Windows to Complexity 2009II

Nonlinear Dynamics in Finance and Economics

June 19 2009, Münster

Financial markets such as stock markets, commodity markets, and derivative markets are central to modern economics. On these specialized markets capital is traded in the form of money, stocks and other financial contracts. Balancing capital supply and demand is the important purpose of financial markets.

Well functioning financial markets are an essential determinant for economic growth. Countries with malfunctioning financial markets often turn out to have problems concerning low productivity and high unemployment. The activities on financial markets have a direct influence on the welfare of the population, on the behavior of firms and consumers, and on business cycles.

There are many causes of nonlinear dynamics of financial market variables, for instance exogenous economic shocks (e.g. an unexpected loss of a public company) or direct state interventions in a financial market (e.g.  central bank interventions in order to influence the exchange rate of the home currency). Another reason are nonlinear functional dependencies, e.g. option prices as a function of the underlying’s  price, or the price-earnings-ratios as a function of the long-term growth prospects of the economy. Further, changing expectations of financial market participants will generally cause nonlinear dynamics.

Typical mathematical tools, used to model nonlinearities in the dynamics of economic and financial variables, are based on transformations of diffusion and jump diffusion processes. The economic models are usually characterized by stochastic differential equations, and the Ito calculus plays an important role. Besides theoretical model building, observed real-world financial time series are analyzed by statistical methods (estimation, specification, and hypothesis-testing procedures).

Both the theoretical and the empirical models can be utilized for policy planning and evaluation. The mathematical models are formal representations of financial market theories; they can be used to generate forecasts of the variables of interest. Further, the models can be applied for policy consulting.

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Invited Speakers

Professor Mikhail Chernov London Business School
Monetary Policy Regimes and the Term Structure of Interest Rates

Prof. Dr. Thomas Lux Christian-Albrechts-Universität zu Kiel
Mass Psychology in Financial Markets: Identification of Social Interaction Effects in the German Stock Market

PD Dr. Stefan Reitz Deutsche Bundesbank, Frankfurt
The Coordination Channel of Foreign Exchange Intervention: A Nonlinear Microstructural Analysis

Prof. Dr. Frank Riedel Universität Bielefeld
Robust Optimal Stopping

Prof. Dr. Christian Schlag Goethe-Universität Frankfurt a.M.
A Jumping Index of Jumping Stocks: An MCMC Analysis of Continuous-Time Models for Individual Stocks