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LCN2 Seminar: Complexity in Economics and Finance

  • Cees Diks
Friday 28 April 2017
Gorlaeus Building
Einsteinweg 55
2333 CC Leiden
Science club

Speaker: prof. dr. Cees Diks (University of Amsterdam)
Title: Complexity in Economics and Finance

We discuss how expectations feedback and heterogeneity among agents can generate complex dynamics in economic and financial systems. The qualitative predictions of the resulting nonlinear models are very different from standard linear benchmarks, with important policy implications. For instance, the fundamental price can become unstable when interest rates are set too low, giving rise to multiple non-fundamental equilibria and/or global instability. This is illustrated in a central application, where we introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices. Using quarterly data we estimate the model parameters for eight different OECD countries. We find that the data support heterogeneity in expectations, with temporary endogenous switching between fundamental mean-reverting and trend-following beliefs based on their relative performance. Finally, a stochastic CUSP model is estimated for the same housing data to study the effect of time-varying mortgage rates in a stochastic setting.

About the LCN2 seminar: This talk is part of a series of seminars organized within an ongoing scientific initiative called "Leiden Complex Networks Network (LCN2), which aims at bringing together scientists with a common interest in both theoretical models and empirical analyses of complex networks and random graphs. The LCN2 community that is being established shares the approach of using networks for describing real-world complex systems and aims at developing related analytical and numerical methods, while also being open to other research approaches for studying complex systems. The talks are designed for a broad audience, allowing for constructive exchanges of ideas between scientists from different disciplines. After the talk, some drinks and simple snacks are provided.

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