Complex Systems in Finance and Econometrics

GlossaryDefinition of the SubjectIntroductionSome of the Pioneering StudiesIllustration with the LLS ModelSummary and Future DirectionsBibliography

IntroductionEconomic Modeling ApproachesMethodological IssuesConditions for ComplexityComplexity and the Role of EvidenceFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionSome Limits of the Mainstream ApproachThe Economics of ComplexityAdditional Features of Agent-Based ModelsAn Ante Litteram Agent-Based Model: Thomas Schelling's Segregation ModelThe Development of Agent-Based ModelingA Recursive System Representation of Agent-Based ModelsAnalysis of Model BehaviorValidation and EstimationThe Role of Economic PolicyFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionThreshold Autoregressive ModelSmooth Transition Autoregressive ModelMarkov-Switching ModelFuture DirectionsAcknowledgmentsBibliography

GlossaryDefinition of the SubjectIntroductionUsing System Dynamics Models in Policy and Strategy Formulation and ImplementationTheory Development – Understanding the Drivers of Business DynamicsApplications and Case ExamplesFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionEarly Corporate and Municipal Bond Market Microstructure ResearchFixed Income Pricing Service (FIPS) ResearchMunicipal Bond Market ResearchTransaction Reporting and Compliance Engine (TRACE) ResearchThe Links Between Bond Market Microstructure Research and Other Finance and Economics ResearchBibliography

GlossaryDefinition of the SubjectIntroductionDisruption and DelayAnalyzing D&D and Project BehaviorCascade Model Building ProcessImplications for DevelopmentFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionPrinciple Structures to Model the Diffusion of InnovationsRepresenting Managerial Decision Making in Innovation Diffusion ModelsManagerial ImplicationsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionThe Alternative Economic Models and Their LimitationsA System Dynamics Model of Resource Allocation, Production and EntitlementsReplicating Income Distribution Patterns Implicit in Models of Alternative Economic SystemsFeedback Loops Underlying Wage and Income PatternsPossibilities for Poverty AlleviationConclusionFuture DirectionsAppendixBibliography

GlossaryDefinition of the SubjectIntroductionThreshold and Markov-Switching Models of Regime ChangeEstimation of a Basic Markov-Switching ModelExtensions of the Basic Markov-Switching ModelSpecification Testing for Markov-Switching ModelsEmpirical Example: Identifying Business Cycle Turning PointsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionLinear Measures of Memory and Linear Error Correction ModelsNonlinear Error Correction (NEC) ModelsNonlinear CointegrationFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionOverview of Linear Panel Data ModelsSequentially Exogenous Regressors and Dynamic ModelsUnbalanced Panel Data SetsNonlinear ModelsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionThe Primacy of ObservationInvestigating One Effect at a TimeWhat Guidance Can Physics Provide?How Cross‐National Observations Can Be Used to Test the Role of Different FactorsHow Vested Interests May Affect the Accessibility and Reliability of Social DataHow Can Exogenous Factors be Taken into Account?Future DirectionsBibliography

GlossaryDefinition of the SubjectHistorical IntroductionStatistical Mechanics of Money DistributionStatistical Mechanics of Wealth DistributionData and Models for Income DistributionOther Applications of Statistical PhysicsFuture Directions, Criticism, and ConclusionsBibliography

GlossaryDefinition of the SubjectIntroductionCommon Elements of Data AnalyzesElectionsUS Economic RecessionsUnemploymentHomicide SurgesSummary: Findings and Emerging PossibilitiesBibliography

IntroductionEconometricsAgent Based ModelingFinanceMarket MicrostructureConclusionAcknowledgmentsBibliography

GlossaryDefinition of the SubjectIntroductionThe Standard RE ModelAnalytical Agent-Based ModelsComputational Agent-Based ModelsOther Applications in FinanceFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionDefining Fat-TailednessEmpirical Evidence About the TailsSome Specific DistributionsVolatility Clustering and Fat TailsApplication to Value-at-RiskFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionBasic Nonlinear Financial Time Series ModelsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionMotivating Predictive RegressionsStructural ModelFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionThe Fama–French Model as a Linear Beta Pricing ModelExplaining the Performance of the Fama–French Model: A Risk-Based InterpretationOther Risk-Based InterpretationsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionValuationThe Equity Premium PuzzleTime-Varying Equity Premia: Possible Biological OriginsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionNonlinear Forecasting Models for the Conditional MeanNonlinear Forecasting Models for the Conditional VarianceForecasting Beyond Mean and VarianceEvaluation of Nonlinear ForecastsConclusionsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionLyapunov Exponent and ForecastabilityNonparametric Estimation of the Global Lyapunov ExponentFour Local Measures of Sensitive DependenceForecasting Financial Asset Returns and Sensitive DependenceFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionExamples in EconomicsBasic Models of Power LawsMarket ModelsIncome Distribution ModelsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionProperties of the GARCH(1,1) ModelEstimation and InferenceTesting for ARCHAsymmetry, Long Memory, GARCH-in-MeanNon- and Semi-parametric ModelsMultivariate GARCH ModelsStochastic VolatilityAggregationFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionGroup Model Building: Basic Ideas and ConceptsDesigning Group Model Building ProjectsConducting Group Model Building SessionsResearching Group Model Building EffectivenessFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionThe History of System DynamicsThe Need for System DynamicsThe Components of System DynamicsAn Overview of Health and Social Care in the UK and EuropeA Case Study: Using System Dynamics to Influence Health and Social Care Policy Nationally in the UK – Delayed Hospital DischargesReview of System Dynamics Studies in Epidemiology in EuropeReview of System Dynamics Studies in Health and Social Care Management in EuropeSystem Dynamics Workforce Planning Models to Support Health ManagementFuture DirectionsAcknowledgmentsBibliographyThis paper describes the application of system dynamics to health and social care in Europe.Systems thinking and the simulation tool set of system dynamics are introduced together with an overview of current strategic health issues and responses in the UK and Europe. A case study is then presented to demonstrate how effective and apposite system dynamics studies can be. This is followed by a pan‐European review of applications of system dynamics in epidemiology and in health treatment and diagnosis in different sectors of health and social care, based on an extensive bibliography. Reference is also made to health workforce planning studies. Lastly, a review of future directions is described.The knowledge base of this paper is located in published work by internal and external consultants and Universities, but it should also be said that there is far more work in system dynamics in health than is referred to in these sources. Many internal and external consultancies undertake studies which remain unpublished.The description of the subject and the applications described are comprehensive, but the review is a personal interpretation of the current state of a fast‐moving field by the author and apologies are made in advance for any unintended omissions.The case study in Sect. “A Case Study: Using System Dynamics to Influence Health and Social Care Policy Nationally in the UK – Delayed Hospital Discharges” is extracted from material published by Springer‐Verlag, US and published with their permission.

GlossaryDefinition of the SubjectIntroductionFour ApplicationsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionTypes of Nonlinear ModelsBusiness Cycle AsymmetryFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionTransferable Utility Games; Some Standard DefinitionsA MarketMarket-Game EquivalenceEquivalence of Markets and Games with Many PlayersCores and Approximate CoresNonemptiness and Convergence of Approximate Cores of Large GamesShapley Values of Games with Many PlayersEconomies with ClubsWith a Continuum of PlayersOther Related Concepts and ResultsSome Remarks on Markets and More General Classes of EconomiesConclusions and Future DirectionsBibliography

GlossaryDefinition of the SubjectMarket StructuresInventory ModelsInformation-Based ModelsEasley and O’Hara’s ModelKyle ModelEmpirical Market MicrostructureFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionInstitutional StructureIntraday DynamicsReturns and VolatilityOrder Flow and Exchange Rates, Part I: Liquidity and InventoriesOrder Flow and Exchange Rates, Part II: InformationPrice Discovery in Foreign ExchangeSummary and Future DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionHistorical BackgroundTwo Leading ExamplesCausal ModelingNew Directions in Structural ModelingMajor InsightsBibliography

GlossaryDefinition of the SubjectIntroductionInvariant TestsTests Based on Divergence MeasuresTests Based on Other Measures of DependenceBootstrap and Permutation TestsFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionMedical Malpractice: A System Dynamics and Public Policy VignetteWhat Is System Dynamics Modeling?How Is System Dynamics Used to Support Public Policy and Management?System Dynamics and Models: A Range of Analytic Scope and ProductsWhat Are the Arenas in Which System Dynamics Models Are Used?What Are some of the Substantive Areas Where System Dynamics Has Been Applied?Evaluating the Effectiveness of System Dynamics Models in Supporting the Public Policy ProcessSummary: System Dynamics – A Powerful Tool to Support Public PolicyFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionEnvironmental Turbulence and Future UncertaintySdP with SD: The Modeling Process ≡ Strategic Situation FormulationCase 1: Cyprus' Environment and Hotel ProfitabilityCase 2: A Japanese Chemicals Keiretsu (JCK)Future DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionModel SpecificationRealized VolatilityApplicationsEstimation MethodsFuture DirectionsAcknowledgmentsBibliography

GlossaryDefinition of the SubjectIntroductionTypes of Dynamic SimulationTranslating Existing Economic Models into a System Dynamics FormatImproving Existing Economic Models with System DynamicsCreating Economic Dynamics Models from ScratchModel ValidityControversiesFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionSystems Thinking and Modeling MethodologyOrganizational LearningModeling for Organizational LearningFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionEmergence of the Systems ApproachCommon Grounds and DifferencesThe Variety of Systems MethodologiesSystem Dynamics – Its Features, Strengths and LimitationsActual and Potential RelationshipsOutlookAppendixBibliography

GlossaryDefinition of the SubjectIntroductionEpistemological FoundationsValidation MethodsValidation ProcessSynopsis and OutlookAppendix: Overview of the Tests Described in This ChapterBibliography

GlossaryDefinition of the SubjectIntroductionThe Model of Mono LakeThe Model of the Salmon in the Tucannon RiverModels of Climate ChangeSystem Dynamics Models of the Carbon CycleLessons from the Regulated Power Industry in the 1970sSimulating the Power Industry Response to a Carbon MarketConditions for Effective Interdisciplinary ModelingFuture DirectionsBibliography

GlossaryDefinition of the SubjectOptimization as CalibrationOptimization of Performance (Policy Optimization)Examples of SD Optimization Reported in the LiteratureFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionSystem Dynamics“Real” World and PresentationalismThe Discussions on Positivism: Presentationalism and KnowledgeA Brief Note Regarding Social TheorySimulation and MethodFuture DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionCharacterizing Linear and Nonlinear SystemsTraditional Control Theory ApproachesPathway Participation MetricsEigenvalue Elasticity AnalysisEigenvectors and Dynamic Decomposition Weights (DDW)Future DirectionsBibliography

GlossaryDefinition of the SubjectIntroductionFeedback ThinkingLoop Dominance and NonlinearityThe Endogenous Point of ViewSystem StructureSuggestions for Further Reading on the Core of System DynamicsBibliography

GlossaryDefinition of the SubjectIntroductionTypes of Treasury IssuesTreasury Market ParticipantsStages of the Treasury Bond MarketThe Treasury Futures MarketSeasonality and Announcement EffectsDiscontinuities in the US Treasury MarketOrder Flow in the US Treasury MarketModeling the Limit Order BookPrice DiscoveryFuture DirectionsBibliography