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This paper takes a look at the Talmudic rule aka the 1/N rule aka the uniform investment strategy from the viewpoint of elementary microeconomics. Specifically, we derive the cardinal utility function for a Talmud-obeying agent which happens to have the Cobb-Douglas form. Further, we investigate individual supply and demand due to rebalancing and compare them to market depth of an exchange. Finally, we discuss how op…
A statistical generalization is made of microeconomics in the spirit of going from classical to statistical mechanics. The price and quantity of every commodity1 traded in the market, at each instant of time, is considered to be an independent random variable: all prices and quantities are considered to be stochastic processes, with the observed market prices being a random sample of the stochastic prices. The dynami…
This article proposes a complementary theoretical framework in behavioural finance by interpreting financial markets during boom-and-bust episodes as a Le Bonian crowd. While behavioural finance has documented the limits of individual rationality through biases and heuristics, these contributions remain primarily microeconomic. A second, more macroeconomic strand appears to treat market instability as the aggregated …
The aim of this paper is the analysis and selection of stock trading systems that combine different models with data of different nature, such as financial and microeconomic information. Specifically, based on previous work by the authors and applying advanced techniques of Machine Learning and Deep Learning, our objective is to formulate trading algorithms for the stock market with empirically tested statistical adv…
The Behrens-Feichtinger model provides a deterministic picture for the co-evolution of sales of two firms, producing the same goods and competing in a common market. The model involves an active investment strategy such that the temporary investment of each of the two firms depends on its relative position in the market. In this work we are interested in a specific regime of evolution referred to as leapfrogging regi…
The monotone mean-variance (MMV) preference proposed by Maccheroni, et al. (Math. Finance 19(3): 487-521, 2009) fails to differentiate strictly dominant payoffs, which may cause inconsistency in portfolio decision-making. This paper introduces a broader class of strictly monotone mean-variance (SMMV) preferences and demonstrates its applications to portfolio selection problems. For the single-period portfolio problem…
Early warning systems (EWSs) are critical for forecasting and preventing economic and financial crises. EWSs are designed to provide early warning signs of financial troubles, allowing policymakers and market participants to intervene before a crisis expands. The 2008 financial crisis highlighted the importance of detecting financial distress early and taking preventive measures to mitigate its effects. In this bibli…
Modern technology and innovations are becoming more crucial than ever for the survival of companies in the market. Therefore, it is significant both from theoretical and practical points of view to understand how governments can influence technology growth and innovation diffusion (TGID) processes. We propose a simple but essential extension of Ausloos-Clippe-Pȩkalski and related Cichy numerical models of the TGID in…
We introduce a microscopic model of interacting financial agents, where each agent is characterized by two portfolios; money invested in bonds and money invested in stocks. Furthermore, each agent is faced with an optimization problem in order to determine the optimal asset allocation. The stock price evolution is driven by the aggregated investment decision of all agents. In fact, we are faced with a differential ga…
The relationship between price volatilty and a market extremum is examined using a fundamental economics model of supply and demand. By examining randomness through a microeconomic setting, we obtain the implications of randomness in the supply and demand, rather than assuming that price has randomness on an empirical basis. Within a very general setting the volatility has an extremum that precedes the extremum of th…
The dual crises of the sub-prime mortgage crisis and the global financial crisis has prompted a call for explanations of non-equilibrium market dynamics. Recently a promising approach has been the use of agent based models (ABMs) to simulate aggregate market dynamics. A key aspect of these models is the endogenous emergence of critical transitions between equilibria, i.e. market collapses, caused by multiple equilibr…
Liberalization of electricity markets has increasingly created the need for understanding the volatility and correlation structure between electricity and financial markets. This work reveals the existence of structural changes in correlation patterns among these two markets and links the changes to both fundamentals and regulatory conditions prevailing in the markets, as well as the current European financial crisis…
I sketch a program for a microeconomic theory of the main component of the business cycle as a recurring disequilibrium, driven by incompleteness of the financial market and by information asymmetries between borrowers and lenders. This proposal seeks to incorporate five distinct but connected processes that have been discussed at varying lengths in the literature: the leverage cycle, financial panic, debt deflation,…
A microeconomic approach is proposed to derive the fluctuations of risky asset price, where the market participants are modeled as prospect trading agents. As asset price is generated by the temporary equilibrium between demand and supply, the agents' trading behaviors can affect the price process in turn, which is called the feedback effect. The prospect agents make actions based on their reactions to gains and loss…
More than thirty years ago, Charnes, Cooper and Schinnar (1976) established an enlightening contact between economic production functions (EPFs) -- a cornerstone of neoclassical economics -- and information theory, showing how a generalization of the Cobb-Douglas production function encodes homogeneous functions. As expected by Charnes \textit{et al.}, the contact turns out to be much broader: we show how information…
We investigate the Heston model with stochastic volatility and exponential tails as a model for the typical price fluctuations of the Brazilian São Paulo Stock Exchange Index (IBOVESPA). Raw prices are first corrected for inflation and a period spanning 15 years characterized by memoryless returns is chosen for the analysis. Model parameters are estimated by observing volatility scaling and correlation properties. We…
Opportunity cost is the value of the next-best alternative you give up when you choose one use of a scarce resource — time, capital, balance-sheet, or a risk limit.
Price elasticity is the percent change in quantity demanded or supplied for a one percent change in price — how much the tape moves volume when the price moves.