Quantification of Economical Crisis Risk

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Quantification of Economical Crisis Risk

 

Purposes

This is a group devoted to discuss economical crisis formation from a scientist point of view. The goal is to discuss non linear models that could be candidate to capture reliabily

  • Probability of occurence of an economical crisis at any future date
  • Dynamic of prices at burst formation.

 

A first model to discuss

We propose a first model to stimulate exchange in this workgroup (code, scientific notes are in open access, see "Ressources" below)

Model Description

It is a very naive and simple rational agent based model, able to capture burst formation involving mechanisms that can be interpreted as liquidity phenomenas:  a population of N "prescient" economical agents exchanges a very simple single stock market. As concentration of cash and shares occurs among agent, a bubble formation burst as the poorest traders are not able anymore to support the market.

Having a closer look to trading mechanisms involved in this model, there are some troubling similarities with the numerical modeling of shock formation in conservation laws (using a stochastic approach). Thus it could be quite interesting to discuss whether agent based models could link to conservation laws, that may for instance occurs as a limiting case of an infinite agents number. Such a link would be extremely satisfactory from an intellectual point of view: interpreting economical crisis as "shock formations in the economical tissue" seems to be a very natural idea.

Insights

There exists distinct phenomena's that generates economical crisis, ranging from psychological to pure economical effects. Among them, speculative behavior of traders based over profit earnings is a reality. Profit earning is not evil: it is the basic mechanism in economy, more generally in every human exchanges. Its main virtue is to stabilize Markets, acting as a powerful return to equilibrium process. However, since the 19-th century, profit earning is also a well known mechanism for being one of the main responsible of economical bubbles formation.

From a scientific point of view, profit is a deterministic effect. An economical system based over profit can be simulated, and should be predictable (in a stochastic sense, due to randomness in the distribution of information). There does not exist any reason for such phenomena's not to be forecasted. In other words, this research program intends to measure the risk of formation of an economical crisis beard by pure speculative behavior. We think that it is one of the main component of bubble formation, mathematicians should be able to handle it, and it is of crucial importance to measure it.

Ressources :

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