One-dimensional maps with two discontinuity points and three linear branches: mathematical lessons for understanding the dynamics of financial markets

We develop a simple financial market model with heterogeneous interacting speculators. The dynamics of our model is driven by a one-dimensional discontinuous piecewise linear map, having two discontinuity points and three linear branches. On the one hand, we study this map analytically and numerically to advance our knowledge about such dynamical systems. In particular, not much is known about discontinuous maps involving three branches. On the other hand, we seek to improve our understanding of the functioning of financial markets. We find, for instance, that such maps can generate complex bull and bear market dynamics.     

RISK MEASURES: RATIONALITY AND DIVERSIFICATION

When there is uncertainty about interest rates (typically due to either illiquidity or defaultability of zero coupon bonds) the cash‐additivity assumption on risk measures becomes problematic. When this assumption is weakened, to cash‐subadditivity for example, the equivalence between convexity and the diversification principle no longer holds. In fact, this principle only implies (and it is implied by) quasiconvexity. For this reason, in this paper quasiconvex risk measures are studied. We provide a dual characterization of quasiconvex cash‐subadditive risk measures and we establish necessary and sufficient conditions for their law invariance. As a byproduct, we obtain an alternative characterization of the actuarial mean value premium principle.     

Capital accumulation and growth: a new look at the empirical evidence

Using annual data for 75 countries in the period 1960–2000, we present evidence of a positive relationship between investment as a share of gross domestic product (GDP) and the long‐run growth rate of GDP per worker. This result is robust for our full sample and for the subsample of non‐OECD countries, but not for the subsample of OECD countries. Our analysis controls for time‐invariant country‐specific heterogeneity in growth rates, and for a range of time‐varying control variables. We also address endogeneity issues, and allow for heterogeneity across countries in model parameters and for cross‐section dependence. Copyright © 2010 John Wiley & Sons, Ltd.     

On the sources of business cycles in the G-7

This paper examines sources of cyclical movements in output, inflation and the term structure of interest rates in the G-7. It employs a novel identification approach which uses the sign of the theoretical cross correlation function in response to shocks to catalog orthogonal disturbances. We find that demand shocks are the dominant source of output and inflation fluctuations in several of the G-7 countries. The proportion of term structure variability explained by different structural sources does not depend on the horizon. Apart from the US and Canada, structural shocks are nearly uncorrelated across countries.     

Back to square one: Identification issues in DSGE models

We investigate identification issues in DSGE models and their consequences for parameter estimation and model evaluation when the objective function measures the distance between estimated and model-based impulse responses. Observational equivalence, partial and weak identification problems are widespread and typically produced by an ill-behaved mapping between the structural parameters and the coefficients of the solution. Different objective functions affect identification and small samples interact with parameters identification. Diagnostics to detect identification deficiencies are provided and applied to a widely used model.     

Growth Rate and Level Effects,the Stability of the Adjustment of Capacity to Demand and the Sraffian Supermultiplier

Abstract

The paper presents a simple but complete formal version of the Sraffian supermultiplier model in which (i) growth is led by the autonomous components of demand that do not create capacity; (ii) private productive investment is an induced expenditure; and (iii) income distribution is exogenous. We show that the main results of the long-period and fully adjusted versions of the model in terms of growth rate and level effects are quite similar and therefore that such results in no way require the full adjustment of capacity to demand. We then analyze a simple set of sufficient dynamic local stability conditions that allow the long-period positions to gravitate towards the fully adjusted position in which capacity is adjusted to demand and that also provide the upper limit to demand-led growth paths. Finally, we show how some critics of the model have misinterpreted it as being supply-led and how this has led to a further confusion between the analysis of the tendency towards a constant value of the capacity-saving-determined warranted rate of growth and the proper stability analysis of the opposite process of adjusting capacity to demand (which tends to adjust the warranted rate endogenously to the growth rate of autonomous demand).     

The cyclical behaviour of inventories: European cross-country evidence from the early 1990s recession

This paper employs data for a panel of firms from France, Italy and the UK to study the effect of the recession of the early 1990s on inventory investment, controlling for cyclical fluctuations at the firm level. The results clearly show some common patterns across countries, pointing to the relevance of financial factors (namely, the level of leverage) in propagating initial recessionary shocks. Moreover, Italian firms, especially if ‘small and young’, seem more likely to suffer from a reduction in the value of collateralizable assets possibly originated by restrictive policy actions.     

Hick's recantation of the temporary equilibrium method ∗

This article deals with the neglecct of the economics profession towards Hick's change of mind, after Value and capital, concerning the appropriateness of the use of the notion of temporary equilibrium analysis. In what follows a reconstruction and critical evalaiton of Hicks's views on the legitimacy of the equilibrium method will be undertaken. It will be argued that Hicks's rejection of both the traditional (long-period) marginalist general equilibrium and the post-Walrasian alternative of temporary or intertemporal equilibrium raises wider issues that pose problems for contemporary treatments of such matters.     

Balancing tourism education and training

This paper assumes that tourism educated and trained students play different roles (in driving future tourist demands and in meeting current tourist preferences, respectively), and it states that the main features characterising the four stakeholders involved in the design, development and implementation of tourism programmes (firms, students, educational and governmental institutions), together with the main facts they face in taking their decisions, lead to a non-optimal strategic long-run equilibrium, where tourism non-graduated or differently-from-tourism graduated employees prevail. The development of an evolutionary model allows to identify the main features characterising firms and students, to be focused on by educational and governmental institutions, in order to move towards the optimal equilibrium, where tourism graduated employees prevail, while the development of a dynamic model allows to show that this equilibrium is not detrimental to tourism trained employees. This work also suggests a possible educational strategy that could allow to move away from the non-optimal equilibrium, by achieving public objectives (such as environmental or ethical tourism), by relying on feasible educational approaches (about what and how to teach), and by taking into account the private characteristics (of firms and students). Therefore, balancing tourism education and training is both possible and beneficial to all stakeholders involved.     

TRAFFIC MANAGEMENT IN WHOLESALE INTERNATIONAL ROAMING: TOWARDS A MORE EFFICIENT MARKET?*

Despite a general trend of lower charges for mobile calls, in Europe, prices for international roaming calls have remained at levels that are surprisingly high. The apparent reluctance of mobile network operators to lower roaming tariff is generating many antitrust concerns. This paper presents in a two‐country two‐firm framework the functioning of the current system governing wholesale international roaming agreements based on interoperator tariffs. The focus is on the role of traffic management; thanks to the emergence of traffic direction techniques, mobile network operators are allowed to select the roaming partner. We show that, unless these techniques do not allow for perfect control on traffic flows, traffic management does not improve the market's efficiency. In line with the regulatory mechanism recently adopted by the European Commission, we show that a simple price cap mechanism may restore partial efficiency in the wholesale market. We also show that although cross‐border cooperation at the wholesale level is Pareto efficient, it will not emerge as an equilibrium of a two‐sided matching game.