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on Computational Economics |
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Issue of 2010‒04‒24
thirteen papers chosen by |
| By: | Ardia, David; Boudt, Kris; Carl, Peter; Mullen, Katharine M.; Peterson, Brian |
| Abstract: | The R package DEoptim implements the differential evolution algorithm. This algorithm is an evolutionary technique similar to genetic algorithms that is useful for the solution of global optimization problems. In this note we provide an introduction to the package and demonstrate its utility for financial applications by solving a non-convex portfolio optimization problem. |
| Keywords: | Differential optimization; non-convex portfolio optimization; DEoptim; R software |
| JEL: | G1 G11 C61 |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22135&r=cmp |
| By: | Viktoria Blüschke-Nikolaeva; Dmitri Blüschke; Reinhard Neck |
| Abstract: | In this paper, we present a new version of the OPTCON algorithm for the optimal control of nonlinear stochastic systems with special reference to econometric models. It delivers approximate numerical solutions of optimum control problems with a quadratic objective function for nonlinear econometric models with additive and multiplicative (parameter) uncertainties. The algorithm was programmed in C# and allows for deterministic and stochastic control, the latter with open-loop and passive learning (open-loop feedback) information patterns. We demonstrate the applicability of the algorithm by experiments with a small quarterly macroeconometric model for Slovenia. This shows the convergence and the practical usefulness of the algorithm and (in most cases) the superiority of open-loop feedback over open-loop controls. |
| Date: | 2010–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:com:wpaper:032&r=cmp |
| By: | Eric M. Aldrich; Jesús Fernández-Villaverde; A. Ronald Gallant; Juan F. Rubio-Ramírez |
| Abstract: | This paper shows how to build algorithms that use graphics processing units (GPUs) installed in most modern computers to solve dynamic equilibrium models in economics. In particular, we rely on the compute unified device architecture (CUDA) of NVIDIA GPUs. We illustrate the power of the approach by solving a simple real business cycle model with value function iteration. We document improvements in speed of around 200 times and suggest that even further gains are likely. |
| JEL: | C87 E0 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15909&r=cmp |
| By: | Gilbert, John (Asian Development Bank Institute); Banik, Nilanjan (Asian Development Bank Institute) |
| Abstract: | Although the overall economic performance of economies in South Asia in recent years has been impressive, there is concern that an aging and increasingly inadequate infrastructure may limit the potential for further growth and economic development. A critical infrastructure component is the transportation network, and there are currently several transportation infrastructure projects in the South Asia Subregional Economic Cooperation (SASEC) region, connecting Nepal, eastern India, Bangladesh, and Bhutan. This paper uses computable general equilibrium (CGE) methods to address how these infrastructure developments might affect the broader economy in SASEC, and in particular impact on income distribution and poverty. The paper describes a new CGE model for South Asia, covering India, Sri Lanka, Bangladesh, Nepal, and Pakistan, which incorporates modifications to household structure in order to capture the implications of reform for changes in intra-household income. The scenarios that are considered reflect proposed investments in land transport infrastructure in the SASEC region. These should result in reductions in the land transport component of international transport margins, which vary bilaterally by commodity. We found that all SASEC economies would benefit from the reductions in terms of aggregate welfare, with the largest gains accruing to India in absolute terms, but the largest relative gains to Nepal, followed by Bangladesh and Sri Lanka when the margin reduction is prorated to intra-South Asian trade rather than just SASEC. In terms of household level distribution, the picture was mixed, with clearly pro-poor outcomes in some countries, such as Nepal, but more ambiguous impacts in others. In terms of potential adjustment costs, examination of the extent of predicted structural changes suggests that these would be minor, although somewhat more significant for the smaller economies in the region. |
| Keywords: | cge method; infrastructure development; sasec; income distribution poverty reduction |
| JEL: | D58 F14 F17 O53 |
| Date: | 2010–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0211&r=cmp |
| By: | Peter Imkeller; Gon\c{c}alo dos Reis; Jianing Zhang |
| Abstract: | We consider the problem of numerical approximation for forward-backward stochastic differential equations with drivers of quadratic growth (qgFBSDE). To illustrate the significance of qgFBSDE, we discuss a problem of cross hedging of an insurance related financial derivative using correlated assets. For the convergence of numerical approximation schemes for such systems of stochastic equations, path regularity of the solution processes is instrumental. We present a method based on the truncation of the driver, and explicitly exhibit error estimates as functions of the truncation height. We discuss a reduction method to FBSDE with globally Lipschitz continuous drivers, by using the Cole-Hopf exponential transformation. We finally illustrate our numerical approximation methods by giving simulations for prices and optimal hedges of simple insurance derivatives. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1004.2248&r=cmp |
| By: | Alvaro Calzadilla; Katrin Rehdanz; Richard Betts; Pete Falloon; Andy Wiltshire; Richard S.J. Tol (Economic and Social Research Institute) |
| Abstract: | Based on predicted changes in the magnitude and distribution of global precipitation, temperature and river flow under the IPCC SRES A1B and A2 scenarios, this study assesses the potential impacts of climate change and CO2 fertilization on global agriculture. The analysis uses the new version of the GTAP-W model, which distinguishes between rainfed and irrigated agriculture and implements water as an explicit factor of production for irrigated agriculture. Future climate change is likely to modify regional water endowments and soil moisture. As a consequence, the distribution of harvested land would change, modifying production and international trade patterns. The results suggest that a partial analysis of the main factors through which climate change will affect agricultural productivity lead to different outcomes. Our results show that global food production, welfare and GDP fall in the two time periods and SRES scenarios. Higher food prices are expected. Independently of the SRES scenario, expected losses in welfare are marked in the long term. They are larger under the SRES A2 scenario for the 2020s and under the SRES A1B scenario for the 2050s. The results show that countries are not only influenced by regional climate change, but also by climate-induced changes in competitiveness. |
| Keywords: | Computable General Equilibrium, Climate Change, Agriculture, Water Resources, River Flow |
| JEL: | D58 Q17 Q25 Q54 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:sgc:wpaper:185&r=cmp |
| By: | Luca Capriotti; Mike Giles |
| Abstract: | We show how Adjoint Algorithmic Differentiation (AAD) allows an extremely efficient calculation of correlation Risk of option prices computed with Monte Carlo simulations. A key point in the construction is the use of binning to simultaneously achieve computational efficiency and accurate confidence intervals. We illustrate the method for a copula-based Monte Carlo computation of claims written on a basket of underlying assets, and we test it numerically for Portfolio Default Options. For any number of underlying assets or names in a portfolio, the sensitivities of the option price with respect to all the pairwise correlations is obtained at a computational cost which is at most 4 times the cost of calculating the option value itself. For typical applications, this results in computational savings of several order of magnitudes with respect to standard methods. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1004.1855&r=cmp |
| By: | Ibrahim Ahamada (Centre d'Economie de la Sorbonne); Philippe Jolivaldt (Centre d'Economie de la Sorbonne) |
| Abstract: | In this article, we compare the performance of Hodrickk-Prescott and Baxter-King filters with a method of filtering based on the multi-resolution properties of wavelets. We show that overall the three methods remain comparable if the theoretical cyclical component is defined in the usual waveband, ranging between six and thirty two quarters. However the approach based on wavelets provides information about the business cycle, for example, its stability over time which the other two filters do not provide. Based on Monte Carlo simulation experiments, our method applied to the American GDP using growth rate data shows that the estimate of the business cycle component is richer in information than that deduced from the level of GDP and includes additional information about the post 1980 period of great moderation. |
| Keywords: | Filters HP, wavelets, Monte Carlo Simulation, break, business cycles. |
| JEL: | C15 C22 C65 E32 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10027&r=cmp |
| By: | Andrew Ledvina; Ronnie Sircar |
| Abstract: | We study continuous time Bertrand oligopolies in which a small number of firms producing similar goods compete with one another by setting prices. We first analyze a static version of this game in order to better understand the strategies played in the dynamic setting. Within the static game, we characterize the Nash equilibrium when there are $N$ players with heterogeneous costs. In the dynamic game with uncertain market demand, firms of different sizes have different lifetime capacities which deplete over time according to the market demand for their good. We setup the nonzero-sum stochastic differential game and its associated system of HJB partial differential equations in the case of linear demand functions. We characterize certain qualitative features of the game using an asymptotic approximation in the limit of small competition. The equilibrium of the game is further studied using numerical solutions. We find that consumers benefit the most when a market is structured with many firms of the same relative size producing highly substitutable goods. However, a large degree of substitutability does not always lead to large drops in price, for example when two firms have a large difference in their size. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1004.1726&r=cmp |
| By: | Yadong Li |
| Abstract: | This paper describes a consistent and arbitrage-free pricing methodology for bespoke CDO tranches. The proposed method is a multi-factor extension to the (Li 2009) model, and it is free of the known flaws in the current standard pricing method of base correlation mapping. This method assigns a distinct market factor to each liquid credit index and models the correlation between these market factors explicitly. A low-dimensional semi-analytical Monte Carlo is shown to be very efficient in computing the PVs and risks of bespoke tranches. Numerical examples show that resulting bespoke tranche prices are generally in line with the current standard method of base correlation with TLP mapping. Practical issues such as model deltas and quanto adjustment are also discussed as numerical examples. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1004.1758&r=cmp |
| By: | Michael D. Makowsky (Department of Economics, Towson University); David M. Levy (Department of Economics, George Mason University) |
| Abstract: | We build a multi-agent model of endogenous technical change in which heterogeneous investments in patented knowledge generate Pareto-Levy and lognormal distributed returns to investment in research from very weak distributional assumptions. Firms produce a homogenous good and a public stock of knowledge accumulates from the expired patents of privately produced knowledge. Increasing returns to scale are derivative of endogenously produced technology, but the market remains competitive due to imperfect information and costly household search. The interaction of heterogeneous knowledge, research investment, revenues, and search outcomes across agents endogenously generates the empirically observed but seemingly idiosyncratic Pareto- Levy and lognormal mixture distribution of market returns. These distributional characteristics have ramifications for endogenous growth models given the importance of extreme values and market leaders in technological advancement. Average growth rates in the model have a global maximum at a finite, non-zero patent length. The distribution of growth rates is characterized by “fat tails.” The variance of growth rates increases with patent length. |
| Keywords: | patents, endogenous growth, increasing returns to scale, price dispersion, search, heterogeneous agents. |
| JEL: | C63 L11 O33 D83 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2010-10&r=cmp |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | With an estimated New Keynesian model, this paper compares the "great recession" of 2007-09 to its two immediate predecessors in 1990-91 and 2001. The model attributes all three downturns to a similar mix of aggregate demand and supply disturbances. The most recent series of adverse shocks lasted longer and became more severe, however, prolonging and deepening the great recession. In addition, the zero lower bound on the nominal interest rate prevented monetary policy from stabilizing the US economy as it had previously; counterfactual simulations suggest that without this constraint, output would have recovered sooner and more quickly in 2009. |
| Keywords: | recession, New Keynesian, zero lower bound |
| JEL: | E32 E52 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:735&r=cmp |
| By: | Siddig, Khalid |
| Abstract: | The latest episode of the armed conflict between Northern and Southern Sudan erupted in 1983 and ended with the signing of the "Comprehensive Peace Agreement (CPA)" in 2005. The CPA allows for a referendum on independence for South Sudan in 2011. A similar scenario is possible for Darfur, where an armed conflict broke out in 2003 over demands for greater decentralization and development in the region. The peace agreement between the central government and the Eastern Sudan region continues to be fragile and the risk of escalation of across the border spillovers of conflicts with Uganda and Chad persists. The U.S., EU, among other global players, is putting pressure on the Khartoum government to change its policies. Economic sanctions are among the tools used by the U.S. government while encouraging others follow suit. This paper investigates the response of the Sudanese economy to eliminating trade flows with the EU in the first phase and with East-Asian countries in the second. It discusses the changes in the macro-indicators, trade variables, and welfare measures that would result. Moreover, it assesses the potential trade diversion and resource reallocation due to sanctions in each phase. To simulate these scenarios, detailed economic databases for Sudan, EU, East-Asian region, MENA, COMESA, and the rest of the world are needed. For this purpose, GTAP Africa database and the standard GTAP model are employed. The 57 sectors of Africa database are aggregated to ten sectors including: grains and crops, livestock and meat products, mining and extraction, processed food, textiles and clothing, light manufacturing, heavy manufacturing, utilities and construction, transport and communication, and other services. Moreover, the database regions are aggregated to six including Sudan, the EU, East Asia, MENA, COMESA, and the Rest of the world. Results show that Sudanese trade reallocates to Asia in the first phase and to COMESA and MENA regions in the second. Sanctions exact a devastating toll on the Sudanese economy: GDP declines, trade shrinks, and welfare deteriorates. The deterioration in the country’s trade is mainly in the imports side, which justifies an improvement of the country’s balance of trade, while welfare losses are derived by a deteriorated terms of trade and allocative efficiency. |
| Keywords: | Sudan; sanctions; GTAP Africa database; EU; East Asia |
| JEL: | F16 C68 C02 D58 F51 |
| Date: | 2010–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22041&r=cmp |