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Large endogenous fluctuations in financial markets and larger economies| title | Large endogenous fluctuations in financial markets and larger economies |
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| start_date | 2023/03/03 |
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| schedule | 14h |
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| online | no |
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| location_info | salle A4-32 & visio |
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| details | l’exposé sera en français. |
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| summary | In financial markets, empirical data reveals that most of the volatility is of endogenous nature, in contrast with standard economic theory which places greater weight on external factors. The liquidity flow into the order book is influenced by past price changes. In particular, liquidity tends to decrease with the amplitude of past volatility and price trends. Such a feedback mechanism in turn increases the volatility, possibly leading to a liquidity crisis. Accounting for such effects within a stylized order book model, we demonstrate numerically that there exists a second order phase transition between a stable regime to an unstable regime as feedback increases. If relevant for the real markets, such a phase transition scenario requires the system to sit below, but very close to the instability threshold (self-organised criticality). An alternative scenario is provided by a class of non-linear Hawkes process that show occasional ‘activated’ liquidity crises, without having to be poised at the edge of instability.
At the macroeconomic scale, a similar puzzle exists: aggregate fluctuations seem too large to be explained by fundamentals. Despite their inability to cope with recent crises and various subsequent calls to « Rebuild Macroeconomics », Dynamics Stochastic General equilibrium (DSGE) models are still at the forefront of monetary policy around the world. Like many standard economic models, DSGE models rely on the figment of representative agents, abolishing the possibility of genuine collective effects induced by heterogeneities and interactions. By allowing feedback of past aggregate consumption on the sentiment of individual households, we pave the way for a class of more realistic models that allow for large output swings induced by relatively minor variations in economic conditions and amplified by interactions. Several important conceptual messages follow, as the de facto impossibility to price extreme risks and the potential of narrative engineering, which may be an efficient depression-prevention policy tool whenever confidence collapse is looming. |
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| responsibles | Nadal |
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Workflow history| from state (1) | to state | comment | date |
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| submitted | published | | 2023/02/28 14:26 UTC |
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