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Jason Cawley
Wolfram Science Group
Phoenix, AZ USA

Registered: Aug 2003
Posts: 712

Complexity in economics paper

While not directly related to NKS, I thought some forum members who have participated in past discussions here about complexity in economics might be interested in the following paper and links. The paper has a number of authors including Sergio Da Silva.

While their own favorite subject of trying to match price series statistics (in this case, exchange rate data in particular) with exotic distributions (to detect and capture a right mix of power law and bounded variance etc) is only tangentially related to NKS ideas, their overview of the issues in sections 2-4 of this paper are of more general interest.

International finance, Levy distributions, and the econophysics of exchange rates

Da Silva, S., R. Matsushita and I. Gleria, et al.

Communications in Nonlinear Science and Numerical Simulation

This paper surveys the developments in the field of international finance, in particular the research of economists on foreign exchange rates. That might be of interest to physicists working on the econophysics of exchange rates. We show how the econophysics agenda might follow naturally from the economists' research. We also present our own work on the econophysics of exchange rates.

http://www.angelfire.com/id/SergioD.../intfinance.pdf

Related Da Silva econ links -

http://www.angelfire.com/id/SergioDaSilva/open.html

http://www.angelfire.com/id/SergioD...onophysics.html

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Old Post 07-23-2004 03:02 PM
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Jason Cawley
Wolfram Science Group
Phoenix, AZ USA

Registered: Aug 2003
Posts: 712

One of the promising ideas mentioned in the paper is modeling diverse endogeneous expectations or popular models of a price series, an idea put forward by R.J. Shiller among others. That is, one partitions market participants into some number of classes based on the sort of model they are posited to have of the economic process.

Then they react to price changes according to their model. Composite expectations change as different segments of the population react to the same developments differently. Traditionally this sort of model has been examined with continuous variables, essentially tracking a few feedback loops, an easy way to get "excess volatility" compared to the amount of new information fundamentals are providing, to get trending and boom bust cycles, etc.

Noticing that price data exhibits some signs of power laws rather than normal distributions gave rise to a different approach, more along the lines of Da Silva et al, trying to find a version of statistics that properly characterizes the mix of trending, mean reversion, long tails, large shocks, etc seen in real financial data.

One approach would be just to use NKS systems to generate various series and look for ones that exhibit similar statistical "signatures" (both directly, and in linear combinations). Another, though, would be to build intuitive assumptions about classes of popular models into an NKS system, and then look at the sort of statistics that model produces. One might call these "search" and "construction". I think in the end we will need both, to see where the sort of empirical statistics we see may actually be coming from.

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Old Post 07-23-2004 03:17 PM
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