guaranty funds and risk taking evidence from the insurance industry abstract this paper examines change in property liability insurers risk taking around enactments of state guaranty fund laws our evidence suggests that the risk of insurers asset portfolios increases following enactments but this increase in risk is significant only for stock insurers our evidence of increased risk taking following guaranty fund adoptions suggests that the way these funds are organized creates counterproductive investment incentives especially for stock companies because these laws were enacted by states over the period 1969 1981 our evidence on changes in risk taking helps resolve statistical problems that have been troublesome for studies of bank deposit insurance

heterogeneous expectations in the gold market specification and estimation abstract the increase in the price of gold between 2002 and 2011 appears to be a candidate for a potential asset price bubble suggesting that chartists feedback traders were highly active in the gold market during this period hence this paper develops and tests empirically several models incorporating heterogeneous expectations of agents specifically fundamentalists and chartists for the gold market the empirical results show that both agent types are important in explaining historical gold prices but that the 10 year bull run of gold in the early 2000s is consistent with the presence of agents extrapolating long term trends technically this paper is a further step toward providing an empirical foundation for certain assumptions used in the heterogeneous agents literature for example the empirical results presented in this paper compare the economical and statistical significance of numerous switching variable specifications that are generally only introduced ad hoc

valuing catastrophe derivatives under limited diversification a stochastic dominance approach abstract we present a new approach to the pricing of catastrophe event cat derivatives that does not assume a fully diversifiable event risk instead we assume that the event occurrence and intensity affect the return of the market portfolio of an agent that trades in the event derivatives based on this approach we derive values for a cat option and a reinsurance contract on an insurer s assets using recent results from the option pricing literature we show that the assumption of unsystematic event risk seriously underprices the cat option last we present numerical results for our derivatives using real data from hurricane landings in florida

instability of sunspot equilibria in real business cycle models under adaptive learning we examine the stability of equilibrium in sunspot driven real business cycle rbc models under adaptive learning we show that the general reduced form of this class of models can admit rational expectations equilibria that are both indeterminate and stable under adaptive learning indeterminacy of equilibrium allows for the possibility that non fundamental sunspot variable realizations can serve as the main driving force of the model and several researchers have put forward calibrated structural models where sunspot shocks play such a role we show analytically how the structural restrictions that researchers have imposed on this type of model lead to reduced form systems where equilibrium is indeterminate but always unstable under adaptive learning we thereby resolve a stability puzzle identified by evans and mcgough 2002

a comparison of economic agent based model calibration methods abstract despite significant expansion in recent years the literature on quantitative and data driven approaches to economic agent based model validation and calibration consists primarily of studies that have focused on the introduction of new calibration methods that are neither benchmarked against existing alternatives nor rigorously tested in terms of the quality of the estimates they produce in response we compare a number of prominent agent based model calibration methods both established and novel through a series of computational experiments in an attempt to determine the respective strengths and weaknesses of each approach overall we find that a simple likelihood based approach to bayesian estimation consistently outperforms several members of the more popular class of simulated minimum distance methods and results in reasonable parameter estimates in many contexts with a degradation in performance observed only when considering a large scale model and attempting to fit a substantial number of its parameters

learnability and equilibrium selection under indeterminacy abstract this paper presents an equilibrium selection procedure for linear rational expectations models under equilibrium indeterminacy in the procedure a specific equilibrium is chosen such that the perceived law of motion for agents with adaptive learning rules converges to the particular solution the procedure is applicable only under empirically implausible parameter settings if the agents perceive fundamental shock processes completely however if they misperceive the fundamental shocks in some degree the procedure works under plausible parameters it is also demonstrated that the selected particular solution exhibits different dynamics from that under the assumption often made in the literature

multiple solution indeterminacies in monetary policy analysis abstract a sizeable fraction of recent research on monetary policy has been concerned with issues relating to analytical indeterminacies i e multiple solutions in rational expectations re models most of the literature features sophisticated re analysis conducted within dynamic models that reflect optimizing behavior by individual agents and incorporate taylor style policy rules a few papers have suggested that some of the particular indeterminacy arguments are misleading or irrelevant for the most part however there has been little dissent from the position that these indeterminacies present a genuine problem for monetary policy makers the purpose of the present paper by contrast is to argue that conclusions based on multiple solution indeterminacy findings are of dubious merit rather generally

alternative forms of deposit insurance pricing and bank incentive issues abstract this paper derives formulas for a deposit insuring agency s liability and hence a fair value deposit insurance premium and the equilibrium value of bank equity considering a wide variety of factors affecting individual bank risk both fixed rate and variable rate risk sensitive insurance systems are analyzed consideration is made as to whether the deposit insuring agency makes direct payments to depositors or arranges mergers following bank closings the effect of these various policy choices on banks incentive for risk taking is also analyzed

some issues concerning interest rate pegging price level determinacy and the real bills doctrine abstract in a recent paper canzoneri henderson and rogoff have shown that it is possible for the monetary authority to peg the nominal interest rate without creating price level indeterminacy in a simplified version of the 1975 sargent wallace model the present paper begins by reviewing that result which involves a limiting case of a money supply rule that depicts the authority as responding to current values of the interest rate then it shows that there exists an alternative rule that will peg the nominal rate without creating indeterminacy but that this rule induces a different pattern of price level fluctuations next the paper considers whether indeterminacy will prevail if the authority tries to effect a peg in a third way by simply standing ready to buy and sell securities at the desired rate finally the implications of the foregoing results are drawn for arguments concerning the real bills doctrine and some critical comments are directed at the recent attempted rehabilitation of that doctrine by sargent and wallace

pricing risk adjusted deposit insurance an option based model this paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships betweeen equity and a call option and insurance and a put option the data utilizes the market value of equity to solve for the asset value and its volatility market perceptions of fdic bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification thus facilitating allocation of aggregate premium across banks while economists have long argued in favor of risk adjusted deposit insurance as both more equitable and more efficient than the current system of flatrate premiums various recent developments have further contributed to an increasing dissatisfaction with the current system first both the banking industry and the government seem to be tending to the view that deregulation of the banking industry would be necessary in order to meet more sophisticated future demands on the industry as well as desirable as a policy means of stimulating greater competition among banks moreover a sudden rise in the incidence of bank failures 1 and the vulnerability of the u s banks to the socalled international debt crisis have served to bring to the fore concern about the health of the banking industry in the absence of deposit insurance riskier banks will be able to attract deposits only at higher rates and these higher costs of funding serve as built in market regulated incentives to limit excessive risk taking by banks as introduction of deposit insurance makes deposits equally risk free across banks these incentives disappear and regulation and close supervision of the banking industry must necessarily replace them as deterrents to excessive risk taking thus when insurance is offered at a flat premium regulation is designed to ensure that the risk posed to the insurer both asset and financial risk is appropriately uniform

fiscal policy and business cycle characteristics in a heterogeneous agent macro model abstract this paper explores the macroeconomic implications of changing fiscal policy in a heterogeneous interacting agent hia model the key contributions to the existing hia complex adaptive trivial system cats literature include the addition of a progressive income tax structure an expanded role for redistribution and a stylized reactive government sector in certain specifications deficit financed tax cuts are shown to effectively shorten recessions while deficit financed spending stimulus is able to lengthen recoveries alternative specifications provide ambiguous support for generalizing the effectiveness of these policy treatments robustness checks support the general findings that increased redistribution towards the unemployed results in higher unemployment rates greater inequality and shorter contractions

market entry waves and volatility outbursts in stock markets abstract we develop a simple agent based financial market model in which speculators market entry decisions are subject to herding behavior and market risk in addition speculators orders depend on price trends market misalignments and fundamental news using a mix of analytical and numerical tools we show that a herding induced market entry wave may amplify excess demand triggering lasting volatility outbursts eventually however higher stock market risk reduces stock market participation and volatility decreases again simulations furthermore reveal that our approach is also able to produce bubbles and crashes excess volatility fat tailed return distributions and serially uncorrelated price changes moreover trading volume is persistent and correlated with volatility

taking stock a rigorous modelling of animal spirits in macroeconomics modelling animal spirits this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

do complex financial models really lead to complex dynamics agent based models and multifractality abstract agent based models are usually claimed to generate complex dynamics however the link to such complexity has not been subject to rigorous examination this paper studies this link between the complexity of financial time series measured by their multifractal properties and the design of various small scale agent based frameworks used to model the heterogeneity of financial markets nine popular models are analyzed and while some of the models do not generate interesting multifractal patterns we observe the strongest tendency towards multifractal behavior for the bornholdt ising model the discrete choice based models by gaunersdorfer hommes and schmitt westerhoff and the transition probabilities based framework by franke westerhoff complexity is thus not an automatic feature of the time series generated by any agent based model but generated only by models with specific properties in addition because multifractality is considered a financial stylized fact its presence can be used as a new means to validate such models

interactions between stock bond and housing markets abstract we develop a model in which investors can participate in stock bond and housing markets investors market entry decisions are subject to herding effects and depend on the markets price trends and on their mispricings the dynamics of our model is governed by a four dimensional nonlinear map and its unique inner steady state is characterized by standard present value relations between dividends rents and the bond rate amongst other things we show that endogenous stock and housing market dynamics emerge countercyclical to each other if investors react strongly to the markets price trends such a cross feedback reflects investors tendency to transfer their enthusiasm from one speculative market to another

misintermediation and macroeconomic fluctuations abstract individuals plan consumption and production for different point in the future using interest rates of various maturities as a guide however the financial intermediaries individuals work through traditionally do not match the maturity structure of their assets and liabilities as a result aggregate production plans and aggregate consumption plans for each period in the future need not coincide the resulting discrepancy will eventually appear as a recession or boom involving an unanticipated change in interest rates and production inside the original intertemporal production possibilities frontier maturity transformation is therefore not an essential function of financial intermediation but rather a mis function one which we call misintermediation

comparing four models of aggregate fluctuations due to self fulfilling expectations abstract this paper compares four equilibrium business cycle models with increasing returns to scale production technologies that allow for aggregate fluctuations due to self fulfilling expectations necessary and sufficient conditions for the existence of stationary sunspot equilibria are derived numerical examples demonstrate that the degree of increasing returns necessary for the existence of stationary sunspot equilibria lies in the upper range of available empirical estimates the paper also shows that persistent fluctuations are not a necessary property of these four models when the only source of fluctuations is changes in people s expectations about the future path of the economy journal of economic literature classification numbers e32 d43

heterogeneous expectations boom bust housing cycles and supply conditions a nonlinear economic dynamics approach abstract we combine a standard stock flow housing market model incorporating explicit relationships between house prices the housing stock and the rent level with a parsimonious expectation formation scheme of housing market investors reflecting an evolving mix of extrapolative and regressive expectation rules the model results in a two dimensional discrete time nonlinear dynamical system based on realistic parameters the model is able to generate endogenous boom bust housing market dynamics with lasting periods of overvaluation and overbuilding we thus exploit our model to investigate how real forces in particular supply conditions interact with expectations driven housing market fluctuations

an interdisciplinary model for macroeconomics macroeconomic modelling has been under intense scrutiny since the great financial crisis when serious shortcomings were exposed in the methodology used to understand the economy as a whole criticism has been levelled at the assumptions employed in the dominant models particularly that economic agents are homogeneous and optimizing and that the economy is equilibrating this paper seeks to explore an interdisciplinary approach to macroeconomic modelling with techniques drawn from other natural and social sciences specifically it discusses agent based modelling which is used across a wide range of disciplines as an example of such a technique agent based models are complementary to existing approaches and are suited to answering macroeconomic questions where complexity heterogeneity networks and heuristics play an important role

valuation of insurers contingent capital with counterparty risk and price endogeneity this study develops a structural framework to value insurers contingent capital with counterparty risk cr and overcomes the problem of price endogeneity pe in the valuation model our results on the focal contingent capital instrument catastrophe equity put option cateput indicate that prices can be significantly overestimated without considering cr and be significantly underestimated without considering pe this study also examines how cateputs affect the buyer s probability of default pd our results show that buying a cateput lowers the pd for high risk insurers but not necessarily so for low risk insurers however without taking cr and pe into account one may significantly overestimate the credit enhancement provided by the cateputs

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

volatility clustering a nonlinear theoretical approach abstract this paper verifies the endogenous mechanism and economic intuition on volatility clustering using the coexistence of two locally stable attractors proposed by gaunersdorfer et al 2008 by considering a simple asset pricing model with two types of boundedly rational traders fundamentalists and trend followers and noise traders we provide theoretical conditions on the coexistence of a locally stable steady state and a locally stable invariant circle of the underlying nonlinear deterministic financial market model and show numerically that the interaction of the coexistence of the deterministic dynamics and noise processes can endogenously generate volatility clustering and long range dependence in volatility observed in financial markets economically volatility clustering occurs when neither the fundamental nor trend following traders dominate the market and when traders switch more often between the two strategies

predicting catastrophe risk evidence from catastrophe bond markets abstract compared to the past literature on prediction markets that uses small scale observational field data or experiments this present research examines the efficiency of such markets by studying catastrophe cat bonds we collect actual catastrophe loss data match them with the defined trigger events of each cat bond contract and then employ an empirical pricing framework to obtain the excess cat premiums in order to represent the market based forecasts our results indeed show that market based forecasts have more significant predictive content for future cat losses than professional forecasts that use natural catastrophe risk models although the predictive information for cat events is specialized and complex our evidence supports that cat bond markets are successful prediction markets that efficiently aggregate information about future cat losses our resultsalso highlight that actual cat losses in future periods can explain the excess cat bond spreads in the primary market and provide support for market efficiency when pricing cat risk

estimation of financial agent based models with simulated maximum likelihood abstract this paper proposes a general computational framework for empirical estimation of financial agent based models for which criterion functions have unknown analytical form for this purpose we adapt a recently developed nonparametric simulated maximum likelihood estimation based on kernel methods in combination with the model developed by brock and hommes 1998 which is one of the most widely analysed heterogeneous agent models in the literature we extensively test the properties and behaviour of the estimation framework as well as its ability to recover parameters consistently and efficiently using simulations key empirical findings indicate the statistical insignificance of the switching coefficient but markedly significant belief parameters that define heterogeneous trading regimes with a predominance of trend following over contrarian strategies in addition we document a slight proportional dominance of fundamentalists over trend following chartists in major world markets

capital standard forbearance and deposit insurance pricing under garch abstract we propose a multiperiod deposit insurance pricing model that simultaneously incorporates the capital standard and the possibility of forbearance the model employs the recently developed garch option pricing technique in determining the deposit insurance value our model offers two distinctive advantages first it explicitly considers the implications of the strict enforcement on capital standard as stipulated in fdic improvement act of 1991 second the use of the garch model allows us to capture many robust features exhibited by financial asset returns by the garch option pricing theory the value of a contingent claim is a function of the asset risk premium this unique feature is found to be prominent in determining the bank s deposit insurance value we also examine the effects of capital forbearance and moral hazard behavior in this multiperiod deposit insurance setting

the valuation of multiple claim insurance contracts this paper provides a closed form solution for the value of a multiple claim insurance contract that is subject to a deductible amount and or an upper limit on claims the solution is a time integral of european option prices the model provides three important insights first systematic risk in insurance policies is altered in the presence of deductibles and maximum indemnity levels second idiosyncratic risk affects policy valuation and the required rates of return on underwriting portfolios finally contrary to traditional actuarial intuition changes in the risk free interest rate may either increase or reduce policy values

identifying booms and busts in house prices under heterogeneous expectations we introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices using quarterly data we estimate the model parameters for eight different countries us uk nl jp ch es se and be we find that the data support heterogeneity in expectations with temporary endogenous switching between fundamental mean reverting and trend following chartists beliefs based on their relative performance for all countries we identify temporary house price bubbles amplified by trend extrapolation and crashes reinforced by fundamentalists the qualitative predictions of such non linear models are very different from standard linear benchmarks with important policy implications the fundamental price becomes unstable e g when the interest rate is set too low or mortgage tax deductions too high giving rise to multiple non fundamental equilibria and or global instability

market evidence on the effective maturity of bank assets and liabilities the recent years increase in interest rate volatility has intensified concern over the exposure of commercial banks to interest rate or funding risk since the effect of interest rate changes on the equity value of a bank depends on the maturity or duration of the bank s assets and liabilities assessing an individual bank s interest rate risk exposure requires information about the maturity composition of its portfolio it is difficult however to assess a bank s risk exposure from balance sheet data because several important asset and liability items have theoretically ambiguous effective maturities in a frictionless market a security s effective maturity will equal its stated maturity or time to repricing with market imperfections e g depositors transaction or information costs however the equilibrium cost of some deposit items may respond sluggishly or incompletely to market rate changes see hester and pierce 1975 or flannery 1982 such liabilities market values discounted at market rates would therefore fluctuate with the level of interest rates these liabilities are sometimes called core deposits which manifest sticky responses to market rate changes we define an asset or liability s effective maturity as the maturity of a fixed rate perfectly elastically supplied security with the same market value elasticity as the bank balance sheet item under consideration naturally a balance sheet item s effective maturity is the relevant determinant of its contribution to the bank s overall interest rate risk sensitivity

on the bimodality of the distribution of the s p 500 s distortion empirical evidence and theoretical explanations abstract after showing that the distribution of the s p 500 s distortion i e the log difference between its real stock market index and its real fundamental value is bimodal we demonstrate that agent based financial market models may explain this puzzling observation within these models speculators apply technical and fundamental analysis to predict asset prices since destabilizing technical trading dominates the market near the fundamental value asset prices tend to be either overvalued or undervalued interestingly the bimodality of the distribution of the s p 500 s distortion confirms an implicit prediction of a number of seminal agent based financial market models

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

structural stochastic volatility in asset pricing dynamics estimation and model contest abstract in the framework of small scale agent based financial market models the paper starts out from the concept of structural stochastic volatility which derives from different noise levels in the demand of fundamentalists and chartists and the time varying market shares of the two groups it advances several different specifications of the endogenous switching between the trading strategies and then estimates these models by the method of simulated moments msms where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index in addition to the standard version of msm with a quadratic loss function we also take into account how often a great number of monte carlo simulation runs happen to yield moments that are all contained within their empirical confidence intervals the model contest along these lines reveals a strong role for a tamed herding component the quantitative performance of the winner model is so good that it may provide a standard for future research

endogenous business cycles and the dynamics of output hours and consumption abstract this paper studies the business cycle fluctuations predicted by a two sector endogenous business cycle model with sector specific external increasing returns to scale it focuses on aspects of actual fluctuations that have been identified both as defining features of business cycles and as ones standard real business cycle models cannot explain for empirically realistic calibrations of the degree of returns to scale the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real business cycle models jel e32

price regulation in property liability insurance a contingent claims approach a discrete time option pricing model is used to derive the fair rate of return for the property liability insurance firm the rationale for the use of this model is that the financial claims of shareholders policyholders and tax authorities can be modeled as european options written on the income generated by the insurer s asset portfolio this portfolio consists mostly of traded financial assets and is therefore relatively easy to value by setting the value of the shareholders option equal to the initial surplus an implicit solution for the fair insurance price may be derived unlike previous insurance regulatory models this approach addresses the ruin probability of the insurer as well as nonlinear tax effects

three paradigms for the role of capitalization requirements in insured financial institutions standard models for deposit insurance strike analogies to more familiar financial contracts and conceive of risk as exogenous the oldest model of deposit insurance likens it to passively underwriting casualty insurance a more sophisticated but still bilateral model likens deposit insurance to writing a passive put option on the enterprise whose funding is insured delays in acknowledging the wreck of the s l industry and its federal insurer fslic discredit these models as guides to managing a deposit insurance fund deposit insurance is better interpreted as a trilateral performance bond that enhances the credit of an insured institution this interpretation endogenizes risk emphasizes incentive conflict and underscores the need to optimize loss control activity the bonding model clarifies that a subset of the monitoring and disciplinary activities traditionally undertaken by government officials can usefully be privatized

herding trend chasing and market volatility abstract we introduce a heterogeneous agent asset pricing model in continuous time to show that although trend chasing switching and herding all contribute to market volatility in price and return and to volatility clustering their impacts are different the fluctuations of the market price and return and the level of the significant autocorrelations acs of the absolute and squared returns increase with the intensities of herding and trend chasing based on long time horizon however an increase in switching intensity reduces the return volatility and in particular a low switching intensity reduces the price volatility and increases the level of the significant acs but the effect becomes opposite when the switching intensity is high we also show that market noise plays a more important role than fundamental noise on the power law behavior of returns

a financial economic evaluation of insurance guaranty fund system an agency cost perspective abstract recent occurrences of financial distress to some insurers have raised questions about whether the current guaranty system is adequate to protect policyholders four new systems have been proposed using the state preference model it was found the stewart s national system faring the best if it adopts uniform regulation based on agency theory the pre assessment approach and the policyholder surcharge or premium increase recoupment method were found to be better than the current post assessment approach and premium tax offset method furthermore uniform policy limits and regulations are recommended

conditional jump dynamics in stock market returns this article develops a new conditional jump model to study jump dynamics in stock market returns we propose a simple filter to infer ex post the distribution of jumps this permits construction of the shock affecting the time t conditional jump intensity and is the main input into an autoregressive conditional jump intensity model the model allows the conditional jump intensity to be time varying and follows an approximate autoregressive moving average arma form the time series characteristics of 72 years of daily stock returns are analyzed using the jump model coupled with a generalized autoregressive conditional heteroscedasticity garch specification of volatility we find significant time variation in the conditional jump intensity and evidence of time variation in the jump size distribution the conditional jump dynamics contribute to good in sample and out of sample fits to stock market volatility and capture the rally often observed in equity markets following a significant downturn

managing rational routes to randomness abstract within the seminal cobweb model of brock and hommes firms adapt their price expectations by a profit based switching behavior between free naive expectations and costly rational expectations brock and hommes demonstrate that fixed point dynamics may turn into increasingly complex dynamics as the firms intensity of choice increases we show that policy makers are able to manage such rational routes to randomness by adjusting profit taxes in particular policy makers should increase decrease profit taxes if destabilizing expectations generate higher lower profits than stabilizing expectations to alter the composition of applied expectation rules and thereby to promote market stability our results are not restricted to cobweb models a huge body of literature demonstrates that rational routes to randomness may emerge in many different markets

indeterminacy home production and the business cycle a calibrated analysis abstract in this paper i present a business cycle model with one market sector that produces a standard good and another that produces a non market or home good the model can have multiple equilibria and therefore cycles driven only by self fulfilling expectations with low externalities to market production in particular an upward sloping aggregate labor demand as e g in farmer and guo j economic theory 63 1994 42 72 is not required for indeterminacy the effect of technology shocks is also studied in all cases the time series that are generated have properties that are comparable to the real us postwar series

the valuation of fdic deposit insurance using option pricing estimates when congress set the premium rate for fdic deposit insurance in the banking act of 1935 which authorized a permanent federal insurance system neither experience nor theory could offer much guidance regarding an appropriate fee structure although rates have since been periodically revised the fdic has yet to attempt to set the insurance rate at a ifair level that is a level equal to administrative costs plus the ex ante value of the insurance such a premium is the rate that would be charged by competitive private insurers however7 the garn st germain act of 1982 directed the fdic to consider the feasibility of a risk based premium structure in response the fdic has suggested a trial system in which each insured bank will be placed in one of three risk classes based on credit and interest rate risk relative to capital and a premium rate will be assigned to each group those rates will be determined in part by the loss experience of the entire banking system fdic 1983 another approach to the determination of the appropriate insurance premium has been offered by merton 1977 who suggested using the analogous relationship between deposit guarantees and put options to value fdic insurance in this paper we follow merton s suggestion and calculate bank specific estimates of the proper premium for deposit insurance for the banks in our sample we find that fdic rates greatly exceed estimates of the fair value of the insurance derived from the blackscholes 1972 option pricing model

speculative behavior and the dynamics of interacting stock markets abstract we develop a simple agent based financial market model in which heterogeneous speculators apply technical and fundamental analysis to trade in two different stock markets speculators strategy market selections are repeated at each time step and depend on predisposition effects herding behavior and market circumstances simulations reveal that our model is able to explain a number of nontrivial statistical properties of and between international stock markets including bubbles and crashes fat tailed return distributions volatility clustering persistent trading volume coevolving stock prices and cross correlated volatilities against this background our model may be deemed to have been validated

some stylized facts of the cryptocurrency market abstractwe examine the stylized facts of eight forms of cryptocurrencies representing almost 70 of cryptocurrency market capitalization in particular the empirical results show that 1 there ex

heterogeneous expectations exchange rate dynamics and predictability abstract this paper proposes a simple chartist fundamentalist model in which we allow for nonlinear time variation in chartists extrapolation rate estimation of the model using monthly data for the major currencies vis a vis the us dollar shows that the model is significant in sample and that it has out of sample predictive power for some of the currencies we investigate the power of tests of the random walk model to detect predictability against the alternative of the proposed model we find that the evidence of short term unpredictability and the long term predictability are consistent with our model

taking stock a rigorous modelling of animal spirits in macroeconomics this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

the determination of fair profits for the property liability insurance firm although the property liability insurance industry has been subject to price regulation for many years surprisingly little research has been directed at producing valuation models of a property liability insurance firm although property liability price regulation has historically involved setting minimum prices to reduce the risk of insolvency some commissions have begun to move toward setting prices more in the spirit of public utility regulation 1 if in an effort to promote efficiency the working objective of such regulation requires the determination of prices that would prevail under competition then regulation must be founded on some model of the costs of regulated firms under competition with free entry prices just cover all economic costs including the opportunity costs of investment by suppliers of capital and a valuation model is required to explain how the market value of the firm and therefore the cost of capital reacts to changes in the prices it charges our objective in this chapter is to provide such a framework

a reexamination of the over or under pricing of deposit insurance this study shows how fair deposit insurance premia can be calculated using data on bank stock prices interest rate movements and income and balance sheet accounts fair insurance premia are estimat ed under the alternative assumptions that the fdic provides either a limited term variable rate or unlimited term insurance cont ract to banks the paper s results suggest that for nearly all of the large commerical banks in the sample the actual insurance premium c harged by the fdic falls between the bounds of fair limited term and unlimited term insurance premia copyright 1987 by ohio state university press

the price dynamics of common trading strategies a deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices this paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies showing how they amplify noise induce structure in prices and cause phenomena such as excess and clustered volatility

optimal monetary policy in a new keynesian model with animal spirits and financial markets this article presents a macro finance interaction model that integrates a nkm with bounded rationality and an agent based financial market model we derive four interactive channels between the two sectors where two channels are strictly microfounded we analyze the impact of the different channels on economic stability and derive optimal conventional and unconventional monetary policy rules we find that coefficients of optimal taylor rules do not significantly change if financial market stabilization becomes part of the central bank s objective function additionally we show that rule based backward looking monetary policy creates huge instabilities if expectations are boundedly rational our model is externally validated by showing that it generates fat tailed output growth rates

insolvency experience risk based capital and prompt corrective action in property liability insurance abstract this paper analyzes the accuracy of the risk based capital formula for property liability insurers that was adopted in 1993 by the national association of insurance commissioners naic a logit analysis is conducted on a large sample of solvent and insolvent insurers spanning the period 1989 1993 predictive accuracy is very low when the ratio of naic risk based capital to actual capital is the sole indendent variable in the logit analysis but accuracy improves significantly when the components of the formula and variables for firm size and organizational form are used as regressors improvements in the formula are needed to facilitate prompt corrective action and reduce insolvency costs

estimation of agent based models using sequential monte carlo methods abstract estimation of agent based models is currently an intense area of research recent contributions have to a large extent resorted to simulation based methods mostly using some form of simulated method of moments estimation smm there is however an entire branch of statistical methods that should appear promising but has to our knowledge never been applied so far to estimate agent based models in economics and finance markov chain monte carlo methods designed for state space models or models with latent variables this latter class of models seems particularly relevant as agent based models typically consist of some latent and some observable variables since not all the characteristics of agents would mostly be observable indeed one might often not only be interested in estimating the parameters of a model but also to infer the time development of some latent variable however agent based models when interpreted as latent variable models would be typically characterized by non linear dynamics and non gaussian fluctuations and thus would require a computational approach to statistical inference here we resort to sequential monte carlo smc estimation based on a particle filter this approach is used here to numerically approximate the conditional densities that enter into the likelihood function of the problem with this approximation we simultaneously obtain parameter estimates and filtered state probabilities for the unobservable variable s that drive s the dynamics of the observable time series in our examples the observable series will be asset returns or prices while the unobservable variables will be some measure of agents aggregate sentiment we apply smc to two selected agent based models of speculative dynamics with somewhat different flavor the empirical application to a selection of financial data includes an explicit comparison of the goodness of fit of both models

are non fundamental equilibria learnable in models of monetary policy abstract recent models of monetary policy can have indeterminacy of equilibria which is often viewed as a difficulty of these models we consider the significance of indeterminacy using the learning approach to expectations formation we employ expectational stability as a selection criterion for different equilibria and derive the expectational stability and instability conditions for forward looking multivariate models both without and with lags the results are applied to several monetary policies

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

direct comparison of agent based models of herding in financial markets abstract the present paper tests a new model comparison methodology by comparing multiple calibrations of three agent based models of financial markets on the daily returns of 24 stock market indices and exchange rate series the models chosen for this empirical application are the herding model of gilli and winker 2003 its asymmetric version by alfarano et al 2005 and the more recent model by franke and westerhoff 2011 which all share a common lineage to the herding model introduced by kirman 1993 in addition standard arch processes are included for each financial series to provide a benchmark for the explanatory power of the models the methodology provides a consistent and statistically significant ranking of the three models more importantly it also reveals that the best performing model franke and westerhoff is generally not distinguishable from an arch type process suggesting their explanatory power on the data is similar

interest risk sensitive deposit insurance premia stable ach estimates abstract the parameters of interest rate uncertainty are estimated by maximum likelihood for the period 1952 1982 and used to evaluate bank or thrift deposit insurance as a function of duration mismatching capital asset ratio and the recent history of interest rate forecasting errors homoskedasticity is overwhelmingly rejected in favor of adaptive conditional heteroskedasticity ach even after removing this heteroskedasticity normality gives much lower likelihood than paretian stable distributions with characteristic exponent in the range 1 614 to 1 714 the conditional deposit insurance values fluctuate by factors in excess of 300 for some duration gaps over the past three decades

microfoundations for switching behavior in heterogeneous agent models an experiment we run a laboratory experiment to study how human subjects switch between several profitable alternatives framed as mutual funds in order to provide a microfoundation for so called heterogeneous agent models the participants in our experiment have to choose repeatedly between two three or four experimental funds the time series of fund returns are exogenously generated prior to the experiment and participants are paid for each period according to the return of the fund they choose for most cases participants decisions can be successfully described by a discrete choice switching model often applied in heterogeneous agent models provided that a predisposition toward one of the funds is included the estimated intensity of choice parameter of the discrete choice model depends on the structure of the fund returns in particular it increases with correlation between past and future returns this suggests human subjects do not myopically chase past returns but are more likely to do so when past returns are more predictive of future returns a feature that is absent in the standard heterogeneous agent models

fair insurance guaranty premia in the presence of risk based capital regulations stochastic interest rate and catastrophe risk abstract a multiperiod model is developed to measure the costs posed to the guaranty fund in a setting that incorporates risk based capital regulations interest rate risk and the possibility of catastrophic losses the guaranty contract is modeled as a put option on the asset of the insurance company with a stochastic strike price and an uncertain maturity the impacts of the key factors of this model are examined numerically and shown to make material differences in the costs to the guaranty fund

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

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

minsky from the bottom up formalising the two price model of investment in a simple agent based framework abstract this paper presents a fully formalised version of hyman minsky s two price model of capital investment embedded in a macroeconomic model consisting of an agent based sector of consumption goods firms as well as three strongly simplified aggregated sectors in an innovation to the literature on minsky models the model is calibrated empirically using moments drawn from us data demonstrating that it is capable of producing plausible time series simulations show that the individual investment and financing choices made by the agent based firms lead to the emergence of business cycles at the aggregate level key aspects of the model can be closely related to central concepts from the financial accelerator literature and moreover it is demonstrated through simulation experiments that expectations and sentiment dynamics play an important role being able to amplify or dampen the cycles it is also shown that the introduction of fiscal policy monetary policy or a restriction on firm dividend payouts can contribute to a stabilisation of the model