Simple Market Model Research Articles

Economic Consequences of Mass Migration: The Venezuelan Exodus in Peru

We study the effects of an unexpected and large migration from Venezuela on Peruvian labor markets. From 2017 to 2019, about 800,000 Venezuelans migrated to Peru, with 84% settling in the Lima metropolitan area. The percentage of Venezuelans in the working age population in Lima increased from nearly 0 to over 10%, with migrants having higher education on average than the local labor force. We propose a simple assignment model of the labor market, which suggests that migration will lead to a reallocation of local workers toward low-skilled jobs. Using synthetic control methods and comparing Lima with a group of other Peruvian metropolitan areas, we find evidence of adjustment in occupational structure in the direction predicted by the model with few decreases in employment of local workers. JEL Classification Codes: F22; J04; O15

Opinion Dynamics Explain Price Formation in Prediction Markets.

Prediction markets are heralded as powerful forecasting tools, but models that describe them often fail to capture the full complexity of the underlying mechanisms that drive price dynamics. To address this issue, we propose a model in which agents belong to a social network, have an opinion about the probability of a particular event to occur, and bet on the prediction market accordingly. Agents update their opinions about the event by interacting with their neighbours in the network, following the Deffuant model of opinion dynamics. Our results suggest that a simple market model that takes into account opinion formation dynamics is capable of replicating the empirical properties of historical prediction market time series, including volatility clustering and fat-tailed distribution of returns. Interestingly, the best results are obtained when there is the right level of variance in the opinions of agents. Moreover, this paper provides a new way to indirectly validate opinion dynamics models against real data by using historical data obtained from PredictIt, which is an exchange platform whose data have never been used before to validate models of opinion diffusion.

Herding and Contrarianism: A Matter of Preference?

Abstract Herding and contrarian strategies produce informational inefficiencies when investors ignore private information, instead following or bucking past trends. In a simple market model, I show theoretically that investors with prospect theory preferences generically follow herding or contrarian strategies, but do so because of future returns as opposed to past trends. I conduct a laboratory experiment to test the theory and obtain an estimate of the distribution of preferences in the subject population. I find that approximately 70% of subjects have preferences that induce herding. Using the preference estimates, I quantify informational efficiencies and predict trade behavior in more general environments.

Does privacy breach affect firm performance? An analysis incorporating event-induced changes and event clustering

Previous studies have analyzed the impact of cybersecurity breaches on firm performance, but the impact of the privacy breach on firm performance is less explored. Needless to say, the privacy of the individual's personal information has been a rising concern for organizations over the years. Previous studies, primarily focused on cybersecurity breaches, have used a simple market model (MM) to observe the impact of these breaches on firm performance. Our study has used an advanced market model (AMM), which observes the event-induced changes in the variance of stock returns and changes in MM parameters, which are ignored by the MM. The ignorance of this may lead to a biased cumulative abnormal return (CAR) computation. We have also included the event clustering observation (events that are very close to each other) in our study and evaluated AMM with seemingly unrelated regression (SUR), i.e., AMM-SUR. We have used data of 193 privacy breaches related to the US firms listed on NYSE (USA), NASDAQ (USA) for the years 2012 (43 breaches), 2013 (37 breaches), 2014 (51 breaches), and 2018 (62 breaches). Abnormal returns for the firms are found negative due to these privacy breaches, but AMM consistently reports more negative abnormal returns than MM for all the years. The AMM-SUR, observing event clustering, consistently reports slightly lower negative abnormal returns than the AMM for all the years. We have also calculated the average financial loss due to a privacy breach for these years and for three different models, i.e., MM, AMM, and AMM-SUR.

A Binary Decision Model and Fat Tails in Financial Market

Binary decision models have been the subject of renewed research in recent years. In these models, agents follow a stochastic evolution where they must choose between two possible choices by taking into account the choices of their peers. Kirman explained the process of ant social herding using a simple model, and he conducted an interesting simulation. The fat-tail distribution in the security market is well known, but its causes have not been sufficiently clarified. The aim of this article is to clarify them by a very simple model. In this article, by establishing a simple security market model and by applying the model of Kirman, the fat tail observed for price fluctuations is reproduced. Recent research in neuroscience has shown that noise plays a positive roll and enables us to have a deeper understanding of a natural commonality between ants and traders. The beauty competition of Keynes is kept in mind, and it is shown that a cause of the fat tail is the balance between independence and interdependence of the economic agents. Using a natural computing algorithm called Kirman’s ant model, I conducted a time series analysis of finance that appears when simplifying the human “behavior of imitating others”. The results show that natural fat tails appear.

A simple robust asset pricing model under statistical ambiguity

We derive a simple robust single-factor market model under statistical ambiguity that uses relative entropy as the ambiguity index constraining the multiple priors set. We also discuss theoretically the validity of relative entropy to measure model discrepancy and detect misspecification. The premium on both risk and ambiguity in our model would set a bound on stock prices that investors can use as a ‘margin of safety’ against extreme market events.

Zero‐intelligence versus human agents: An experimental analysis of the efficiency of Double Auctions and Over‐the‐Counter markets of varying sizes

AbstractWe study two well‐known electronic markets: an over‐the‐counter (OTC) market, in which each trader looks for the best counterpart through bilateral negotiations, and a double auction (DA) market, in which traders post their quotes publicly. We focus on the DA–OTC efficiency gap and show how it varies with different market sizes (10, 20, 40, and 80 traders). We compare experimental results from a sample of 6400 undergraduate students in Economics and Management with zero‐intelligence agent‐based simulations. Simulation results show that the traded quantity increases with market size under both DA and OTC. Experimental results confirm the same tendency under DA, while the share of periods in which the traded quantity is lower than the efficient one increases with market size under OTC, ultimately leading to a DA–OTC efficiency gap increasing with the market size. We rationalize these results by putting forward a simple model of OTC market as a repeated bargaining procedure under incomplete information on buyers' valuations and sellers' costs. We show that efficiency decreases slightly with size due to two counteracting effects: acceptance rates in earlier interactions decrease with size, and earlier offers increase, but not always enough to compensate for the decrease in acceptance rates.

Revisiting the Hypothesis of High Discounts and High Unemployment

AbstractWe revisit the hypothesis that cyclical fluctuations in unemployment are caused by shocks to the discount rate. We use a simple but rich search-theoretic model of the labour market in which the UE, EU and EE rates are all endogenous. Analytically, we show that an increase in the discount rate lowers the UE rate and, under some natural conditions, it lowers the EU rate. Quantitatively, we show that an increase in the discount rate from 4% to 10% generates a 3.5% decline in the UE rate and a 6% decline in the EU rate. These findings are at odds with the actual behaviour of the US labour market over the business cycle, which features a negative comovement between the UE and EU rates.

An Estimated Search and Matching Model of the Croatian Labor Market: Post-crisis Analysis

The paper specifies a simple search and matching model of the labor market and studies how well the model can describe aggregate Croatian labor market dynamics. The model developed is a discrete-time search and matching model with convex vacancy posting costs and two types of shocks: productivity and separation shocks. The model is estimated on unemployment and vacancy data during the period from 2012 to 2020 by using Bayesian methods. The model fits the data well and the estimation shows that productivity shocks are the main driving force of the fluctuations in the labor market, especially for the case of vacancies and output, while the separation shock process accounts for a large percentage of unemployment fluctuations.

Market stability with machine learning agents

We consider the effect of adaptive model selection and regularization by agents on price volatility and market stability in a simple agent-based model of a financial market. The agents base their trading behavior on forecasts of future returns, which they update adaptively and asynchronously through a process of model selection, estimation, and prediction. The addition of model selection and regularization methods to the traders’ learning algorithm is shown to reduce but not eliminate overfitting and resulting excess volatility. Our results suggest that even a high degree of attention to overfitting on the part of traders who are engaged in data mining is unlikely to entirely eliminate destabilizing speculation. They also accord well with the empirical “sparse signals” and “pockets of predictability” findings of Chinco et al. (2019) and Farmer et al. (2019).

The Formation of a Core Periphery Structure in Heterogeneous Financial Networks

Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a simple model of the overnight interbank lending market, in which banks compete for intermediation benefits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.

Banning information in hiring decisions

Over the past decade, federal, state and local governments have restricted the types and uses of information in hiring and promotion decisions. Examples include the banning of credit reports and criminal records. This paper presents a simple microeconomic model of a competitive labor market and studies the economic effects of information bans. The key trade off is between allocative efficiency and helping a labor type with an undesirable characteristic. We compare information bans to direct subsidies. Moreover, we discuss the case where the ban creates negative feedback on the perceptions of firms considering workers of the bad type.

Competition in smart distribution grids

Smart grids are often considered a cornerstone of energy transition and market liberalization in electric industries. From a critical reading of the interdisciplinary academic and governmental literature, we draw a new definition of grid smartness that is based on the reduction of the volatility of market prices and flows. Then, relying on a simple industrial-organization model of the electric market, we analyze the impact of smart grids on competition among energy suppliers and on the incentives of distribution system operators to invest in it. We show that the risk-reduction effect of smart grids pushes firms to supply more energy. However, the latter can be compensated by an indirect competition effect of investments in smart grids which prevents the entry of firms into the market, though the aggregate effect on energy supply is always positive. We also find that distribution system operators under-invest in smart grids because they fail to internalize positive externalities on energy consumers and producers.

A simple model of a money-management market with rational and extrapolative investors

I analyze a simple model of competition in fees among mutual funds. The funds are vertically differentiated in terms of the expected return they can generate for investors. Following Berk and Green (2004), I assume that a fund’s net return is decreasing in the amount of capital it manages, and that there is an infinite supply of capital by rational investors. Unlike the Berk-Green model, I assume there is also a finite supply of capital by non-rational investors who naively chase recent net returns. Investor behavior and the funds’ fee profile induce a long-run average amount of managed capital for each fund. I analyze Nash equilibrium in the game played by the funds, focusing on the implications of fund skill on fees, capital flows and net performance.

Impact of Regulated Biogas Market Structure on Benefits of Biogas in Ghana

Improved environmental management facilities provide social benefits to economic agents in Ghana. Biogas technology facility is one solution that offers societal gains. However, the maximization of social benefit in some cases depends on the structure of the market. The objective of this study was to examine loss in consumer surplus and gain in producer surplus, and if there was, deadweight loss relating to regulated biogas market structure in Ghana. The simple market models were fundamental tools in the economic surplus method used for the study. The results of the study showed that regulated monopoly although productive reduces societal gains and so inefficient compared with the free market. The regulated monopolist‖ producer gain was 13%, but there was 37% and 41% loss to consumers and investors‖ NPV respectively. There was also a deadweight loss of US$18,140.00. Market forces allow consumers to be future regulators of previously government regulated 2nd and 3rd degree discriminating monopoly. It is possible to avoid Market forces regulation in biogas diffusion when participants are reluctant to hike price.

Age of Marriage, Weather Shocks, and the Direction of Marriage Payments

We study how aggregate economic conditions affect the timing of marriage, and particularly child marriage, in Sub‐Saharan Africa and in India. In both regions, substantial monetary or in‐kind transfers occur with marriage: bride price across Sub‐Saharan Africa and dowry in India. In a simple equilibrium model of the marriage market in which parents choose when their children marry, income shocks affect the age of marriage because marriage payments are a source of consumption smoothing, particularly for a woman's family. As predicted by our model, we show that droughts, which reduce annual crop yields by 10 to 15% and aggregate income by 4 to 5%, have opposite effects on the marriage behavior of a sample of 400,000 women in the two regions: in Sub‐Saharan Africa they increase the annual hazard into child marriage by 3%, while in India droughts reduce such a hazard by 4%. Changes in the age of marriage due to droughts are associated with changes in fertility, especially in Sub‐Saharan Africa, and with declines in observed marriage payments. Our results indicate that the age of marriage responds to short‐term changes in aggregate economic conditions and that marriage payments determine the sign of this response. This suggests that, in order to design successful policies to combat child marriage and improve investments in daughters' human capital, it is crucial to understand the economic role of marriage market institutions.

On the economic advantage of superconductive lines of power transmission

We consider a comparative study of economic effects for power transmission lines based on traditional technology and superconductivity. A simple theoretical model of competitive energy market includes suppliers, network companies and consumers interacting within a transmission network. In the simplest case, this net consists of two nodes, connected with one transmission line. It is shown that superconductivity is beneficial due to the scale economy. This principle is valid for superconductive lines because of fixed energy inputs required for cooling the cables. The economic advantages of superconductivity are based on the absence of energy losses caused by resistance in metallic wires and on the possibility to increase the maximal load several times compared to traditional transmission lines. In contrast, traditional lines are subject to decreasing returns, because energy losses in these lines increase non-linearly with load. We demonstrate that the superconductive line ensures a higher integral return than the traditional line under large volumes of power transmission.

Efficiency of the Major Borsa Istanbul Indexes: An Empirical Investigation about the Interaction between Corporate Governance and Equity Prices Through a Market Model Approach

This paper is intended to argue the connection between corporate governance quality and stock returns and aimed to present a slightly different approach to capturing relationship between the fundamental stock market indexes and corporate governance in Turkey by relating the major index returns to the corporate governance index returns through a simple market model. Moreover, it is also aimed to compare relative efficiencies of the market portfolios included to one another according to their reactional behaviors against the corporate governance index. For this purpose, three market indexes in Borsa Istanbul, namely BIST 30, BIST 100 and BIST ALL as well as the Corporate Governance Index (CGI) have been considered and analyzed. The returns on each of these three market indexes are regressed on the returns of the corporate governance index through the Ordinary Least Squares (OLS) and Multivariate Adaptive Regression Splines (MARS) techniques. Our findings suggest that the market index returns are positively correlated with the corporate governance index returns and provide some evidence supporting the conclusion that the BIST 100 index can be considered to be relatively efficient as compared to BIST 30 and BIST ALL.

“Quantum Equilibrium-Disequilibrium”: Asset price dynamics, symmetry breaking, and defaults as dissipative instantons

We propose a simple non-equilibrium model of a financial market as an open system with a possible exchange of money with an outside world and market frictions (trade impacts) incorporated into asset price dynamics via a feedback mechanism. Using a linear market impact model, this produces a non-linear two-parametric extension of the classical Geometric Brownian Motion (GBM) model, that we call the “Quantum Equilibrium-Disequilibrium” (QED) model.The QED model incorporates non-linear mean-reverting dynamics, broken scale invariance, and corporate defaults. In the simplest one-stock (1D) formulation, our parsimonious model has only one degree of freedom, yet calibrates to both equity returns and credit default swap spreads. Defaults and market crashes are associated with dissipative tunneling events, and correspond to instanton (saddle-point) solutions of the model. When market frictions and inflows/outflows of money are neglected altogether, “classical” GBM scale-invariant dynamics with an exponential asset growth and without defaults are formally recovered from the QED dynamics. However, we argue that this is only a formal mathematical limit, and in reality the GBM limit is non-analytic due to non-linear effects that produce both defaults and divergence of perturbation theory in a small market friction parameter.

Estimates of the Effects of Emigration on the Labour Market


 Migration flows have increased since the EU enlargement in 2004. In many European countries, they are sufficiently large to have significant economic effects. These effects are among the most popular topics in public debate.
 In this paper, the authors attempt to quantify the effects of emigration on wages, welfare and in­come redistribution in the selected new EU member states. Emigration reduces labour supply and in­creases national wage generating income redistribu­tion from the owners of capital to the labour force. Emigration also results in welfare loss as emigrants no longer produce output in their home country. The au­thors of the article adopt a simple theoretical model of the labour market which allows quantifying these effects through the use of basic economic and demo­graphic statistics.
 The research on the effects of emigration on wages uses a simple supply and demand framework, where labour demand is derived from a marginal pro­ductivity condition using the Cobb–Douglas produc­tion function. The authors also assume perfectly ine­lastic labour supply, in case of which the effect of emigration on wages is entirely determined by labour demand. Wage elasticity estimation uses the fact that the capital share parameter in the Cobb–Douglas function also measures labour demand elasticity. This property of the production function allows the au­thors to estimate the elasticity using national ac­counts data.
 The estimates of labour demand (wage) elas­ticity for Lithuania range from 0.44 to 0.55, implying that due to emigration wages might have increased from 0.75 to 0.94 per cent a year, on average. In the period of 2001–2008, emigration might have resulted in a wage increase of 5.9 to 7.3 per cent. However, these estimates require caution as the beginning of the period was characterised by high unemployment. Emigration loss amounts to 0.4 per cent of GDP, and 2.8 per cent of GDP is redistributed to labour every year.
 Due to the poor quality of migration data, the impact of emigration on wages, welfare and income redistribution in other countries is most likely signifi­cantly underestimated. The assumption that the share of declared emigration is similar across countries would imply that those affected by emigration the most are Slovenia, Czech Republic and Estonia.