returns is too small as compared to real data we demonstrate that with a minor modification to how traders go about deciding which of their prediction rules to rely on when making demand decisions the model can in fact produce return kurtosis that is comparable to that of actual returns data

scale economies in pension fund investments a dissection of investment costs across asset classes abstract using a unique dataset of 225 dutch occupational pension funds with a total of 928 billion euro of assets under management we provide a comprehensive cross sectional analysis of the relation between investment costs and pension fund size our dataset is free from self reporting biases and decomposes investment costs for 6 asset classes in management costs and performance fees we find that a pension fund that has 10 times more assets under management on average reports 7 67 basis points lower annual investment costs economies of scale differ per asset class we find significant economies of scale in fixed income equity and commodity portfolios but not in real estate investments private equity and hedge funds we also find that large pension funds pay significantly higher performance fees for equity private equity and hedge fund investments

the cost of institutional equity trades presented are an overview of the findings from the recent literature on the cost of u s equity trades for institutional investors and new evidence on trading costs from a large sample of institutional trades the findings discussed have important implications for policymakers and investors implicit trading costs are economically significant equity trading costs vary considerably and vary systematically with trade difficulty and order placement strategy and whether a trade price represents best execution depends on detailed data for the trade s entire order submission process especially information on pretrade decision variables such as the trading horizon

learning with fixed rules the minority game abstract this paper gives a critical account of the literature on adaptive behaviour in the minority game a simple congestion game the literature has proposed a model which differs markedly from many standard learning models in that players are endowed with a fixed subset of behavioural rules or response modes which map the observed history to actions these rules need not have a behavioural interpretation or be derived from some form of optimizing behaviour nonetheless this model gives rise to behaviour that is close to equilibrium behaviour at the aggregate level the individual level behaviour predicted by the model seems to capture some aspects of observed experimental behaviour that are difficult to explain using standard models

the reality game abstract we introduce an evolutionary game with feedback between perception and reality which we call the reality game it is a game of chance in which the probabilities for different objective outcomes e g heads or tails in a coin toss depend on the amount wagered on those outcomes by varying the reality map which relates the amount wagered to the probability of the outcome it is possible to move continuously from a purely objective game in which probabilities have no dependence on wagers to a purely subjective game in which probabilities equal the amount wagered we study self reinforcing games in which betting more on an outcome increases its odds and self defeating games in which the opposite is true this is investigated in and out of equilibrium with and without rational players and both numerically and analytically we introduce a method of measuring the inefficiency of the game similar to measuring the magnitude of the arbitrage opportunities in a financial market we prove that the inefficiency converges to equilibrium as a power law with an extremely slow rate of convergence the more subjective the game the slower the convergence

the diagnosis of an electricity crisis and alternative energy development in pakistan abstract the electricity sector in pakistan is currently facing the formidable challenges of an insufficient installed capacity a suboptimal infrastructure circular debt and revenue shortage all of these problems hamper socioeconomic activities this paper diagnoses the overall condition of the electricity sector as well as the potential and recent progress in the implementation of alternative energy projects in the context of the targets set in the national energy security plan nesp the assessment reveals the unsatisfactory overall progress of the implementation of the nesp in general and alternative energy in particular we assess that if the short term measures contained in the nesp have been adequately executed were enough to bridge the existing electricity supply demand gap and the country might not be facing an ongoing electricity crisis further we investigated the specific alternative energy policy issues that hinder this sector s development in pakistan we conclude that fuel diversification by means of the maximum utilisation of alternative energy resources would help in solving the crisis and would also furnish the long term energy needs of the country finally we recommend a comprehensive strategy for revamping the electricity sector and developing the alternative energy resources needed to tackle the ongoing electricity crisis in pakistan

expectational diversity in monetary economies abstract we investigate an overlapping generations monetary economy in which expectations depend upon backward looking predictors of the future price level we use discrete choice theory to model how agents select a predictor based on its past forecast error letting the number of available predictors tend to infinity we obtain the large type limit of the system taking the large type limit dramatically reduces the number of free parameters while maintaining the expectational diversity which we argue is necessary for constructing plausible learning based models the model s dynamics are strongly influenced by the intensity of choice which measures how sensitive an agent s predictor choice is to differences in forecast errors across predictors when the intensity of choice is low the monetary steady state is stable as the intensity of choice increases and if certain parametric restrictions are met the system undergoes a hopf bifurcation in which case we document the existence of highly irregular equilibrium price paths

behavioral heuristics and market patterns in a bertrand edgeworth game abstract this paper studies bertrand price setting behavior when firms face capacity constraints bertrand edgeworth game this game is known to lack equilibria in pure strategies while the mixed strategy equilibria are hard to characterize we explore families of heuristic rules for individual price setting behavior and the resulting market patterns through simulations of agent based models and laboratory experiments overall the individual pricing strategies observed experimentally can be represented approximately by a sales based simple rule in the experiments average market prices tend to converge from above and approach a state resembling a steady state with slow aggregate price variations and low price dispersion around an average near the competitive level however that configuration can be disturbed occasionally by excursions triggered by discrete price raises of some agents salient features of experimental results can be described by simulations where agents use sales based heuristics with parameters calibrated from the experiments the results obtained here suggest the existence of useful complementarities between analytical experimental and agent based simulation approaches