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Emeritus Professor Carl Chiarella

Biography

Carl completed a BSc (Hons) and MSc in applied mathematics at the University of Sydney and then a PhD in applied mathematics at the University of New South Wales in 1969 for a thesis on nuclear reactor theory.

After two years as a post-doctoral fellow at the Centre de Calcul Automatique at the University of Nancy in France, Carl joined the School of Mathematical Sciences at the University of Technology, Sydney in 1971 as a lecturer.

He completed the MCom (Hons) in economics at the University of New South Wales in 1976 and took out a PhD in economics in 1987 from the same University for a thesis in economic dynamics. He joined the School of Banking and Finance at the University of New South Wales in 1986 as a senior lecturer and was appointed Associate Professor in 1988. He took up the position of Professor of Finance at the University of Technology, Sydney in 1989, a position from which he retired early in 2004 as an Emeritus Professor. He returned to the School as a Professor of Quantitative Finance in mid-2005.

Carl has held visiting appointments at a number of universities including the University of Kyoto, Nanyang Technological University, Hitotsubashi University, Tokyo Metropolitan University, the University of Bielefeld and the University of Urbino.

He is the author of over 190 research articles in international and national journals and edited volumes and the author/coauthor of 19 books. Carl was previously a Co-Editor of the Journal of Economic Dynamics and Control and Associate Editor of Journal of Economic Behavior and Organization. He is currently an Associate Editor of the four journals - Quantitative Finance, Studies in Nonlinear Dynamics and Econometrics, European Journal of Finance and Computational Economics. In 2013 Carl was awarded a Doctor of Letters degree by UTS.

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Peter Lang Series on Dynamic Economic Theory

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Emeritus Professor, Finance Discipline Group
Core Member, QFRC - Quantitative Finance
Bachelor of Science (Applied Mathematics), Master of Commerce (Hons in Economics), Master of Science (Applied Mathematics), Doctor of Philosophy (Mathematics), Doctor of Philosophy (Economics)
 
Phone
+61 2 9514 7719

Research Interests

Derivative securities pricing, term structure of interest rates, quantitative finance techniques, disequilibrium macroeconomics, asset pricing theory and empirics.

Derivative Securities, Finance Theory, Portfolio Analysis, Current Issues in Finance and Advanced Macroeconomics.

Books

Chiarella, C., Xue-Zhong, H. & Nikitopoulos, C.S. 2015, Derivative Security Pricing Techniques, Methods and Applications, Springer.
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The book presents applications of stochastic calculus to derivative security pricing and interest rate modelling.
Chiarella, C., Kang, B. & Meyer, G. 2014, The numerical solution of the American option pricing problem: Finite difference and transform approaches, 1st, World Scientific Publishing Co, USA.
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Chiarella, C., Flaschel, P. & Semmler, W. 2012, Reconstructing Keynesian Macroeconomics Volume 1: Partial Perspectives, 1st, Routledge, USA.
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This book represents the first of three volumes offering a complete reinterpretation and restructuring of Keynesian macroeconomics and a detailed investigation of the disequilibrium adjustment processes characterizing the financial, the goods and the labour markets and their interaction. It questions in a radical way the evolution of Keynesian macroeconomics after World War II and focuses on the limitations of the traditional Keynesian approach until it fell apart in the early 1970s, as well as the inadequacy of the new consensus in macroeconomics that emerged from the Monetarist critique of Keynesianism. Professors Chiarella, Flaschel and Semmler investigate basic methodological issues, the pitfalls of the Rational Expectations School, important feedback channels in the tradition of Tobins work, and theories of the wage-price spiral and the evidences for them. The book uses primarily partial approaches, the integration of which will be the subject of subsequent volumes. With its focus on Keynesian propagation mechanisms, the research in this book provides a unique alternative to the black-box shock-absorber approaches that dominate modern macroeconomics. Reconstructing Keynesian Macroeconomics should be of interest to students and researchers who want to look at alternatives to the mainstream macrodynamics that emerged from the Monetarist critique of Keynesianism.
Charpe, M., Chiarella, C., Flaschel, P. & Semmler, W. 2011, Financial Assets, Debt and Liquidity Crises: A Keynesian Approach, 1st, Cambridge University Press, US.
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The macroeconomic development of most major industrial economies is characterised by boom-bust cycles. Normally such boom-bust cycles are driven by specific sectors of the economy. In the financial meltdown of the years 2007-2009 it was the credit sector and the real-estate sector that were the main driving forces. This book takes on the challenge of interpreting and modelling this meltdown. In doing so it revives the traditional Keynesian approach to the financial-real economy interaction and the business cycle, extending it in several important ways. In particular, it adopts the Keynesian view of a hierarchy of markets and introduces a detailed financial sector into the traditional Keynesian framework. The approach of the book goes beyond the currently dominant paradigm based on the representative agent, market clearing and rational economic agents. Instead it proposes an economy populated with heterogeneous, rationally bounded agents attempting to cope with disequilibria in various markets.
Asada, T., Chiarella, C., Flaschel, P. & Franke, R. 2010, Monetary Macrodynamics, 1st, Routledge, USA.
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This book investigates the interaction of effective goods demand with the wage-price spiral, and the impact of monetary policy on financial and the real markets from a Keynesian perspective. Endogenous business fluctuations are studied in the context of long-run distributive cycles in an advanced, rigorously formulated and quantitative setup. The material is developed by way of self-contained chapters on three levels of generality, an advanced textbook level, a research-oriented applied level and on a third level that shows how the interaction of real with financial markets has to be modelled from a truly integrative Keynesian perspective.
Bischi, G., Chiarella, C., Kopel, M.O. & Szidarovsky, F. 2010, Nonlinear Oligopolies: Stability and Bifurcations, 1st, Springer, Heidelberg, Germany.
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The book focuses on the dynamics of nonlinear oligopoly models. It discusses the classical Cournot model with a large variety of demand and cost functions that illustrate the many different types of possible best response functions and it shows the existence of unique and multiple equilibria. Particular emphasis is placed on the influence of nonnegativity and capacity constraints. Dynamics are introduced under various assumptions for the adjustment process. An introduction to the analysis of global dynamics is given through some specific examples. The book also considers concave and general oligopolies and gives conditions for the local asymptotic stability of their equilibria, and it investigates global dynamics in some special cases. Other oligopolies examined include market share attraction games, labor-managed oligopolies, partially cooperating firms and models with intertemporal demand attraction. Local/global stability analyses are carried out for these models and the impact of constraints is discussed. The book contains a number of technical appendices that summarize techniques of global dynamics not easily accessible elsewhere.
Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2009, Financial Markets and the Macroeconomy: A Keynesian Perspective, 1, Routledge, USA.
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The financial instability and its spillover to the real sector have become a great challenge to macro-economic theory. The book takes a Keynesian theoretical perspective, representing an attempt to revive what Keynes stressed in his General Theory, namely the role of the financial market in macroeconomic outcomes. Although this book is inspired and motivated by the Asian currency and financial crises in the years 1997-8 and the experiences of the currently evolving U.S. financial disruptions, it also focuses on reviving a modeling tradition that provides a theoretical framework that throws light on recent financial market episodes and disturbances and their macroeconomic effects. It brings to the forefront, as Keynes has suggested, the role of financial market stability for growth and macroeconomics. It criticizes theories that see economic disruptions and shocks rooted solely in the real side of the economy. It stresses the financial real interaction as the major source for macroeconomic instability and disruptions. This important new book from a group of Keynesian, but nonetheless technically oriented economists would be of most interest to specialists and graduate students in macroeconomics and financial economics, especially those with an interest in US and European financial markets, emerging market analysis, and dynamic economic modeling
Chiarella, C., Flaschel, P. & Franke, R. 2005, Foundations for a Disequilibrium Theory of the Business Cycle - Qualitative Analysis and Quantitative Assessment, 1, Cambridge University Press, Cambridge, UK.
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Asada, T., Chiarella, C., Flaschel, P. & Franke, R. 2003, Open Economy Macrodynamics: An Integrated Disequilibrium Approach, 1, Springer-Verlag, Berlin.
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Chiarella, C., Flaschel, P., Khomin, A. & Zhu, P. 2002, The SND package: applications to Keynesian monetary growth dynamics, 1, Peter Lang, Frankfurt.
Chiarella, C., Flaschel, P., Khomin, A. & Zhu, P. 2002, The SND Package: Applications to Keynesian Monetary Growth Dynamics, Peter Lang, Frankfurt.
Chiarella, C. & Flaschel, P. 2000, The dynamics of keynesian monetary growth: macrofoundations, Cambridge University Press, Cambridge, UK.
Chiarella, C., Flaschel, P., Groh, G. & Semmler, W. 2000, Disequilibrium, growth and labor market dynamics, Springer-Verlag, Berlin, Germany.

Chapters

Chiarella, C., Kang, B., Meyer, G. & Ziogas, A. 2014, 'Computational methods for derivatives with early exercise features' in Schmedders, K. & Judd, K.L. (eds), Handbook of Computational Economics, Elsevier, Netherlands, pp. 225-275.
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Chiarella, C. 2014, 'What's Beyond? Some Perspectives on the Future of Mathematical Finance' in Dieci, R., He, X. & Hommes, C. (eds), Nonlinear Economic Dynamics and Financial Modelling: Essays in Honour of Carl Chiarella, Springer, pp. 19-29.
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Bohm, V., Chiarella, C., He, X. & Huls, T. 2013, 'A homoclinic route to volatility: Dynamics of asset prices under autoregressive forecasting' in Bischi, G.I., Chiarella, C. & Sushko, I. (eds), Global analysis of dynamic models in economics and finance: Essays in honour of Laura Gardini, Springer, Germany, pp. 289-316.
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The article investigates the impact of mean-reverting forecasts in a model of asset pricing with two groups of investors under market clearing. Fundamentalists believe that asset prices follow an exogenous stochastic process, while chartists assume that asset prices follow a stochastic geometric decay process. For high values of mean reversion a period-doubling bifurcation occurs followed by a Neimark-Sacker bifurcation, after which homoclinic points exist inducing chaotic dynamics. Before the occurrence of homoclinic points, all orbits induce significant fluctuations with recurring symmetries and nonvanishing autocorrelations in all time series of prices and returns. After the homoclinic bifurcation, prices and returns follow alternating phases with low fluctuations near the steady state followed by phases with large excursions from the steady state. This shows that nonlinearities of the deterministic model rather than random perturbations are the causes of volatility clustering and of the generation of fat tails. Autocorrelations of prices and returns vanish while those of absolute returns and squared returns persist for high-order lags. Thus, the model is able to reproduce some important empirical market features
Chiarella, C., Huang, N. & Chi-Fai Lo, E. 2013, 'Credit portfolio correlations with dynamic leverage ratios' in Rösch, D. & Scheule, H. (eds), Credit Securitisations and Derivatives: Challenges for the Global Markets, Wiley, Australia, pp. 71-94.
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This chapter extends the dynamic leverage ratio model of of Hui et al. to the two-firm case so as to study the implications for default correlations and joint survival probabilities. The two-firm model has been proposed by Zhou, who extends the one-firm model of Black and Cox to the two-firm situation. The chapter reviews the techniques used by the authors to solve the first-passage-time problem: the method of images and the time varying barrier technique for dealing with time-dependent parameters. The chapter presents the numerical results for the impact on joint survival probabilities and default correlations across a range of different scenarios, for example, different correlation levels, drift rates, volatilities and initial leverage ratios
Chiarella, C. & Di Guilmi, C. 2013, 'A reconsideration of the formal Minskyan analysis: Microfoundations, endogenous money and the public sector' in Bischi, G.I., Chiarella, C. & Sushko, I. (eds), Global analysis of dynamic models in economics and finance: Essays in honour of Laura Gardini, Springer, Germany, pp. 63-81.
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The paper presents a survey of the literature that has grown out of the work of Hyman Minsky and, in particular, of the main models which have mathematically formalised the cyclical dynamics of a capitalist economy implied by the Financial Instability Hypothesis. We identify some of the issues that the existing literature has left unsolved. We then briefly summarise the contributions by Chiarella and Di Guilmi (J Econ Dyn Control 35(8):11511171, 2011c) and (Stud Nonl Dyn Econom forthcoming, 2012), highlighting how these papers have addressed the open questions and how they could be further developed.
Chiarella, C., Flaschel, P. & Semmler, W. 2013, 'Keynes, the dynamic stochastic general equilibrium model, and the business cycle' in Ryuzo Kuroki (ed), Keynes and Modern Economics, Routledge, New York, USA, pp. 85-116.
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Keynes in his General Theory has extensively responded to and criticized the classical economics that was dominant at his time. This paper elaborates on how Keynes would have responded to the dynamic stochastic general equilibrium (DSGE) model, or its more popular version, the real business cycle model, that appears to dominate macroeconomics today. Recently also many New Keynesians have employed this new paradigm in macroeconomics. We will discuss some major macroeconomic issues and show how differences in traditional Keynesian and the DSGE models may arise.4 We will also pursue a further more detailed study of why certain Keynesian ideas can usefully be applied to modem macroeconomics. This will help to resolve some important puzzles of modem macroeconomic theory.
Cheang, G.H. & Chiarella, C. 2012, 'A modern view on Merton's jump-diffusion model' in Cohen, S.N., Madan, D., Siu, T.K. & Yang, H. (eds), Advances in Statistics, Probability and Actuarial Science: Stochastic Processes, Finance and Control, World Scientific, USA, pp. 217-234.
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Chiarella, C., Flaschel, P. & Semmler, W. 2012, 'A macrodynamic model of real-financial interaction: Implications of budget equations and capital accumulation' in Kyrtsou, C. & Vorlow, C. (eds), Progress in Financial Markets Research, Nova Science Publishers Inc, New York, USA, pp. 243-262.
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In this paper, we investigate the real-financial interaction of an approach of Blanchard to stock market and multiplier dynamics from the stock-flow consistency perspective by including the capacity and the financing effect of the investment decision of firms into the model. We thus add budget equations as well as the growth law for the capital stock to the Blanchard dynamics and investigate the implications of these additions for steady state locations and their stability. We show that the steady state solutions of the Blanchard approach are no longer of relevance here, but rather are replaced by a unique interior long-run solution. We demonstrate asymptotic stability with respect to this steady state when stock market adjustment is sufficiently sluggish, and this even in the case of myopic perfect foresight. In the opposite situation, if stock market adjustment is made sufficiently fast, the system loses stability by way of a Hopf bifurcation for increasing adjustment speeds of capital gains expectations and will generate purely explosive behavior shortly thereafter.
Chiarella, C., Dieci, R. & He, X. 2010, 'A framework for CAPM with heterogeneous beliefs' in Bischi, G.I., Chiarella, C. & Gardini, L. (eds), Nonlinear Dynamics in Economics, Finance and the Social Sciences: Essays in Honour of John Barkley Rosser Jr, Springer, US, pp. 353-369.
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The Sharpe~Lintnel~Mossin (Sharpe 1964; Lintner 1965; Mossin 1966) Capital Assel Pricing Model (CAPM) plays a central role in modern finance theory. It is founded on the paradigm of humogeneous beliefs and a rational representarive agent. However, from a theoretical perspective this paradigm has been criticized on a number of grounds, in particular concerning liS: extreme assumptions about homoge~ neous beliefs, information about the economic envlronment, and the computational ability on the part of the ratIonal representative economic agent
Chiarella, C., Ziogas, A. & Ziveyi, J. 2010, 'Representation of American option prices under Heston stochastic volatility dynamics using integral transforms' in Chiarella, C. & Novikov, A. (eds), Contemporary Quantitative Finance: Essays in Honour of Eckhard Platen, Springer, Germany, pp. 281-315.
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We consider the evaluation of American options on dividend paying stocks in the case where the underlying asset price evolves according to Hestons stochastic volatility model in (Heston, Rev. Financ. Stud. 6:327343, 1993). We solve the Kolmogorov partial differential equation associated with the driving stochastic processes using a combination of Fourier and Laplace transforms and so obtain the joint transition probability density function for the underlying processes. We then use this expression in applying Duhamels principle to obtain the expression for an American call option price, which depends upon an unknown early exercise surface. By evaluating the pricing equation along the free surface boundary, we obtain the corresponding integral equation for the early exercise surface.
Chiarella, C., Dieci, R. & He, X. 2009, 'Heterogeneity, market mechanisms and asset price dynamics' in Hens, T. & Schenk-Hoppe, K.R. (eds), Handbook of Financial Markets: Dynamics and Evolution, Elsevier, USA, pp. 277-344.
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Chiarella, C., Meyer, G. & Ziogas, A. 2008, 'Pricing American Options Under Stochastic Volatility and Jump-Diffusion Dynamics' in Muller, K. & Steffens, U. (eds), Die Zukunft der Finanzdienstleistungs-industrie in Deutschland, Frankfurt School Verlag, Frankfurt, Germany, pp. 213-236.
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Chiarella, C., El-Hassan, N. & Kucera, A. 2008, 'The evaluation of discrete barrier options in a path integral framework' in Kontoghiorghes, E., Rustem, B. & Winker, P. (eds), Computational Methods in Financial Engineering: Essays in Honour of Manfred Gilli, Springer, Germany, pp. 117-144.
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The pricing of discretely monitored barrier options is a difficult problem. In general, there is no known closed form solution for pricing such options. A path integral approach to the evaluation of barrier options is developed. This leads to a backward recursion functional equation linking the pricing functions at successive barrier points. This functional equation is solved by expanding the pricing functions in Fourier-Hermite series. The backward recursion functional equation then becomes the backward recurrence relation for the coefficients in the Fourier-Hermite expansion of the pricing functions. A very efficient and accurate method for generating the pricing function at any barrier point is thus obtained. A number of numerical experiments with the method are performed in order to gain some understanding of the nature of convergence. Results for various volatility values and different numbers of basis functions in the Fourier-Hermite expansion are presented. Comparisons are given between pricing of discrete barrier option in the path integral framework and by use of finite difference methods.
Chiarella, C. & He, X. 2008, 'An adaptive model of asset price and wealth dynamics in a market with heterogeneous trading strategies' in Seese, D., Weinhardt, C. & Schlottmann, F. (eds), Handbook on Information Technology in Finance, Springer, Germany, pp. 465-499.
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The traditional asset-pricing models such as the capital asset pricing model (CAPM) of [42] and [34], the arbitrage pricing theory (APT) of [40], or the intertemporal capital asset pricing model (ICAPM) of [38] have as one of their important assumptions, investor homogeneity. In particular the paradigm of the representative agent assumes that all agents are homogeneous with regard to their preferences, their expectations and their investment strategies.1 However, as already argued by Keynes in the 1930s, agents do not have sufficient knowledge of the structure of the economy to form correct mathematical expectations that would be held by all agents
Asada, T., Chiarella, C., Flaschel, P. & Franke, R. 2007, 'Interacting Two-Country Business Fluctuations: Euroland and the USA' in Mazzi, G. & Savio, G. (eds), Growth and Cycle in the Eurozone, Palgrave Macmillan, New York, USA, pp. 109-118.
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This book presents recent theoretical and empirical advances on business cycles analysis with particular attention to Euro-zone characteristics. It also identifies applications of sophisticated tools by private and public institutions involved in the analysis of economic fluctuations and seeks to increase interaction between the academics, researchers and institutions in the area of business cycle analysis. This volume encompasses methodological advances in several important areas for business cycle analysis, such as multivariate statistical methods, synchronization and convergence, composite indicators, turning points dating and detection, output gap measurement, as well as innovative applications of the existing theories and methods to the economy of the Euro-zone.
Asada, T., Chen, P., Chiarella, C. & Flaschel, P. 2006, 'AD-AS and the Phillips curve: a baseline disequilibrium model' in Chiarella, C., Franke, R., Flaschel, P. & Semmler, W. (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 173-227.
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Chen, P., Chiarella, C., Flaschel, P. & Semmler, W. 2006, 'Keynesian macrodynamics and the Phillip curve: an estimated model for the US economy' in Chiarella, C., Franke, R., Flaschel, P. & Semmler, W. (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 229-284.
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Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2006, 'A high-dimensional model of real-financial market interaction: the cascade of stable matrices approach' in Chiarella, C., Franke, R., Flaschel, P. & Semmler, W. (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 359-384.
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Chiarella, C., He, X. & Wang, D. 2006, 'Statistical properties of a heterogeneous asset pricing model with time-varying second moment' in Namatame, A., Kaizouji, T. & Aruka, Y. (eds), The Complex Networks of Economic Interactions: essays in agent-based economics & econophysics, Springer, Berlin, Germany, pp. 109-123.
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Chiarella, C., Flaschel, P., He, X. & Hung, H. 2006, 'A stochastic model of real-financial interaction with boundedly rational heterogeneous agents' in Chiarella, C., Franke, R., Flaschel, P. & Semmler, W. (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 333-358.
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Chiarella, C., Dieci, R. & Gardini, L. 2005, 'Asset price dynamics and diversification with heterogeneous agents' in Lux, T., Reitz, S. & Samanidou, E. (eds), Nonlinear Dynamics and Heterogeneous Interacting Agents, Springer, Berlin, Germany, pp. 251-267.
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A discrete-time dynamic model of a financial market is developed, where two types of agents, fundamentalists and chartists, allocate their wealth between two risky assets and a safe asset, according to one-period mean-variance maximization. The two groups of agents form different expectations about asset returns and their variance/covariance structure, and this results in different demand functions. At the end of each trading period, agents' demands are aggregated by a market maker, who sets the next period prices as functions of the excess demand. The model results in a high-dimensional nonlinear discrete-time dynamical system, which describes the time evolution of prices and agents' beliefs about expected returns, variances and correlation. It is shown that the unique steady state may become unstable through a Hopf-bifurcation and that an attracting limit cycle, or more complex attractors, exist for particular ranges of the key parameters. In particular, the two risky assets may exhibit coupled long-run price fluctuations and time-varying correlation of returns.
Chiarella, C. & He, X. 2005, 'An asset pricing model with adaptive heterogeneous agents and wealth effects' in Lux, T., Reitz, S. & Samanidou, E. (eds), Nonlinear Dynamics and Heterogeneous Interacting Agents, Springer, Berlin, Germany, pp. 269-285.
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The characterisation of agents' preferences by decreasing absolute risk aversion (DARA) and constant relative risk aversion (CRRA) are well documented in the literature and also supported in both empirical and experimental studies. This paper considers a financial market with heterogeneous agents having power utility functions, which are the only utility functions displaying both DARA and CRRA. By introducing a population weighted average wealth measure, we develop an adaptive model to characterise asset price dynamics as well as the evolution of population proportions and wealth dynamics. Some numerical simulations are included to illustrate the evolution of the wealth dynamics, market behaviour and market efficiency within the framework of heterogeneous agents.
Chiarella, C., Flaschel, P. & Semmler, W. 2004, 'Real-financial interaction: a reconsideration of the Blanchard model with a state-of-market dependent reaction coefficient.' in Barnett, W., Deissenberg, C. & Feichtinger, G. (eds), Economic complexity: Non-linear dynamics, multi-agents economies, and learning., Elsevier, Amsterdam, The Netherlands, pp. 31-65.
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Chiarella, C. & He, X. 2004, 'Dynamics of beliefs and learning under AL processes - the homogeneous case.' in Barnett, W., Deissenberg, C. & Feichtinger, G. (eds), Economic complexity: Non-linear dynamics, multi-agents economics, and learning, Elsevier, Amsterdam, The Netherlands, pp. 363-390.
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Chiarella, C., Dieci, R. & Gardini, L. 2004, 'A dynamical analysis of speculation across two markets.' in Gallegati, M., Kirman, A.P. & Marsili, M. (eds), The Complex Dynamics of Economic Interaction: essays in economics and econophysics, Springer, Heidelberg, pp. 197-212.
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Chiarella, C., Szidarovszky, F. & Zhu, P. 2002, 'The interaction of uncertainty and information lags in the Cournot oligopoly model' in Puu, T. & Sushko, I. (eds), Oligopoly Dynamics: models and tools, Springer-Verlag, Berlin, Germany, pp. 233-263.
Chiarella, C. & Khomin, A. 2002, 'Learning in a generalised Dornbusch model of exchange rate dynamics' in Woodland, A.D. (ed), Economic Theory and International Trade: essays in honour of Murray C Kemp, Edward Elgar Publishing Ltd, Cheltenham, pp. 249-267.
Bhar, R., Chiarella, C. & Runggaldier, W.J. 2002, 'Estimation in models of the instantaneous short term interest rate by use of a dynamic Bayesian algorithm' in Sandmann, K. & Schonbucher, P.J. (eds), Advances in Finance and Stochastics: essays in honour of Dieter Sondermann, Springer-Verlag, Berlin, Germany, pp. 177-195.
Chiarella, C. & Szidarovszky, F. 2002, 'The birth of limit cycles in nonlinear oligopolies with continuously distributed information lag' in Dror, M., L'Ecuyer, P. & Szidarovszky, F. (eds), Modeling Uncertainty - An examination of stochastic theory, methods, and applications, Kluwer Academic Publishers, Boston, pp. 249-268.
Chiarella, C., Pasquali, S. & Runggaldier, W.J. 2002, 'On Filtering in Markovian Term Structure Models' in Yong, J. (ed), Recent Developments in Mathematical Finance, World Scientific, Singapore, pp. 139-150.
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Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2001, 'Output, Financial Markets & Growth. An Extension of the Balnchard Stock-Market Approach' in Friedman, R., Knuppel, L. & Lutkepohl, H. (eds), Econometric Studies: A Festschrift in Honour of Joachim Frohn, LIT Verlag, Munster, Germany, pp. 159-183.
Chiarella, C., Flaschel, P. & Semmler, W. 2001, 'The Macrodynamics of debt deflation' in Bellofiore, R. & Ferri, P. (eds), Financial Fragility and Investment in the Capitalist Economy, Edward Elgar Publishing, Cheltenham, UK, pp. 133-184.
Chiarella, C. & Khomin, A. 2000, 'The dynamic interaction of rational fundamentalists and trend chasing chartists in a monetary economy' in D, Gallegati Deili Gatti, M. & Kirman, A.P. (eds), Interaction and Market Structure: essays on heterogeneity in economics, Springer-Verlag, Berlin, Germany, pp. 151-165.
Chiarella, C., Flaschel, P., Groh, G. & Semmler, W. 2000, 'AS-AD disequilibrium dynamics and economic growth' in Hartl, E.J., Dockner, R.F., Luptacik, M. & Sorger, G. (eds), Optimization, Dynamics, and Economic Analysis, Physica-Verlag, Heidelberg, Germany, pp. 101-117.
Chiarella, C. & Flaschel, P. 2000, 'The emergence of complex dynamics in a naturally nonlinear integrated keynesian model of monetary growth' in Chiarella, W., Barnett, C., Keen, S., Marks, R. & Schnabl, H. (eds), Commerce, Complexity, and Evolution: topics in economics, finance, marketing and management: proceedings of the twelfth international symposium in economic theory and economentrics, Cambridge University Press, Cambridge, UK, pp. 111-145.
Bhar, R. & Chiarella, C. 2000, 'Analysis of time varying exchange rate risk premia' in Dunis, C.L. (ed), Advances in Quantitative Asset Management, Kluwer Academic Publishers, Norwell, Canada, pp. 255-273.
Chiarella, C. & He, X. 2000, 'The dynamics of the cobweb when producers are risk averse learners' in Hartl, E.J., Dockner, R.F., Luptacik, M. & Sorger, G. (eds), Optimization, Dynamics, and Economic Analysis, Physica-Verlag, Heidelberg, Germany, pp. 86-100.

Conferences

Chiarella, C., Di Guilmi, C. & Zhi, T. 2014, 'Modelling the 'Animal Spirits of Bank's Lending Behaviour', Society for Nonlinear Dynamics and Econometrics 22nd Annual Symposium, New York, USA.
Chiarella, C., Griebsch, S. & Kang, B. 2014, 'A comparative study on time-efficient methods to price compound options in the heston model', 8th World Congress of the Bachelier Finance Society, Brussels, Belgium.
Chiarella, C., Beyna, I. & Kang, B. 2014, 'Pricing Interest Rate Derivatives in a Multifactor HJM Model with Time Dependent Volatility', 20th International Conference Computing in Economics and Finance, Oslo, Norway.
Chiarella, C., Griebsch, S. & Kang, B. 2014, 'A comparative study on time-efficient methods to price compound options in the Heston model', Fourth IMS-FPS (Institute for Mathematical Statistics - Finance, Probability and Statistics) Workshop, Sydney, Australia.
Chiarella, C., Griebsch, S. & Kang, B. 2014, 'A comparative study on time-efficient methods to price compound options in the Heston model', International Symposium on Di, Sanya, Hainan, China.
Chiarella, C., Kang, B. & Meyer, G. 2013, 'The evaluation of barrier option prices under stochastic volatility', The First Asian Quantitative Finance Conference, Singapore.
Chiarella, C., Kang, B. & Poon, S. 2013, 'Forward variance and VIX futures dynamics', 57th Annual Meeting of the Australian Mathematical Society, Sydney, Australia.
Chiarella, C., He, X. & Wei, L. 2013, 'Learning and Evolution of Trading Strategies in Limit Order Markets', Quantitative Methods in Finance 2013 Conference, Sydney, Australia.
Chiarella, C., Kang, B., Nikitopoulos Sklibosios, C. & To, T. 2012, 'Humps in the volatility structure of the crude oil futures market: New evidence', Seminar presentation, Manchester Business School, Manchester, UK.
Chiarella, C., Clewlow, L. & Kang, B. 2011, 'The evaluation of gas swing contracts with regime switching', Topics in Numerical Methods for Finance: Proceedings in Mathematics and Statistics, Numerical Methods for Finance Conference 2011, Springer, Limerick, Ireland, pp. 155-176.
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Chiarella, C. 2012, 'The difference between Europe and the rest of the world - An Australian perspective', First Meeting of COST working groups Action IS1104, Urbino, Italy.
Chiarella, C., Dieci, R. & He, X. 2012, 'Time-varying beta: A boundedly rational equilibrium approach', Seminar Presentatiom, National Cheng-Chi University, Taiwan.
Chiarella, C., Dieci, R. & He, X. 2012, 'Heterogeneity, market mechanisms, and asset price dynamics', First Meeting of COST working groups Action IS1104, Urbino, Italy.
Chiarella, C. & Di Guilmi, C. 2012, 'A reconsideration of the formal Minskyan analysis: Microfoundations, endogenous money and the public sector', MDEF2012, Urbino, Italy.
Beyna, I., Chiarella, C. & Kang, B. 2012, 'Pricing interest rate derivatives in a multifactor HJM model with time dependent volatility', SIAM Conference on Financial Mathematics and Engineering, Minneapolis, Minnesota, USA.
Chiarella, C. & Kang, B. 2012, 'The evaluation of American compound option prices under stochastic volatility and stochastic interest rates', 7th World Congress of the Bachelier Finance Society, Sydney, Australia.
Chiarella, C., Kang, B., Nikitopoulos Sklibosios, C. & To, T. 2012, 'Humps in the volatility structure of the crude oil futures market: New evidence', 18th International Conference Computing in Economics and Finance, Prague, Czech Republic.
Chiarella, C., Kang, B., Nikitopoulos Sklibosios, C. & To, T. 2012, 'Humps in the volatility structure of the crude oil futures market: New evidence', 29th Spring International Conference of the French Finance Association, Strasbourg, France.
Chiarella, C., Kang, B., Nikitopoulos Sklibosios, C. & To, T. 2012, 'Humps in the volatility structure of the crude oil futures market: New evidence', Seminar Presentation, University of Cyprus, Cyprus.
Chiarella, C., Kang, B., Nikitopoulos Sklibosios, C. & To, T. 2012, 'Humps in the volatility structure of the crude oil futures market: New evidence', Asian Finance Association and Taiwan Finance Association 2012 Joint International Conference, Taipei, Taiwan.
Bohm, V., Chiarella, C., He, X. & Huls, T. 2012, 'A homoclinic route to volatility: Dynamics of asset prices under autoregressive forecasting', Seminar Presentation, Tunghai University, Taiwan.
Chiarella, C., Dieci, R., He, X. & Li, K. 2012, 'An evolutionary CAPM under heterogeneous beliefs', Proceedings of the 25th Australasian Finance and Banking Conference 2012, The 25th Australasian Finance and Banking Conference 2012, University of NSW, Sydney, Australia, pp. 1-38.
Chiarella, C., Kang, B. & Meyer, G. 2012, 'The evaluation of barrier option prices under stochastic volatility', Seminar Presentation, Department of Mathematics, Zhejiang University, Hangzhou, China.
Chiarella, C., Kang, B. & Nikitopoulos Sklibosios, C. 2012, 'Humps in the volatility structure of the crude oil futures market: New evidence', Seminar Presentation, Sydney Institute of Language and Commerce, Shanghai University, Shanghai, China.
Chiarella, C., Kang, B. & Nikitopoulos Sklibosios, C. 2012, 'Humps in the volatility structure of the crude oil futures market: New evidence"', Seminar Presentation, School of Commerce and the Centre for Applied Financial Studies, University of South Australia, Adelaide, Australia.
Chiarella, C., Hsiao, C. & To, T. 2011, 'Stochastic correlation and risk premia in term structure models', Seminar Presentation, Copenhagen Business School, Copenhagen, Denmark.
Chiarella, C. & Kang, B. 2011, 'The evaluation of American compound option prices under stochastic volatility and stochastic interest rates', Seminar Presentation, Aarhus University, Aarhus, Denmark.
Chiarella, C., Dieci, R. & He, X. 2011, 'Time-varying beta: A boundedly rational equilibrium approach', Seminar Presentation, University of Freiburg, Germany.
Chiarella, C., Dieci, R. & He, X. 2011, 'Time-varying beta: A boundedly rational equilibrium approach', Seminar Presentation, Dublin City University, Ireland.
Bao, Y., Chiarella, C. & Kang, B. 2011, 'Particle filters for markov switching stochastic volatility models', 17th International Conference on Computing in Economics and Finance, San Francisco, California, USA.
Chiarella, C. & Kang, B. 2011, 'The evaluation of American compound option prices under stochastic volatility and stochastic interest rates', 17th International Conference on Computing in Economics and Finance, San Francisco, California, USA.
Chiarella, C., Benya, I. & Kang, B. 2011, 'Pricing interest rate derivatives in a multifactor HJM model with time dependent volatility', 55th Annual Meeting of the Australian Mathematical Society, Wollongong, Australia.
Chiarella, C., Benya, I. & Kang, B. 2011, 'Pricing interest rate derivatives in a multifactor HJM model with time dependent volatility', Seminar Presentation, Tongji University, Shanghai, China.
Chiarella, C., Benya, I. & Kang, B. 2011, 'Pricing interest rate derivatives in a multifactor HJM model with time dependent volatility', Quantitative Methods in Finance 2011 Conference, Sydney Australia.
Chiarella, C., Hsiao, C. & To, T. 2010, 'Risk premia and Wishart term structure models', Society for Nonlinear Dynamics and Econometrics 18th Annual Symposium, Novara, Italy.
Chiarella, C., He, X. & Zheng, M. 2010, 'The market impact and survival of boundedly rational traders', Young Researchers Workshop in Finance, Tokyo, Japan.
Chiarella, C., Dieci, R. & He, X. 2010, 'Time-varying beta: A bounded rational equlibrium approach', 11th Workshop on Optimal Control, Dynamic Games and Nonlinear Dynamics, Amsterdam, The Netherlands.
Chiarella, C., Giansante, S., Sordi, S. & Vercelli, A. 2010, 'Financial fragility and interacting units: An exercise', Interacting Agents and Nonlinear Dynamics in Macroeconomics, Udine, Italy.
Chiarella, C., Kang, B. & Meyer, G. 2010, 'The evaluation of barrier option prices under stochastic volatility', 16th International Conference on Computing in Economics and Finance, London, UK.
Chiarella, C. & Di Guilmi, C. 2010, 'Debt deflation dynamics in a heterogenous agent economy', 16th International Conference on Computing in Economics and Finance, London, UK.
Chiarella, C., Clewlow, L. & Kang, B. 2010, 'The evaluation of swing contracts with regime switching', 16th International Conference on Computing in Economics and Finance, London, UK.
Chiarella, C., Clewlow, L. & Kang, B. 2010, 'The evaluation of swing contracts with regime switching', 6th World Congress of the Bachelier Finance Society, Toronto, Canada.
Chiarella, C., Kang, B. & Meyer, G. 2010, 'The evaluation of barrier option prices under stochastic volatility', 6th World Congress of the Bachelier Finance Society, Toronto, Canada.
Chiarella, C. & Ziveyi, J. 2010, 'American option pricing under two stochatsic volatility processes', 6th World Congress of the Bachelier Finance Society, Toronto, Canada.
Chiarella, C., Clewlow, L. & Kang, B. 2010, 'Modelling and estimating the forward price curve in the energy market', Symposium on Challenges in Commodity-Energy Price and Revenue Management, Heidelberg, Germany.
Chiarella, C., Clewlow, L. & Kang, B. 2010, 'The evaluation of swing contracts with regime switching', 24th European Conference on Operations Research, Lisbon, Portugal.
Chiarella, C., Hsiao, C. & To, T. 2010, 'Risk premia and Wishart term structure models', China International Conference in Finance, Beijing, China.
Chiarella, C. & Maina, S.C. 2010, 'Defaultable hidden Markov HJM term structure class of models', 16th International Conference on Computing in Economics and Finance, London, UK.
Chiarella, C., Clewlow, L. & Kang, B. 2010, 'The evaluation of swing contracts with regime switching', Quantitative Methods in Finance 2010 Conference, Sydney, Australia.
Novikov, A. & Chiarella, C. 2009, 'Contemporary Quantitative Finance, Essays in Honour of Eckhard Platen', Quantitative Mathematical Finance, Quantitative Mathematical Finance, Springer, Sydney, Australia, pp. 1-410.
The contributors to this volume write a series of articles outlining contemporary advances in a number of key areas of mathematical finance such as, optimal control theory applied to finance, interest rate models, credit risk and credit derivatives, use of alternative stochastic processes, numerical solution of equations of mathematical finance, estimation of stochastic processes in finance. The list of authors includes many of the researchers who have made the major contributions to these various areas of mathematical finance. This volume addresses both researchers and professionals in financial institutions, as well as regulators working in the above mentioned fields.
Chiarella, C. & Di Guilmi, C. 2009, 'Financial instability hypothesis: A stochastic microfoundation framework', Workshop on the Complexity of Financial Crisis in a Long-Period Perspective: Facts, Theory and Models, Sienna, Italy.
Giansante, S., Chiarella, C., Sordi, S. & Cercelli, A. 2009, 'Financial fragility and fluctuations in a world with multi-heterogeneous agents', Workshop on the Complexity of Financial Crisis in a Long-Period Perspective: Facts, Theory and Models, Sienna, Italy.
Chiarella, C., Clewlow, L. & Kang, B. 2009, 'Modelling and estimating the forward price curve in the energy market', Daiwa Young Researchers Workshop on Finance, Kyoto, Japan.
Chiarella, C., Clewlow, L. & Kang, B. 2009, 'Pricing swing options and modelling multi-factor forward price curves in the energy market', Research Forum on Finance and Decision Making, Tokyo, Japan.
Chiarella, C., He, X. & Zheng, M. 2009, 'Consensus investor and intertemporal asset pricing with heterogeneous beliefs', AsianFA International Conference, Brisbane, Australia.
Chiarella, C., He, X. & Zheng, M. 2009, 'Consensus investor and intertemporal asset pricing with heterogeneous beliefs', International Conference on Economic Science with Heterogeneous Interacting Agents, Beijing, China.
Chiarella, C. & Kang, B. 2009, 'The evaluation of American compound option prices under stochastic volatility using the sparse grid approach', 3rd Workshop on High-Dimensional Approximation, Sydney, Australia.
Chiarella, C., He, X. & Zheng, M. 2009, 'Consensus investor and intertemporal asset pricing with heterogeneous beliefs', 15th International Conference on Computing in Economics and Finance, Sydney, Australia.
Chiarella, C., Dieci, R. & He, X. 2009, 'Time-varying beta: A bounded rational equlibrium approach', Evolution and Market Behavior in Economics and Finance Workshop, Pisa, Italy.
Chiarella, C., Hsiao, C. & To, T. 2009, 'Risk premia in dynamic affine term structure models', Young Statistician Conference, Sydney, Australia.
Chiarella, C., Dieci, R. & He, X. 2009, 'Time-varying beta: A bounded rational equilibrium approach', Seminar Presentation, Bocconi University, Milan, Italy.
Chiarella, C., Clewlow, L. & Kang, B. 2009, 'Modelling and estimating the forward price curve in the energy market', Seminar Presentation, Universita dell' Insubria, Varese, Italy.
Chiarella, C. 2009, 'Heterogeneity, market mechanisms and asset price dynamics', Financial Econometrics Workshop on Informational Asymmetry/ Heterogeneous Beliefs, Auckland, New Zealand.
Chiarella, C. & Flaschel, P. 2009, 'The complex dynamics of capitalism', Workshop on Nonlinearity, Complexity and Randomness, Trento, Italy.
Chiarella, C., Clewlow, L. & Kang, B. 2009, 'Modelling and estimating the forward price curve in the energy market', 3rd International Conference on Computational and Financial Econometrics, Limassol, Cyprus.
Chiarella, C. & Di Guilmi, C. 2009, 'Financial instability hypothesis: A stochastic microfoundation framework', The Sixth International Workshop on Agent-based Approaches in Economic and Social Complex Systems, Taipei, Taiwan.
Chiarella, C. & Di Guilmi, C. 2009, 'Financial instability hypothesis: A stochastic microfoundation framework', 8th Annual Meeting of the European Economics and Finance Society International Conference, Warsaw, Poland.
Chiarella, C. & Huang, N. 2009, 'Modelling default correlations in a two-firm model by dynamic leverage ratios following jump diffusion processes', Seminar Presentation, Discipline of Operations Management and Econometrics, University of Sydney, Sydney, Australia.
Bohm, V., Chiarella, C. & He, X. 2008, 'Dynamics of asset prices in the CAPM under autoregressive forecasting and noise', International Workshop on Nonlinear Economic Dynamics and Financial Market Modelling, Beijing, China.
Bohm, V., Chiarella, C. & He, X. 2008, 'Dynamics of asset prices in the CAPM under autoregressive forecasting and noise', MDEF 2008, Urbino, Italy.
Chiarella, C. 2008, 'The evaluation of American compound option prices under stochastic volatility', 5th International Conference on Computational Management Science, London, UK.
Chiarella, C., He, X. & Zheng, M. 2008, 'Heterogeneous expectations and exchange rate dynamics', 16th Society for Nonlinear Dynamics and Econometrics Conference, San Francisco, USA.
Chiarella, C., He, X. & Zheng, M. 2008, 'Consensus investor and intertemporal asset pricing with heterogeneous beliefs', International Workshop on Nonlinear Economic Dynamics and Finance, Beijing, China.
Chiarella, C., He, X. & Zheng, M. 2008, 'The stochastic dynamics of speculative prices', Sydney Agents Conference, Sydney, Australia.
Chiarella, C., Clewlow, L. & Kang, B. 2008, 'The evaluation of swing option price with make-up and carry-forward provisions', Bachelier Finance Society 5th World Congress, London, UK.
Chiarella, C., Dieci, R. & He, X. 2008, 'Heterogeneity, market mechanisms and asset price dynamics', Learning Week, Summer Workshop, Federal Reserve Bank of St Louis, St Louis, USA.
Chiarella, C., He, X. & Zheng, M. 2008, 'Heterogeneous expectations and exchange rate dynamics', 14th International Conference on Computing in Economics and Finance, Paris, France.
Chiarella, C., He, X. & Zheng, M. 2008, 'The stochastic dynamics of speculative prices', Bachelier Finance Society 5th World Congress, London, UK.
Chiarella, C. & Kang, B. 2008, 'The evaluation of American compound option prices under stochastic volatility using the sparse grid approach', Bachelier Finance Society 5th World Congress, London, UK.
Chiarella, C. & Kang, B. 2008, 'The evaluation of American compound option prices under stochastic volatility', 2nd Annual Risk Management Conference, Singapore.
Chiarella, C., Dieci, R. & He, X. 2008, 'A dynamic heterogeneous beliefs CAPM', Modelling Dynamics in Economics and Finance MDEF 08, Urbino, Italy.
Chiarella, C. & Kang, B. 2008, 'The evaluation of American compound option prices under stochastic volatility', Seminar Presentation, University of Karlsruhe, Karlsruhe, Germany.
Chiarella, C. & Kang, B. 2008, 'The evaluation of American compound option prices under stochastic volatility', 14th International Conference of the Society for Computational Economics, Paris, France.
Chiarella, C. 2008, 'The evaluation of American compound option prices under stochastic volatility', Second Annual Risk Management Conference, Singapore.
Chiarella, C., Dieci, R. & He, X. 2008, 'Heterogeneity, market mechanisms and asset price dynamics', Seminar Presentation, University of Karlsruhe, Karlsruhe, Germany.
Chiarella, C., He, X. & Zheng, M. 2008, 'Consensus Investor and Intertemporal Asset Pricing with Heterogeneous Beliefs', Quantitative Methods in Finance 2008 Conference, Sydney, Australia.
Chiarella, C. 2008, 'The evaluation of swing options with make-up and carry-forward provisions', Quantitative Methods in Finance 2008 Conference, Sydney, Australia.
Chiarella, C., He, X. & Zheng, M. 2008, 'Heterogeneous expectations and exchange rate dynamics', International Workshop on Nonlinear Economic Dynamics and Financial Market Modelling, Beijing, China.
Chiarella, C., He, X. & Zheng, M. 2008, 'Heterogeneous expectations and exchange rate dynamics', Seminar Presentation, Sydney Agents Network, Sydney, Australia.
Giansante, S., Chiarella, C., Sordi, S. & Vercelli, A. 2008, 'Financial fragility and fluctuations in a world with multi-heterogeneous agents', MDEF 2008, Urbino, Italy.
Chiarella, C., He, X., Wang, D. & Zhu, M. 2008, 'Stock price and market maker inventory dynamics with heterogeneous beliefs', International Workshop on Nonlinear Dynamics and Financial Market Modelling, Beijing, China.
Thulasiram, R.K., Downing, C.T., Chiarella, C., Coleman, T., Dempster, M., Dongarra, J., Duan, J.C., Gao, G., Appadoo, S.S., Atiya, A., Bagchi, A., Birge, J., Brabazon, A., Broadie, M., Campolieti, J., Cincotti, S., Downing, C., Gilli, M., Isaenko, S., Jacoby, G., Kumar, K., Klebaner, F., Li, X., Li, Y., Livdan, D., Lyuu, Y.D., Nath, G.C., Okten, G., Oosterlee, C.W., Ouskel, A.M., Platen, E., Seco, L., Srinivasan, A., Srinivasan, R., Thenmozhi, M., Thulasiraman, P., Tsang, E.P.K., Wagner, A., Wang, L., Wilson, C., Wittum, G., Ing, C.W. & Tanaka-Yamawaki, M. 2008, 'Message from PDCoF-08 Workshop Chairs', IPDPS Miami 2008 - Proceedings of the 22nd IEEE International Parallel and Distributed Processing Symposium, Program and CD-ROM.
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Adolfsson, T., Cheang, G.H., Chiarella, C. & Ziogas, A. 2007, 'Approximate evaluation of European spread options under jump-diffusion dynamics', 13th International Conference on Computing in Economics and Finance, Montreal, Canada.
Chiarella, C. 2007, 'The stochastic dynamics of speculative behaviour', Workshop on Statistical Physics and Financial Markets, Trieste, Italy.
Chiarella, C. 2007, 'The evaluation of American option prices under stochastic volatility and jump-diffusion dynamics using the method of lines', Stochastic Processes: Theory and Applications Conference, Brescanore, Italy.
Chiarella, C. 2007, 'Pricing American options under stochastic volatility', Convegno Amases, Leccie, Italy.
Chiarella, C., He, X. & Zheng, M. 2007, 'The stochastic price dynamics of speculative behaviour', 13th International Conference on Computing in Economics and Finance, Montreal, Canada.
Chiarella, C. & Hsiao, C. 2007, 'Optimal investment strategies under stochastic volatility', 13th International Conference on Computing in Economics and Finance, Montreal, Canada.
Chiarella, C., Dieci, R. & He, X. 2007, 'Aggregation of heterogeneous beliefs and asset pricing theory: A mean-variance analysis', ASFA/FMA Conference, Hong Kong, China.
Cheang, G.H., Chiarella, C., Meyer, G. & Ziogas, A. 2006, 'The valuation of American spread options under jump-diffusion processes', Bachelier Finance Society 4th World Congress, Tokyo, Japan.
Cheang, G.H., Chiarella, C., Meyer, G. & Ziogas, A. 2006, 'Numerical methods for American spread options under jump-diffusion processes', 12th International Conference on Computing in Economics and Finance, Limasso, Cyprus.
Cheang, G.H., Chiarella, C. & Ziogas, A. 2006, 'American-style options on two assets under jump-diffusion processes', Bachelier Finance Society 4th World Congress, Tokyo, Japan.
Chen, P., Chiarella, C., Flaschel, P. & Hung, H. 2006, 'Keynesian disquilibrium dynamics: Estimated convergence roads to instability and the emergence of complex business fluctuations', Complex Behavior in Economics: Modelling, Computing and Mastering Complexity, Complex Behavior in Economics: Modelling, Computing and Mastering Complexity, Greqan, Aix-En-Provence, France, pp. 1-35.
Chiarella, C. 2006, 'Pricing American options under stochastic volatility dynamics', Conference on Numerical Methods in Finance, Inria-Rocquencourt, France.
Chiarella, C., Dieci, R. & He, X. 2006, 'A dynamic heterogenous beliefs CAPM', Complex Behavior in Economics: Modelling, Computing and Mastering Complexity, Complex Behavior in Economics: Modelling, Computing and Mastering Complexity, GREQAM, Aix-en-Provence, France, pp. 1-26.
Chiarella, C., Dieci, R. & He, X. 2006, 'A dynamic heterogenous beliefs CAPM', Workshop on Financial Market Dynamics, Piacenza, Italy.
Chiarella, C., Dieci, R. & He, X. 2006, 'Aggregation of heterogenous beliefs and asset pricing: A mean-variance analysis', Workshop on Economics of Heterogenous Interacting Agents, Bologna, Italy.
Chiarella, C., Dieci, R. & He, X. 2006, 'Aggregation of heterogeneous beliefs and asset pricing: A mean-variance analysis.', 12th International Conference on Computing in Economics and Finance, Limassol, Cyprus.
Chiarella, C., Dieci, R. & He, X. 2006, 'On the dynamic behavior of asset prices in disequilibrium: Where are we after three decades?', MDEF 2006, Urbino, Italy.
Chiarella, C., Dieci, R. & He, X. 2006, 'On the dynamic behaviour of asset prices in disequilibrium: Where are we after three decades?', WIVA 3 Conference, Sienna, Italy.
Chiarella, C., He, X. & Hommes, C. 2006, 'A dynamic analysis of moving average rules', Workshop on Dynamic Models in Economics and Finance, Piacenza, Italy.
Chiarella, C., He, X. & Li, Y. 2006, 'A dynamic heterogenous beliefs CAPM', 1st International Conference on Economic Science with Heterogenous Interacting Agents, Bologna, Italy.
Chiarella, C. & Gao, S. 2006, 'Direct estimation of a continous time model of the stock market', 14th IFAC Symposium on System Identification, Newcastle, Australia.
Chiarella, C., Meyer, G. & Ziogas, A. 2006, 'Pricing American options under stochastic volatility and jump-diffusion dynamics', Bachelier Finance Society 4th World Congress, Tokyo, Japan.
Chiarella, C., Meyer, G. & Ziogas, A. 2006, 'Pricing American options under stochastic volatility and jump-diffusion dynamics', Quantitative Methods in Finance 2006 Conference, Quantitative Methods in Finance 2006 Conference, Sydney, Australia.
Chiarella, C. & Ziogas, A. 2006, 'Pricing American options under stochastic volatility', Advanced Mathematical Methods for Finance Workshop, Advanced Mathematical Methods for Finance Workshop, Paris, France.
Perello, J., Iori, G. & Chiarella, C. 2006, 'Heterogenous trading rules impact on the microstructure of double auction markets', Complex Behavior in Economics: Modelling, Computing and Mastering Compexity, Complex Behavior in Economics: Modelling, Computing and Mastering Compexity, Aix-Enl Provence, France.
Cheang, G.H., Chiarella, C. & Ziogas, A. 2005, 'The valuation of multiple asset American options under jump diffusion processes', 11th Annual Conference on Computing in Economics and Finance, 11th Annual Conference on Computing in Economics and Finance, -, Washington, USA.
Chen, P., Chiarella, C., Flaschel, P. & Semmler, W. 2005, 'Keynesian dynamics and the wage-price spiral: Estimating and analysing a baseline disequilibrium approach', 11th Annual Conference on Computing in Economics and Finance, 11th Annual Conference on Computing in Economics and Finance, Society of Computational Economics, Washington, USA, pp. 1-53.
Chen, P., Chiarella, C., Flaschel, P. & Semmler, W. 2005, 'Keynesian dynamics and the wage-price spiral: Estimating and analysing a baseline disequilibrium approach', 13th Annual Symposium of the Society for Non-Linear Dynamics and Econometrics, 13th Annual Symposium of the Society for Non-Linear Dynamics and Econometrics, -, London, UK.
Chiarella, C., Cheang, G.H. & Ziogas, A. 2005, 'The valuation of multiple asset American options under jump diffusion processes', Mini Symposium on Financial Engineering, Mini Symposium on Financial Engineering, -, Kyoto, Japan.
Chiarella, C. 2005, 'Pricing American options under stochastic volatility', Quantitative Methods in Finance 2005 Conference, Quantitative Methods in Finance 2005 Conference, -, Sydney, Australia.
Chiarella, C., Bohm, V. & He, X. 2005, 'The interaction of non-linear and stochastic elements in a one period model of asset price dynamics', Econophysics Colloquium, Econophysics Colloquium, -, Canberra, Australia.
Chiarella, C., Hsiao, C. & Semmler, W. 2005, 'Intertemporal asset allocation with inflation - indexed bonds', 11th Annual Conference on Computing in Economics and Finance, 11th Annual Conference on Computing in Economics and Finance, -, Washington, USA.
Chiarella, C. & Iori, G. 2005, 'The impact of heterogeneous trading rules of the limit', 13th Annual Symposium of the Society for Non-Linear Dynamics and Econometrics, 13th Annual Symposium of the Society for Non-Linear Dynamics and Econometrics, -, London, UK.
Chiarella, C. & Szidarovszky, F. 2005, 'The complex asymptotic behavior of dynamic oligopolies with partially cooperating firms', 4th Conference on Nonlinear Economic Dynamics, 4th Conference on Nonlinear Economic Dynamics, -, Urbino, Italy.
Chiarella, C. & Ziogas, A. 2005, 'Pricing American options under stochastic volatility', 11th Annual Conference on Computing in Economics and Finance, 11th Annual Conference on Computing in Economics and Finance, Society for Computational Economics, Washington, USA, pp. 1-36.
Chiarella, C. & Ziogas, A. 2005, 'Pricing American options on jump-diffusion processes: A numerical integration approach', Quantitative Methods in Finance 2005, Quantitative Methods in Finance 2005, -, Sydney, Australia.
Chiarella, C. & Ziogas, A. 2005, 'Pricing American options under stochastic volatility', Daiwa Securities International Workshop on Financial Engineering, Daiwa Securities International Workshop on Financial Engineering, -, Tokyo, Japan.
Hsiao, C., Semmler, W. & Chiarella, C. 2005, 'Intertemporal asset allocation when the underlying factors are unobservable', 13th Annual Symposium of the Society for Nonlinear Dynamics and Econometrics, 13th Annual Symposium of the Society for Nonlinear Dynamics and Econometrics, -, London, UK.
To, T., Chiarella, C. & Hung, H. 2005, 'The volatility structure of the fixed income market under the HJM framework: A non-linear filtering approach', Mini Symposium on Financial Engineering, Mini Symposium on Financial Engineering, -, Kyoto, Japan.
To, T., Chiarella, C. & Hung, H. 2005, 'The volatility structure of the fixed income market under the HJM framework: A non-linear filtering approach', The First Symposium on Econometric Theory and Its Applications, The First Symposium on Econometric Theory and Its Applications, -, Taipei, Taiwan.
Chiarella, C. 2004, 'The time varying conditional distribution of the ex-ante equity risk premium implied by earnings and dividend yield', French Finance Association Meeting, French Finance Association Meeting, -, Paris, France.
Chiarella, C. 2004, 'A class of stochastic volatility HJM interest rate models', European financial management association meeting, European Financial Managment Association Meeting, -, Basel, Switzerland.
Chiarella, C. 2004, 'Mean variance preferences expectations formation and the dynamics of ransom asset prices', -, Quantitative Methods in Finance 2004 Conference, -, Sydney, Australia.
Chiarella, C., Dieci, R. & Gardini, L. 2004, 'Asset price and wealth dynamics in a financial market with heterogeneous agents', Computational Economics - 10th International Conference on Computing in Economics and Finance, Computational Economics - 10th International Conference on Computing in Economics and Finance, Society for Computational Economics, Amsterdam, Netherland, pp. 1-30.
Chiarella, C., Flaschel, P., He, X. & Hung, H. 2004, 'A stochastic model of real-financial interaction with boundedly rational heterogeneous agents', Society for nonlinear dynamics and economics, Society for Nonlinear Dynamics and Economics, -, Atlanta, USA.
Chiarella, C., He, X. & Hommes, C. 2004, 'A dynamic analysis of moving average rules', Computational Economics - 10th International Conference on Computing in Economics and Finance, Computational Economics - 10th International Conference on Computing in Economics and Finance, Society for Computational Economics, Amsterdam, Netherland, pp. 1-19.
Chiarella, C. & Iori, G. 2004, 'The microstructure of double auction markets: Some further simulation analysis', 3rd International conference on non-linear economic dynamics, 3rd International Conference on Nonlinear Economic Dynamics, -, Tokyo, Japan.
Chiarella, C. & Iori, G. 2004, 'The impact of heterogeneous trading rules on returns, volatility and the limit order book', Volatility of financial markets: theoretical models, forecasting and trading, Volatility of Financial Markets: Theoretical Models, Forecasting and Trading, -, University of Leiden, Netherland.
Chiarella, C. & Ziogas, A. 2004, 'Pricing American options on jump-diffusion processes using Fourier-Hermite series expansions', -, Computing in Economics and Finance 2004, -, Arsterdam, Netherlands.
Chiarella, C. & Ziogas, A. 2004, 'Pricing American options on jump-diffusion processes: Analytical results and numerical methods', -, Quantitative Methods in Finance Conference 2004, -, Sydney, Australia.
Asada, T., Chen, P., Chiarella, C. & Flaschel, P. 2004, 'Keynesian dynamics and the wage-price spiral: a baseline disequilibrium approach', Proceeding of the Australian Conference of Economists 2004, Australian Conference of Economists 2004 - 33rd Conference of Economists, The Economics Society of Australia, Sydney, Australia, pp. 1-43.
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Chiarella, C. & Ziogas, A. 2003, 'McKean's method applied to American call options on jump-diffusion processes', 20th AFFI International Conference 2003, 20th AFFI International Conference 2003, The Association Francaise de Finance, Lyon, France, pp. 1-37.
Chiarella, C. & Nikitopoulos Sklibosios, C. 2003, 'A class of jump-diffusion bond pricing model within the HJM framework', 20th AFFI International Conference 2003, 20th AFFI International Conference 2003, The Association Francaise de Finance, Lyon, France, pp. 1-36.
Chiarella, C. & He, X. 2003, 'Asset pricing and wealth dynamics - an adaptive model with heterogenous agents', WEHIA 2003, 8th Annual Workshop on Economics with Heterogeneous Interacting Agents, Institute of Economics, Keil, Germany, pp. 1-20.
Bhar, R., Chiarella, C. & To, T. 2003, 'Estimating the volatility structure of Eurodollar futures contracts within a Heath-Jarrow-Morton framework', 20th AFFI International Conference 2003, AFFI International Conference 2003, The Association Francaise de Finance, Lyon, France, pp. 1-42.
Bohm, V. & Chiarella, C. 2003, 'Mean variance preferences, expectations formation and the dynamics of random asset prices', 26th Bosphorous Workshop on Economic Design, --, Turkey.
Chiarella, C. 2003, 'McKean's method applied to American call options on jump-diffusion processes', 2nd National Symposium on Financial Mathematics, --, Sydney, Australia.
Chiarella, C. 2003, 'McKean's method applied to American call options on jump-diffusion processes', Quantitative Methods in Finance 2003 Conference, --, Sydney, Australia.
Chiarella, C. & To, T. 2003, 'The jump component of the volatility structure of interest rate futures markets: An international comparison', 13th Asia-Pacific Futures Research Symposium, 13th Asia-Pacific Futures Research Symposium, --, Shanghai, China.
Chiarella, C., Flaschel, P., He, X. & Hung, H. 2003, 'A stochastic model of real-financial interaction with boundedly rational heterogeneous agents', Bielefeld Workshop on Real-Financial Interaction, --, Bielefeld, Germany.
Chiarella, C. & He, X. 2003, 'An adaptive model of asset pricing and wealth dynamics with heterogeneous trading strategies', WEHIA 2003 - Annual Workshop on Economics with Heterogeneous Interacting Agents, --, Keil, Germany.
Chiarella, C., He, X. & Zhu, P. 2003, 'Fading memory learning in the cobweb model with risk averse heterogeneous producers', 9th International Conference on Computing in Economics and Finance, --, Seattle, USA.
Chiarella, C. & Nikitopoulos Sklibosios, C. 2003, 'A jump-diffusion bond pricing model within the HJM frame work', Japanese Association Financial Econometrics and Engineering Meeting, --, Tokyo, Japan.
Chiarella, C. & Nikitopoulos Sklibosios, C. 2003, 'An implementation of the Shirakawa jump-diffusion term structure model', 9th International Conference on Computing in Economics and Finance, --, Seattle, USA.
Chiarella, C., Schlogl, E. & Nikitopoulos Sklibosios, C. 2003, 'A Markovian defaultable term structure model with state dependent volatilities', CREDIT 2003 Conference on Dependence Modelling for Credit Portfolios, --, Venice, Italy.
Chiarella, C. & Ziogas, A. 2003, 'McKean's method applied to American call options on jump-diffusion processes', 9th International Conference on Computing in Economics and Finance, --, Seattle, USA.
Chiarella, C., Nikitopoulos Sklibosios, C. & Schlogl, E. 2003, 'A Markovian defaultable term structure model with state dependent volatilities', Quantitative Methods in Finance 2003 Conference, Quantitative Methods in Finance 2003 Conference, --, Sydney, Australia.
Bhar, R., Chiarella, C. & To, T. 2002, 'A maximum likelihood approach to estimation of Heath-Jarrow-Morton models', Asia Pacific Finance Association Conference, Asia Pacific Finance Association Conference, Tokyo, Japan.
Bischi, G., Chiarella, C. & Kopel, M.O. 2002, 'On market games with misspecified demand functions long run outcomes and global dynamics', Society for Computational Economics Conference, Society for Computational Economics Conference, Aix-En-Provence, France.
Chiarella, C. 2002, 'A maximum likelihood approach to estimation of Heath-Jarrow-Morton models', Econometic Society Australasian Meeting, Econometric Society Australasian Meeting, Brisbane, Australia.
Nikitopoulos Sklibosios, C. & Chiarella, C. 2002, 'A jump diffusion derivative pricing model arising within the Heath-Jarrow-Morton framework', 2nd World Congress of the Bachelier Finance Society, 2nd World Congress of the Bachelier Finance Society, Knossos,Crete.
Chiarella, C. 2002, 'On estimation of interest rate volatility structure within the HJM framework', Quantitative Methods on Finance 2002 Conference, Quantitative Methods on Finance 2002 Conference, Sydney and Cairns, australia.
Chiarella, C. 2002, 'Heterogeneous beliefs, risk and learning in a simple asset-pricing model with a market maker', Modelli Economici in Economicia E Finanza Workshop, Modelli Economici in Economicia E Finanza Workshop, University of Urbino, Italy.
Chiarella, C. 2002, 'Real-financial interaction: A stochastic Blanchard model with a state-of-market reaction co-efficient', Workshop on Macrodynamics, Real-Financial Interaction and the Labor Market, Workshop on Macrodynamics, Real-Financial Interaction and the Labor Market, Bielefeld, Germany.
Chiarella, C., Bhar, R. & Runggaldier, W.J. 2002, 'Estimation of interest rate models by use of a bayesian algorithm', 8th International Conference on Forecasting Financial Markets, 8th International Conference on Forecasting Financial Markets, London, UK.
Chiarella, C., Bhar, R., Runggaldier, W.J. & Zhu, P. 2002, 'The volatility of the spot interest rate implied by arbitrage', Forecasting Financial Markets Conference, Forecasting Financial Markets Conference, London, UK.
Chiarella, C., Craddock, M.J. & El-Hassan, N. 2002, 'A short time expansion of the volatility function for the calibration of option pricing models', Society of Computational Economics Conference, Society of Computational Economics Conference, Aix-en-Provence, France.
Chiarella, C., Dieci, R. & Gardini, L. 2002, 'Price dynamics and diversification under heterogeneous expectations', Society for Computational Economics Conference, Society for Computational Economics Conference, Aix-En-Provence, France.
Chiarella, C. & To, T. 2002, 'The jump component of the volatility structure of interest rate futures markets: an international comparison', Australian Banking & Finance Conference, Australian Banking and Finance Conference, Australia.
Chiarella, C., Flaschel, P., Gong, G. & Semmler, W. 2002, 'Nonlinear Phillips curves, the emergence of complex dynamics and the role of monetary policy role', Society for Computational Economics Conference, Society for Computational Economics Conference, Aix en Provence, France.
Chiarella, C., Gallegati, M., Leombruni, R. & Palestrini, A. 2002, 'Asset price dynamics among heterogenous interacting agents', Society for Computational Economics Agents, Society for Computational Economics Conference, Aix en Province, France.
Chiarella, C. & He, X. 2002, 'Adaptive models of asset pricing and wealth dynamics in economies with heterogeneous agents', Workshop on Economic Dynamics - CENDEF, Workshop on Economic Dynamics - CENDEF, University of Leiden, The Netherlands.
Chiarella, C. 2002, 'An adaptive model on asset pricing an wealth dynamics with heterogeneous trading strategies', Society for Computational Economics, Society for Computational Economics Conference, Aix en Provence, France.
Chiarella, C. & He, X. 2002, 'An adaptive model on asset pricing and wealth dynamics with heterogeneous trading systems', Asia Pacific Finance Association Conference, Asia Pacific Finance Association Conference, Tokyo, Japan.
Chiarella, C. & Iori, G. 2002, 'A simple microstructure model of double auction markets', Society for Computational Economics, Society for Computational Economics Conference, Aix en Province, France.
Chiarella, C. & Kwon, O. 2002, 'Finite dimensional affine realisation of HTM models in terms of forward rates and yields', 2nd International Conference on Statistical Finance & Financial Engineering, 2nd International Conference on Statistical Finance & Financial Engineering, Tokyo, Japan.
Chiarella, C. & Kwon, O. 2002, 'Finite dimensional realisations of HJM models in terms of forward rates and yields', Asia Pacific Finance Association Conference, Asia Pacific Finance Association Conference, Tokyo, Japan.
Chiarella, C. & Musti, S. 2002, 'Numerical investigations of the HJM model with forward rate dependent volatility', Society for Computational Economics Conference, Society for Computational Economics Conference, Aix En Provence, France.
Chiarella, C. & Ziogas, A. 2002, 'Evaluation of American strangles', Society for Computational Economics Conference, Society for Computational Economics Conference, Aix en Province, France.
Chiarella, C., Semmler, W., Mittnik, S. & Zhu, P. 2002, 'Stock market interest rate and output: A model and estimation for US time series data', Centre fotr Empirical Macroeconomics, University of Bielefeld, Seminar Presentation, Centre fotr Empirical Macroeconomics, University of Bielefeld, Bielfield, Germany.
Engel, A., Chiarella, C., Szidarovszky, F., IEEE, IEEE, IEEE & IEEE 2002, 'A game theoretical model of international fishing with time delay', 2001 IEEE INTERNATIONAL CONFERENCE ON SYSTEMS, MAN, AND CYBERNETICS, VOLS 1-5, pp. 2658-2663.
Chiarella, C. & El-Hassan, N. 2001, 'Evaluating barrier options using Fourier-Hermite expansions', 8th Annual Asia-Pacific Finance Association Conference, Bangkok, Thailand.
Chiarella, C. & El-Hassan, N. 2000, 'The evaluation of point barrier options in a path integral framework', 4th Columbia-JAFFEE Conference Proceedings, Columbia-JAFFEE Conference, JAFFEE, Tokyo, Japan, pp. 103-126.
Chiarella, C., El-Hassan, N. & Kucera, A. 2000, 'The evaluation of multiasset European and American options via Fourier-Hermite series expansions', Sixth International Conference on Computing in Economics and Finance, Barcelona, Spain.
Chiarella, C., El-Hassan, N. & Kucera, A. 2000, 'The evaluation of point barrier options in a path integral framework', Seventh International Conference on Computational Finance/Forecasting Financial Markets, London, UK.
Chiarella, C., El-Hassan, N. & Kucera, A. 1997, 'Evaluation of derivative security prices in a path integral framework using Fourier-Hermite series expansions', JIC97, Japanese Association of Financial Econometrics and Engineering, Tokyo, Japan, pp. 350-372.
Bhar, R. & Chiarella, C. 1997, 'The estimation of the Heath-Jarrow-Morton model by use of Kalman filtering techniques', COMPUTATIONAL APPROACHES TO ECONOMIC PROBLEMS, pp. 113-126.
Bhar, R., Chiarella, C. & IEEE 1996, 'Interest rate futures: Estimation of volatility parameters in an arbitrage-free framework', PROCEEDINGS OF THE IEEE/IAFE 1996 CONFERENCE ON COMPUTATIONAL INTELLIGENCE FOR FINANCIAL ENGINEERING (CIFER), pp. 168-182.
CHIARELLA, C., PHAM, T., SIM, A. & TAN, M. 1992, 'DETERMINANTS OF CORPORATE CAPITAL STRUCTURE - AUSTRALIAN EVIDENCE', PACIFIC-BASIN CAPITAL MARKETS RESEARCH VOLUME III, pp. 139-158.

Journal articles

CHIARELLA, C., CLEWLOW, L. & KANG, B. 2016, 'THE EVALUATION OF MULTIPLE YEAR GAS SALES AGREEMENT WITH REGIME SWITCHING', International Journal of Theoretical and Applied Finance, vol. 19, no. 1, pp. 1-25.
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A typical gas sales agreement (GSA), also called a gas swing contract, is an agreement between a supplier and a purchaser for the delivery of variable daily quantities of gas, between specified minimum and maximum daily limits, over a certain number of years at a specified set of contract prices. The main constraint of such an agreement that makes them difficult to value is that in each gas year there is a minimum volume of gas (termed take-or-pay or minimum bill) for which the buyer will be charged at the end of the year (or penalty date), regardless of the actual quantity of gas taken. We propose a framework for pricing such swing contracts for an underlying gas forward price curve that follows a regime switching process in order to better capture the volatility behavior in such markets. With the help of a recombining pentanomial tree, we are able to efficiently evaluate the prices of the swing contracts, find optimal daily decisions and optimal yearly use of both the make-up bank and the carry forward bank at different regimes. We also show how the change of regime will affect the decisions.
Di Guilmi, C. & Chiarella, C. 2016, 'Monetary Policy and Debt Deflation: Some Computational Experiments,', Macroeconomic Dynamics.
Chiarella, C. & Di Guilmi, C. 2015, 'The limit distribution of evolving strategies in financial markets', Studies in Nonlinear Dynamics and Econometrics, vol. 19, no. 2, pp. 137-159.
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This paper reconsiders the popular Brock and Hommes [Brock, W. A., and C. H. Hommes. 1997. 'A Rational Route to Randomness.' Econometrica 65: 1059-1096.] framework for the study of the evolution of agents' choices when different behavioural strategies are available. In particular, we model the intensity of choice as an endogenous variable and not a parameter as it is commonly treated in the literature. We make use of the maximum entropy inference to obtain an analogous exponential type probability function for strategies, with the intensity of choice varying over time according to the performance of each strategy. We test this approach on an existing asset pricing model, highlighting the effects on the system of the different switching pattern that originate in the endogenous switching intensity.
Chiarella, C., Ter Ellen, S., He, X.-.Z. & Wu, E. 2015, 'Fear or fundamentals? Heterogeneous beliefs in the European sovereign CDS market', Journal of Empirical Finance, vol. 32, pp. 19-34.
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This paper proposes a model for credit default swap (CDS) spreads under heterogeneous expectations to explain the escalation in sovereign European CDS spreads and the widening variations across European sovereigns following the Global Financial Crisis (GFC). In our model, investors believe that sovereign CDS spreads are determined by country-specific fundamentals and momentum. By estimating the model we find evidence that, while some of the recent movements in sovereign CDS spreads can be explained by deteriorating fundamentals for core European Union (EU) countries, momentum has also played a destabilizing role since the GFC in all sovereign credit markets studied.
Caldana, R., Cheang, G.H.L., Chiarella, C. & Fusai, G. 2015, 'Correction: Exchange Option under Jump-diffusion Dynamics', Applied Mathematical Finance, vol. 22, no. 1, pp. 99-103.
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Mina, K., Cheang, G. & Chiarella, C. 2015, 'Approximate Hedging of Options Under Jump-Diffusion Processes', International Journal of Theoretical and Applied Finance, vol. 18, no. 4, pp. 1-26.
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We consider the problem of hedging a European-type option in a market where asset prices have jump-diffusion dynamics. It is known that markets with jumps are incomplete and that there are several risk-neutral measures one can use to price and hedge options. In order to address these issues, we approximate such a market by discretizing the jumps in an averaged sense, and complete it by including traded options in the model and hedge portfolio. Under suitable conditions, we get a unique risk-neutral measure, which is used to determine the option price integro-partial differential equation, along with the asset positions that will replicate the option payoff. Upon implementation on a particular set of stock and option prices, our approximate complete market hedge yields easily computable asset positions that equal those of the minimal variance hedge, while at the same time offers protection against upward jumps and higher profit compared to delta hedging
Chiarella, C., He, X. & Wei, L. 2015, 'Learning, information processing and order submission in limit order markets', Journal of Economic Dynamics and Control, vol. 61, pp. 245-268.
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Chiarella, C. & Ziveyi, J. 2014, 'Pricing American options written on two underlying assets', Quantitative Finance, vol. 14, no. 3, pp. 409-426.
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Chiarella, C. & Di Guilmi, C. 2014, 'Financial instability and debt deflation dynamics in a bottom-up approach', Economics Bulletin, vol. 34, no. 1, pp. 125-132.
Chiarella, C., Griebsch, S. & Kang, B. 2014, 'A comparative study on time-efficient methods to price compound options in the Heston model', Computers & Mathematics With Applications, vol. 67, no. 6, pp. 1254-1270.
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Chiarella, C., He, X. & Zwinkels, R. 2014, 'Heterogeneous expectations in asset pricing: Empirical evidence from the S&P500', Journal of Economic Behavior and Organization, vol. 105, pp. 1-16.
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Lian, G., Chiarella, C. & Kalev, P. 2014, 'Volatility swaps and volatility options on discretely sampled realized variance', Journal of Economic Dynamics and Control, vol. 47, pp. 239-262.
Kontoghiorghes, E.J., Van Dijk, H.K., Belsley, D.A., Bollerslev, T., Diebold, F.X., Dufour, J.-.M., Engle, R., Harvey, A., Koopman, S.J., Pesaran, H., Phillips, P.C.B., Smith, R.J., West, M., Yao, Q., Amendola, A., Billio, M., Chen, C.W.S., Chiarella, C., Colubi, A., Deistler, M., Francq, C., Hallin, M., Jacquier, E., Judd, K., Koop, G., Luetkepohl, H., MacKinnon, J.G., Mittnik, S., Omori, Y., Pollock, D.S.G., Proietti, T., Rombouts, J.V.K., Scaillet, O., Semmler, W., So, M.K.P., Steel, M., Taylor, R., Tzavalis, E., Zakoian, J.-.M., Boswijk, H.P., Luati, A., Maheu, J. & Board, C.A. 2014, 'CFEnetwork: The Annals of Computational and Financial Econometrics 2nd Issue', COMPUTATIONAL STATISTICS & DATA ANALYSIS, vol. 76, pp. 1-3.
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Chiarella, C. & Ladley, D. 2014, 'Chasing trends at the micro-level: The effect of technical trading on order book dynamics', Journal of Banking and Finance.
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© 2015 Elsevier B.V. Technical traders attempt to exploit trends in market prices and the order flow. Despite this little is known about how these traders behave in a micro-structure context. We consider a model of an order book based financial market. The market contains two groups: informed traders and technical traders. A numerical technique is used to identify a Markov perfect equilibrium of the trading game and so determine the optimal strategies. We find that technical trading rules are profitable and allow traders to increase their returns. The effect of technical traders on the market, however, is ambiguous. They decrease volatility and pricing errors but also increase trading costs despite primarily acting as liquidity suppliers.
Cheang, G.H., Chiarella, C. & Ziogas, A. 2013, 'The representation of American options prices under stochastic volatility and jump-diffusion dynamics', Quantitative Finance, vol. 13, no. 2, pp. 241-253.
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This paper considers the problem of pricing American options when the dynamics of the underlying are driven by both stochastic volatility following a square-root process as used by Heston [Rev. Financial Stud., 1993, 6, 327½343], and by a Poisson jump process as introduced by Merton [J. Financial Econ., 1976, 3, 125½144]. Probability arguments are invoked to find a representation of the solution in terms of expectations over the joint distribution of the underlying process. A combination of Fourier transform in the log stock price and Laplace transform in the volatility is then applied to find the transition probability density function of the underlying process. It turns out that the price is given by an integral dependent upon the early exercise surface, for which a corresponding integral equation is obtained. The solution generalizes in an intuitive way the structure of the solution to the corresponding European option pricing problem obtained by Scott [Math. Finance, 1997, 7(4), 413½426], but here in the case of a call option and constant interest rates
Matsumoto, A., Chiarella, C. & Szidarovszky, F. 2013, 'Dynamic monopoly with bounded continuously distributed delay', Chaos, Solitions & Fractals, vol. 47, pp. 66-72.
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A continuously distributed time lag is considered in a monopoly where the time window of past data is bounded from below and its length is fixed. The dynamic behavior of the resulting system is described by a special delayed differential equation with infinite spectrum. The location of the stability switch is determined and a simple rule is developed to determine which ones lead to the loss of stability or the regaining of stability. A simple computer example illustrates the theoretical findings. The distribution delay with finite time lag may be considered as an intermediate case between a finite fixed delay and an infinitely distributed delay, as is usually proposed in the existing literature.
Chiarella, C., Maina, S.C. & Nikitopoulos Sklibosios, C. 2013, 'Credit derivatives pricing with stochastic volatility models', International Journal of Theoretical and Applied Finance, vol. 16, no. 4, pp. 1-28.
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This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions Read More: http://www.worldscientific.com.ezproxy.lib.uts.edu.au/doi/abs/10.1142/S0219024913500192
Chiarella, C., He, X. & Zheng, M. 2013, 'Heterogeneous expectations and exchange rate dynamics', The European Journal of Finance, vol. 19, no. 5, pp. 392-419.
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This article presents a continuous-time model of exchange rates not only relying on macroeconomic factors but also having an investor heterogeneity component. The driving macroeconomic factor is the domestic½foreign interest rate differential, while the investor heterogeneity is described by the expectations of boundedly rational portfolio managers who use a weighted average of the expectations of fundamentalists and chartists. Within this framework, the different roles of the macroeconomic factor and investor heterogeneity in the determination of the exchange rate are examined explicitly. We show that this simple model generates very complicated market behaviour, including the existence of multiple steady-state equilibria, deviations of the market exchange rate from the fundamental one and market fluctuations. Numerical simulation of the corresponding stochastic version of the model shows that the model is able to generate typical time series and volatility clustering patterns observed in exchange rate markets.
Chiarella, C., Dieci, R. & He, X. 2013, 'Time-varying beta: A boundedly rational equlibrium approach', Journal of Evolutionary Economics, vol. 23, no. 3, pp. 609-639.
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The conditional CAPM with time-varying betas has been widely used to explain the cross-section of asset returns. However, most of the literature on time-varying beta is motivated by econometric estimation using various latent risk factors rather than explicit modelling of the stochastic behaviour of betas through agents behaviour, such as momentum trading. Misspecification of beta risk and the lack of any theoretical guidance on how to specify risk factors based on the representative agent economy appear empirically challenging. In this paper, we set up a dynamic equilibrium model of a financial market with boundedly rational and heterogeneous agents within the mean-variance framework of repeated one-period optimisation and develop an explicit dynamic behaviour CAPM relation between the expected equilibrium returns and time-varying betas. By incorporating the two most commonly used types of investors, fundamentalists and chartists, into the model, we show that there is a systematic change in the market portfolio, risk-return relationships, and time varying betas when investors change their behaviour, such as the chartists acting as momentum traders. In particular, we demonstrate the stochastic nature of time-varying betas. We also show that the commonly used rolling window estimates of time-varying betas may not be consistent with the ex-ante betas implied by the equilibrium model. The results provide a number of insights into an understanding of time-varying beta.
Chiarella, C., Dieci, R., He, X. & Li, K. 2013, 'An evolutionary CAPM under heterogeneous beliefs', Annals of Finance, vol. 9, no. 2, pp. 185-215.
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Heterogeneity and evolutionary behaviour of investors are two of the most important characteristics of financial markets. This paper incorporates the adaptive behaviour of agents with heterogeneous beliefs and establishes an evolutionary capital asset pricing model (ECAPM) within the mean-variance framework. We show that the rational behaviour of agents switching to better-performing trading strategies can cause large deviations of the market price from the fundamental value of one asset to spill over to other assets. Also, this spill-over effect is associated with high trading volumes and persistent volatility characterized by significantly decaying autocorrelations of, and positive correlation between, price volatility and trading volume.
Chiarella, C., Matsumoto, A. & Szidarovszky, F. 2013, 'Isoelastic oligopolies under uncertainty', Applied mathemetics and computation, vol. 219, no. 21, pp. 10475-10486.
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Single-product oligopolies are examined with uncertain isoelastic price functions and linear cost functions. Each firm wants to maximize its expected profit and also wants to minimize its uncertainty by minimizing the variance. This multiobjective optimization problem is solved by the weighting method, where the utility function of each firm is a linear combination of the expectation and variance of its profit. The existence and uniqueness of the equilibrium of the resulting n-person game is proved and an efficient algorithm is suggested to compute the equilibrium. The asymptotic behavior of the equilibrium is also investigated. Complete stability and bifurcation analysis is presented. The theoretical results are verified by computer simulation.
Chiarella, C., Kang, B., Nikitopoulos Sklibosios, C. & To, T.D. 2013, 'Humps in the volatility structure of the crude oil futures market: New evidence', Energy Economics, vol. 40, no. 1, pp. 989-1000.
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This paper analyses the volatility structure of commodity derivatives markets. The model encompasses hump-shaped, unspanned stochastic volatility, which entails a finite-dimensional affine model for the commodity futures curve and quasi-analytical prices for options on commodity futures. Using an extensive database of crude oil futures and futures options spanning 21 years, we find the presence of hump-shaped, partially spanned stochastic volatility in the crude oil market. The hump shaped feature is more pronounced when the market is more volatile, and delivers better pricing as well as hedging performance under various dynamic factor hedging schemes.
Chiarella, C. & Ziveyi, J. 2013, 'American option pricing under two stochastic volatility processes', Applied mathemetics and computation, vol. 224, no. 1, pp. 283-310.
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In this paper we consider the pricing of an American call option whose underlying asset dynamics evolve under the influence of two independent stochastic volatility processes as proposed in Christoffersen, Heston and Jacobs (2009) [13]. We consider the associated partial differential equation (PDE) for the option price and its solution. An integral expression for the general solution of the PDE is presented by using Duhamels principle and this is expressed in terms of the joint transition density function for the driving stochastic processes. For the particular form of the underlying dynamics we are able to solve the Kolmogorov PDE for the joint transition density function by first transforming it to a corresponding system of characteristic PDEs using a combination of Fourier and Laplace transforms. The characteristic PDE system is solved by using the method of characteristics. With the full price representation in place, numerical results are presented by first approximating the early exercise surface with a bivariate log linear function. We perform numerical comparisons with results generated by the method of lines algorithm and note that our approach provides quite good accuracy
Chiarella, C. & Kang, B. 2013, 'The evaluation of American compound option prices under stochastic volatility and stochastic interest rates', Journal of Computational Finance, vol. 17, no. 1, pp. 71-92.
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A compound option (the mother option) gives the holder the right, but not the obligation, to buy (long) or sell (short) the underlying option (the daughter option). In this paper, we consider the problem of pricing American-type compound options when the underlying dynamics follow Heston 's stochastic volatility and with stochastic interest rate driven by Cox-Ingersoll-Ross processes. We use a partial differential equation (PDE) approach to obtain a numerical solution. The problem is formulated as the solution to a two-pass free-boundary PDE problem, which is solved via a sparse grid approach and is found to be accurate and efficient compared with the results from a benchmark solution based on a least-squares Monte Carlo simulation combined with the projected successive over-relaxation method.
Chiarella, C. 2013, 'Le prospettive per la teoria economica nei prossimi 30 anni', Pristem Storis: note di matematica, storia e cultura, vol. 31, no. Feb, pp. 79-88.
Questo articolo riassume gli sviluppi nella teoria economica durante gli ultimi settanta anni. Si evidenzia come la teoria abbia oscillato fra due punti di vista, quello keynesiano negli anni '30, per poi successivamente essere dominata dal punto di vista neoclassico. Recentemente Ie idee keynesiane sono state oggetto di un rinnovato interesse. I;articolo esamina anche i principali metodi matematici dei due campi.
CHIARELLA, C.A.R.L., MAINA, S.A.M.U.E.L.C.H.E.G.E. & SKLIBOSIOS, C.H.R.I.S.T.I.N.A.N.I.K.I.T.O.P.O.U.L.O.S. 2013, 'CREDIT DERIVATIVES PRICING WITH STOCHASTIC VOLATILITY MODELS', International Journal of Theoretical and Applied Finance, vol. 16, no. 04.
This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions.
Chiarella, C., He, X., Huang, W. & Zheng, H. 2012, 'Estimating behavioural heterogeneity under regime switching', Journal of Economic Behavior & Organization, vol. 83, no. 3, pp. 446-460.
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Financial markets are typically characterized by high (low) price level and low (high) volatility during boom (bust) periods, suggesting that price and volatility tend to move together with different market conditions/states. By proposing a simple heterogeneous agent model of fundamentalists and chartists with Markov chain regime-dependent expectations and applying the S&P 500 data from January 2000 to June 2010, we show that the estimation of the model matches well with the boom and bust periods in the US stock market. In addition, we find evidence of time-varying behavioural heterogeneity within-group and that the model exhibits good forecasting accuracy.
Chiarella, C., He, X. & Pellizzari, P. 2012, 'A dynamic analysis of the microstructure of moving average rules in a double auction market', Macroeconomic Dynamics, vol. 16, no. 4, pp. 556-575.
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Inspired by the theoretically oriented dynamic analysis of moving average rules in the model of Chiarella, He, and Hommes (CHH) [Journal of Economic Dynamics and Control 30 (2006), 1729-1753], this paper conducts a dynamic analysis of a more realistic microstructure model of continuous double auctions in which the probability of heterogeneous agents trading is determined by the rules of either fundamentalists mean-reverting to the fundamental or chartists choosing moving average rules based on their relative performance. With such a realistic market microstructure, the model is able not only to obtain the results of the CHH model but also to characterize most of the stylized facts including volatility clustering, insignificant autocorrelations (ACs) of returns, and significant slowly decaying ACs of the absolute returns. The results seem to suggest that a comprehensive explanation of several statistical properties of returns is possible in a framework where both behavioral traits and realistic microstructure have a role
Chiarella, C., Flaschel, P., Koper, C., Proano, C. & Semmler, W. 2012, 'Macroeconomic stabilization policies in intrinsically unstable macroeconomies', Studies in NonLinear Dynamics and Econometrics, vol. 16, no. 2, pp. 1-36.
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Many monetary and fiscal policy measures have aimed at mitigating the effects of the financial market meltdown that started in the U. S. subprime sector in 2008 and has subsequently spread world wide as a great recession. Slowly some recovery appears to be on the horizon, yet it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of a framework that builds on the ideas of Keynes and Tobin. This framework stresses the fragilities and destabilizing feedback mechanisms that are potential features of all major markets-those for goods, labor, and financial assets. We use a Tobin macroeconomic portfolio approach and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we study what potential labor market, fiscal and monetary policies can have in stabilizing unstable macroeconomies. In order to study this problem we introduce, besides money, long term bonds and equity into the asset market. We in particular propose a countercyclical monetary policy that sells assets in the boom and purchases them in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of the suggested policies. The policies suggested here could help the Fed in its search for an appropriate exit strategy after its massive intervention in the financial market.
Chiarella, C., Kang, B. & Meyer, G. 2012, 'The evaluation of barrier option prices under stochastic volatility', Computers & Mathematics With Applications, vol. 64, no. 6, pp. 2034-2048.
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This paper considers the problem of numerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston (1993)[7]. We develop a method of lines approach to evaluate the price as well as the delta and gamma of the option. The method is able to efficiently handle both continuously monitored and discretely monitored barrier options and can also handle barrier options with early exercise features. In the latter case, we can calculate the early exercise boundary of an American barrier option in both the continuously and discretely monitored cases.
Chiarella, C. & Di Guilmi, C. 2012, 'The fiscal cost of financial instalbility', Studies in NonLinear Dynamics and Econometrics, vol. 16, no. 4, pp. 1-27.
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This paper presents an agent based model that investigates the possible outcomes of different fiscal and regulatory policies in a financially fragile economy. We analyse the consequences of the attempt by the government to counteract a downturn when it ignores the debt dynamics as modelled by Fisher and Minsky. In particular, we formulate an educated guess about the burden that the government and the taxpayer must bear when a bubble bursts, and its relationship with the extent of government intervention and the taxation system. We also evaluate the outcomes of possible alternatives or complementary regulatory policies. We model four different scenarios treating separately a tax on profits and a tax on private wealth and, for both of them, we specify two cases depending on whether the financial system is able to autonomously generate liquidity. Therefore, we can assess the effect of endogenous money and endogenous credit on the different stabilization policies.
Giansante, S., Chiarella, C., Sordi, S. & Vercelli, A. 2012, 'Structural contagion and vulnerability to unexpected liquidity shortfalls', Journal of Economic Behavior & Organization, vol. 83, no. 3, pp. 558-569.
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This paper assumes that financial fluctuations are the result of the dynamic interaction between liquidity and solvency conditions of individual economic units. The framework is an extention of designed as an heterogeneous agent model which proceeds through discrete time steps within a finite time horizon. The interaction at the micro-level between economic units monitors the spread of contagion and systemic risk, producing interesting complex dynamics. The model is analysed by means of numerical simulations and systemic risk modelling, where local interaction of units is captured and analysed by the bilateral provision of liquidity among units. The behaviour and evolution of economic units are studied for different parameter regimes in order to investigate the relation between units' expectations, liquidity regimes and contagion. Liquidity policy implications are briefly discussed
Chiarella, C., Flaschel, P., Hartmann, F. & Proaño, C. 2012, 'Stock market booms, endogenous credit creation and the implications of broad and narrow banking for macroeconomic stability', Journal of Economic Behavior and Organization, vol. 83, no. 3, pp. 410-423.
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In this paper we study the implications of the present broad banking system for macroeconomic stability. We show that when commercial banks are allowed to trade in financial assets (here equities) as a substitute for traditional lending, the macroeconomic system is likely to be an unstable one. We then consider a narrow banking system defined by a Fisherian 100 percent reserve ratio for checkable deposits and the ban for commercial banks from trading in stocks and other financial assets. Within the stylized theoretical framework set up here, we show that in the second system macroeconomic stability is guaranteed by some weak assumptions on the behavior of economic agents. Moreover, while a sufficient loan supply can be guaranteed in such a framework, the rationale for bank runs can be eliminated, in contrast to what is likely to happen under traditional broad banking. Though narrow banking is an extreme banking system unlikely to be adopted in the short-run, its features highlight the stability and efficiency properties that the separation between commercial and investment banking bring about.
Rothig, A. & Chiarella, C. 2011, 'Small Traders in Currency Futures Markets', Journal of Futures Markets, vol. 31, no. 9, pp. 898-913.
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This study examines the interrelation between small traders open interest and large hedging and speculation in the Canadian dollar, Swiss franc, British pound, and Japanese yen futures markets. The results, based on Granger-causality tests and vector autoregressive models, suggest that small traders open interest is closely related to large speculators open interest. Small traders and speculators tend to herd, which means that small traders are long [short] when speculators are long [short] as well. Moreover, small traders and speculators are positive feedback traders whereas hedgers are contrarians. Regarding information flows, speculators lead small traders in three of the four currency futures markets. The results therefore suggest that small traders are small speculators who follow the large speculators, indicating that they are less well informed than the large speculators.
Chiarella, C., Hsiao, C. & To, T. 2011, 'Stochastic correlation and risk premia in term structure models'.
Chiarella, C., Fanelli, V. & Musti, S. 2011, 'Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model', European Journal Of Operational Research, vol. 208, no. 2, pp. 95-108.
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In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and credit default swap option price in a probability setting equipped with a subfiltration structure. The EulerMaruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical scheme for pricing. Finally, the antithetic variable technique is used to reduce the variance of credit default swap option prices.
Chiarella, C. & Di Guilmi, C. 2011, 'The financial instability hypothesis: A stochastic microfoundation framework', Journal of Economic Dynamics and Control, vol. 35, no. 8, pp. 1151-1171.
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This paperexaminesthedynamicsoffinancialdistressandinparticularthemechanism of transmissionofshocksfromthefinancialsectortotherealeconomy.Theanalysisis performedbyrepresentingthelinkagesbetweenmicroeconomicfinancialvariablesand the aggregateperformanceoftheeconomybymeansofamicrofoundedmodelwith firms thathaveheterogeneouscapitalstructures.Themodelissolvedbothnumerically and analytically,bymeansofastochasticapproximationthatisabletoreplicatequite well thenumericalsolution.Thesemethodologies,byovercomingtherestrictions imposedbythetraditionalmicrofoundedapproach,enableustoprovidesomeinsights into thestabilizationpolicieswhichmaybeeffectiveinafinanciallyfragilesystem.
Chiarella, C., Dieci, R. & He, X. 2011, 'Do heterogeneous beliefs diversify market risk?', The European Journal of Finance, vol. 17, no. 3, pp. 241-258.
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It is believed that diversity is good for our society, but is it good for financial markets? In particular, does the diversity with respect to beliefs among investors reduce the market risk of risky assets? The current paper aims to answer this question.Within the standard meanvariance framework, we introduce heterogeneous beliefs not only in risk preferences and expected payoffs but also in variances/covariances. By aggregating heterogeneous beliefs into a market consensus belief, we obtain capital asset pricing model-like equilibrium price and return relationships under heterogeneous beliefs.We show that the market aggregate behaviour is in principle a weighted average of heterogeneous individual behaviours. The impact of heterogeneity on the market equilibrium price and risk premium is examined in general. In particular, we give a positive answer to the question in the title by considering some special structure in heterogeneous beliefs. In addition, we provide an explanation of Millers long-standing hypothesis on the relation between a stocks risk and the divergence of opinions.
Chiarella, C., He, X. & Zheng, M. 2011, 'An analysis of the effect of noise in a heterogeneous agent financial market model', Journal of Economic Dynamics and Control, vol. 35, no. 1, pp. 148-162.
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Heterogeneousagentmodels(HAMs)infinanceandeconomicsareoftencharacterised by highdimensionalnonlinearstochasticdifferentialordifferencesystems.Becauseof thecomplexityoftheinteractionbetweenthenonlinearitiesandnoise,acommonly used,oftencalledindirect,approachtothestudyofHAMscombinestheoreticalanalysis of theunderlyingdeterministicskeletonwithnumericalanalysisofthestochastic model.However,itiswellknownthatthisindirectapproachmaynotproperly characterisethenatureofthestochasticmodel.Thispaperaimstotacklethisissueby developingadirectandanalyticalapproachtotheanalysisofastochasticmodelof speculativepricedynamicsinvolvingtwotypesofagents,fundamentalistsand chartists,andthemarketpriceequilibriaofwhichcanbecharacterisedbythe stationarymeasuresofastochasticdynamicalsystem.Usingthestochasticmethodof averagingandstochasticbifurcationtheory,weshowthatthestochasticmodeldisplays behaviourconsistentwiththatoftheunderlyingdeterministicmodelwhenthetimelag in theformationofpricetrendsusedbythechartistsisfarawayfromzero.However, whenthislagapproacheszero,suchconsistencybreaksdown.
Asada, T., Chiarella, C., Flaschel, P., Mouakil, T., Proano, C. & Semmler, W. 2011, 'Stock-flow Interactions, Disequilibrium Macroeconomics and the Role of Economic Policy', Journal of Economic Surveys, vol. 25, no. 3, pp. 569-599.
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This paper presents the `KMGT (KeynesMetzlerGoodwinTobin) portfolio model and studies its stability properties. The approach to macrodynamic modelling taken here extends the KMG model of Chiarella and Flaschel (2000), focusing in particular on the incorporation of financial markets and policy issues. The original KMG model considered three asset markets (equities, bonds and money) but depicted them in a rudimentary way so that they had little influence on the real side of the model. The only financial market influencing the real side of the economy was the money market (via an LM curve theory of interest). Here Tobins portfolio choice theory models the demand for each asset in such a way that the total amount of assets that households want to hold equals their net wealth, which is a stock constraint attached to portfolio choice. There is also a flow constraint, that the net amount of assets accumulated (liabilities issued) by one sector must equal its net savings (expenditures). The Tobinian macroeconomic portfolio approach characterizes the potential for financial market instability, focusing on the interconnectedness of all three markets. The paper goes on to study the potential for labour market and fiscal policies to stabilize unstable macroeconomies.
Bischi, G., Chiarella, C. & Gardini, L. 2011, 'Foreward to the special issue of computational economics on complex dynamics in economics and finance', Computational Economics, vol. 38, no. 3, pp. 207-208.
Chiarella, C., Dieci, R. & He, X. 2011, 'The dynamic behaviour of asset prices in disequilibrium: a survey', International Journal of Behavioural Accounting and Finance, vol. 2, no. 2, pp. 101-139.
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This article surveys boundedly rational heterogeneous agent (BRHA) models of financial markets. We give particular emphasis to the role of the market clearing mechanism used, the utility function of the investors, the interaction of price and wealth dynamics, and calibration of this class of models. Due to agents behavioural features and market noise, the BRHA class of models are both non-linear and stochastic. We show that BRHA models produce both a locally stable fundamental equilibrium corresponding to that of the standard paradigm, as well as instability with a consequent rich range of possible complex behaviours that are analysed by both simulation and deterministic bifurcation analysis. A calibrated model is able to reproduce quite well the stylised facts of financial markets. The BRHA framework seems able to better accommodate market features such as fat tails, volatility clustering, large excursions from the fundamental and bubbles than the standard financial market paradigm.
Cheang, G.H. & Chiarella, C. 2011, 'Exchange Options Under Jump-Diffusion Dynamics', Applied Mathematical Finance, vol. 18, no. 3, pp. 245-276.
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This article extends the exchange option model of Margrabe, where the distributions of both stock prices are log-normal with correlated Wiener components, to allow the underlying assets to be driven by jump-diffusion processes of the type originally introduced by Merton. We introduce the RadonNikody´m derivative process that induces the change of measure from the market measure to an equivalent martingale measure. The choice of parameters in the RadonNikody´m derivative allows us to price the option under different financial-economic scenarios. We also consider American style exchange options and provide a probabilistic interpretation of the early exercise premium.
Bischi, G.I., Chiarella, C. & Gardini, L. 2011, 'Foreword to the Special Issue of Computational Economics on Complex Dynamics in Economics and Finance Proceedings of the MDEF (Modelli Dinamici in Economia e Finanza) Workshop, Urbino 23rd-25th September 2010', COMPUTATIONAL ECONOMICS, vol. 38, no. 3, pp. 207-208.
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Chiarella, C. & Ziveyi, J. 2011, 'Method of Lines Approach for Pricing American Spread Options'.
A numerical technique for the evaluation of American spread call options where the underlying asset dynamics evolve under the influence of a single stochastic variance process of the Heston (1993) type is presented. The numerical algorithm involves extending to the multi-dimensional setting the method of lines approach first presented in the option pricing framework by Meyer and van der Hoek (1997) when pricing the standard American put option. We transform the pricing partial differential equation to a corresponding system of ordinary differential equations with the aid of the Riccati transformation. We use the implicit trapezoidal rule to solve the resulting Riccati equations. Numerical results are presented outlining the effectiveness of the algorithm. The effects of stochastic volatility are explored by making comparisons with the geometric Brownian motion results.
Asada, T., Chiarella, C., Flaschel, P., Mouakil, T., Proaño, C. & Semmler, W. 2010, 'Stabilizing an unstable economy: On the choice of proper policy measures', Economics, vol. 3, no. 21, pp. 1-43.
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In the last months, the world's economies were confronted with the largest economic recession since the Great Depression. The occurrence of a worldwide financial market meltdown as a consequence originally stemming from of the crisis in the US subprime housing sector was only prevented by extraordinary monetary and fiscal policy measures implemented at the international level. Although the world economy seems now to be slowing recovering, it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of Keynesian macro models. Fragilities and destabilizing feedback mechanisms are known to be potential features of all marketsthe product markets, the labor market, and the financial markets. In this paper we focus in particular on the financial market. We use a Tobin-like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial market to characterize the potential instability of the financial markets. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we also study how labor market, fiscal and monetary policies can stabilize unstable macroeconomies. Besides other stabilizing policies we in particular propose a countercyclical monetary policy that sells assets in the boom and purchases assets in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of those suggested policies.
Chiarella, C. & Flaschel, P. 2010, 'Some numerical explorations of the Keynes-Metzler-Goodwin monetary growth model', Indian Economic Review, vol. 45, no. 1, pp. 1-28.
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We study numerically Keynes-Metzler-Goodwin growth, modelling households, firms and government as interacting across real and financial markets. The model allows for sluggish wage / price adjustment, disequilibrium on the market for goods, equilibrium in asset markets and a dynamic government budget restraint. It is first studied in the presence of its intrinsic nonlinearities. Then we add an extrinsic nonlinearity capturing the institutional feature of downward wage rigidity. The dynamic properties of the resulting nonlinear model are studied via bifurcation diagrams, stability basins, by adding stochastic noise to aggregate demand, and by distributional characteristics of key economic quantities.
Chiarella, C., Hung, H. & Flaschel, P. 2010, 'Keynesian Macrodynamics: Convergence, roads to instability and the emergence of complex business fluctuations', AUCO Czech Economic Review, vol. 4, no. 3, pp. 236-262.
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We reformulate the traditional AS-AD growth model, with a Taylor policy rule replacing the conventional LM-curve. The essential features of the model are gradually adjusting wages and prices, perfect foresight on current inflation rates and an adaptive revision of the inflationary climate in which the economy is operating. We compare this approach with the New Keynesian approach with staggered price and wage setting and find that whilst both approaches have common components, they have radically different dynamic implications due to the treatment of the forward-looking part of our wage-price spiral. We show that an estimated version of our model implies local asymptotic stability, due to stable interaction of goods market dynamics with the interest rate policy rule of the central bank, and due to a normal working of a real-wage feedback chain. These results are however endangered when there is a global floor to money wage inflation rates, leading in fact to economic breakdown. In this latter case, the return of some money wage flexibility in deep depressions is of help in restoring the viability of the model, thereby avoiding explosive dynamics and the collapse of the economy.
Chiarella, C. & Duan, J.-.C. 2010, 'Special issue: 2008 Annual Risk Management Conference held in Singapore during June 30-July 2, 2008 Preface', JOURNAL OF ECONOMIC DYNAMICS & CONTROL, vol. 34, no. 11, pp. 2231-2231.
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Chiarella, C. & Szidarovsky, F. 2009, 'Dynamic oligopolies and intertemporal demand interaction', CUBO Matematica Educational, vol. 11, no. 2, pp. 85-105.
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Dynamic oligopolies are examined with continuous time scales and under the assumption that the demand at each time period is affected by earlier demands and consumptions. After the mathematical model is introduced the local asymptotical stability of the equilibrium is examined, and then we will discuss how information delays alter the stability conditions. We will also investigate the occurrence of a Hopf bifurcation gving the possibility of the birth of limit cycles. Numerical examples will be shown toillustrate the theoretical results.
Chiarella, C. & Szidarovsky, F. 2009, 'A multiobjective model of oligopolies under uncertainty', CUBO Matematica Educational, vol. 11, no. 2, pp. 107-115.
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It is assumed that in an n-firm single-product oligopoly without product differentiation the firms face an uncertain price function, which is considered random by the firms. At each time period each firm simultaneously maximizes its expected profit and minimizes the variance of the profit since it wants to receive as high as possible profit with the least possible uncertainty. It is assumed that the best response of each firm is obtained by the weighting method. We show the existence of a unique equilibrium, and investigate the local stability of the equilibrium.
Bhar, R. & Chiarella, C. 2009, 'Inference on forward exchange rate risk premium: Reviewing signal extraction methods', International Journal of Monetary Economics and Finance, vol. 2, no. 2, pp. 115-125.
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The existence of risk premium is thought to be the reason why forward exchange rate is not an unbiased predictor of future spot exchange rate. In this paper we review two methodologies for inferring this unobserved risk premium based upon signal extraction mechanism. One approach relies on the theory of derivatives pricing that relates historical and risk neutral measures via market price of risk. The other approach specifies the risk premium in the historical measure directly. We compare these two methods in predicting future spot exchange rates and contrast these with that of random walk forecast
Chiarella, C. & Szidarovsky, F. 2009, 'Existence and uniqueness in Cournot models with cost externalities', Mathematica Pannonica, vol. 20, no. 1, pp. 17-25.
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In this paper we examine single product Cournot oligopolies, with- out product differentiation, under the assumption that the cost of each firm depends on its own output and also on the output of the rest of the industry. The competition of the firms on the secondary market for manpower, capital, energy, and so forth as well as the spillover effect of the R&D investments of the firms can be taken into account with this more general cost structure. The existence of a unique NashCournot equilibrium is proved under realistic conditions. Our result is a straightforward generalization of the well-known existence and uniqueness theorem of concave oligopolies.
Chiarella, C., Kang, B., Meyer, G. & Ziogas, A. 2009, 'The evaluation of American option prices under stochastic volatility and jump diffusion dynamics using the method of lines', International Journal of Theoretical and Applied Finance, vol. 12, no. 3, pp. 393-425.
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This paper considers the problem of numerically evaluating American option prices when the dynamics of the underlying are driven by both stochastic volatility following the square root process of Heston [18], and by a Poisson jump process of the type originally introduced by Merton [25]. We develop a method of lines algorithm to evaluate the price as well as the delta and gamma of the option, thereby extending the method developed by Meyer [26] for the case of jump-diffusion dynamics. The accuracy of the method is tested against two numerical methods that directly solve the integro-partial differential pricing equation. The first is an extension to the jump-diffusion situation of the componentwise splitting method of Ikonen and Toivanen [21]. The second method is a Crank-Nicolson scheme that is solved using projected successive over relaxation and which is taken as the benchmark for the price. The relative efficiency of these methods for computing the American call option price, delta, gamma and free boundary is analysed. If one seeks an algorithm that gives not only the price but also the delta and gamma to the same level of accuracy for a given computational effort then the method of lines seems to perform best amongst the methods considered.
Zhu, M., Chiarella, C., He, X. & Wang, D. 2009, 'Does the market maker stabilize the market?', Physica A: Statistical Mechanics and its Applications, vol. 388, no. 15-16, pp. 3164-3180.
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The market maker plays an important role in price formation, but his/her behavior and stabilizing impact on the market are relatively unclear, in particular in speculative markets. This paper develops a financial market model that examines the impact on market stability of the market maker, who acts as both a liquidity provider and an active investor in a market consisting of two types of boundedly rational speculative investorsâthe fundamentalists and trend followers. We show that the market maker does not necessarily stabilize the market when he/she actively manages the inventory to maximize profits, and that rather the market makerâs impact depends on the behavior of the speculators. Numerical simulations show that the model is able to generate outcomes for asset returns and market inventories that are consistent with empirical findings.
Chiarella, C., Iori, G. & Perello, J. 2009, 'The impact of heterogeneous trading rules on the limit order book and order flows', Journal of Economic Dynamics and Control, vol. 33, no. 3, pp. 525-537.
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In this paper we develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to exogenously fixed rules. Agents are assumed to have three components of the expectation of future asset returns, namely fundamentalist, chartist and noise trader. Furthermore agents differ in the characteristics describing these components, such as time horizon, risk aversion and the weights given to the various components. The model developed here extends a great deal of earlier literature in that the order submissions of agents are determined by utility maximisation, rather than the mechanical unit order size that is commonly assumed. In this way the order flow is better related to the ongoing evolution of the market. For the given market structure we analyze the impact of the three components of the trading strategies on the statistical properties of prices and order flows and observe that it is the chartist strategy that is mainly responsible of the fat tails and clustering in the artificial price data generated by the model. The paper provides further evidence that large price changes are likely to be generated by the presence of large gaps in the book.
Chiarella, C., Hung, H. & To, T. 2009, 'The volatility structure of the fixed income market under the HJM framework: A nonlinear filtering approach', Computational Statistics and Data Analysis, vol. 53, no. 6, pp. 2075-2088.
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The dynamics for interest rate processes within the well-known multi-factor Heath, Jarrow and Morton (HJM) specification are considered. Despite the flexibility of and the notable advances in theoretical research about the HJM model, the number of empirical studies of it is still very sparse. This paucity is principally due to the difficulties in estimating models in this class, which are not only high-dimensional, but also nonlinear and involve latent state variables. The estimation of a fairly broad class of HJM models as a nonlinear filtering problem is undertaken by adopting the local linearization filter, which is known to have some desirable statistical and numerical features, so enabling the estimation of the model via the maximum likelihood method. The estimator is then applied to the US, the UK and the Australian markets. Different two- and three-factor models are found to be the best for each market, with the factors being the level, the slope and the twist effect. The contribution of each factor towards overall variability of the interest rates and the financial reward each factor claims are found to differ considerably from one market to another.
Chiarella, C. & Ziogas, A. 2009, 'American Call Options Under Jump-Diffusion Processes - A Fourier Transform Approach', Applied Mathematical Finance, vol. 16, no. 1, pp. 37-79.
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We consider the American option pricing problem in the case where the underlying asset follows a jump-diffusion process. We apply the method of Jamshidian to transform the problem of solving a homogeneous integro-partial differential equation (IPDE) on a region restricted by the early exercise (free) boundary to that of solving an inhomogeneous IPDE on an unrestricted region. We apply the Fourier transform technique to this inhomogeneous IPDE in the case of a call option on a dividend paying underlying to obtain the solution in the form of a pair of linked integral equations for the free boundary and the option price. We also derive new results concerning the limit for the free boundary at expiry. Finally, we present a numerical algorithm for the solution of the linked integral equation system for the American call price, its delta and the early exercise boundary. We use the numerical results to quantify the impact of jumps on American call prices and the early exercise boundary.
Asada, T., Chiarella, C. & Westerhoff, F.H. 2009, 'Disclosure Requirements, the Release of New Information and Market Efficiency: New Insights from Agent-Based Models', Economics Discussion Paper, no. 2009.
We explore how disclosure requirements that regulate the release of new information may affect the dynamics of financial markets. Our analysis is based on three agentbased financial market models that are able to produce realistic financial market dynamics. We discover that the average deviation between market prices and fundamental values increases if new information is released with a delay, while the average price volatility is virtually unaffected by such regulations. Interestingly, the tails of the distribution of returns become fatter if fundamental data is released less continuously, indicating an increase in financial market risk.
Chiarella, C., Dieci, R., Gardini, L. & Sbragia, L. 2008, 'A model of financial market dynamics with heterogeneous beliefs and state-dependent confidence', Computational Economics, vol. 32, no. 1-2, pp. 55-72.
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In a simple model of financial market dynamics, we allow the price of a risky security to be set by a market maker depending on the excess demand of heterogeneous interacting traders, fundamentalists and chartists, who place their orders based upon different expectations schemes about future prices: while chartists rely on standard trend-based rules, fundamentalists are assumed to know the economic environment and to form their beliefs accordingly. As price moves away from the long-run fundamental, fundamentalists become less confident in their forecasts, and put increasing weight on a reversion towards the fundamental price. The resulting two-dimensional discrete time dynamical system can exhibit a rich range of dynamic scenarios, often characterized by coexistence of attractors. A simple noisy version of the model reveals a variety of possible patterns for return time series.
Chiarella, C., He, X., Wang, D. & Zheng, M. 2008, 'The Stochastic Bifurcation Behaviour of Speculative Financial Markets', Physica A: Statistical Mechanics and its Applications, vol. 387, no. 15, pp. 3837-3846.
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This paper establishes a continuous-time stochastic asset pricing model in a speculative financial market with fundamentalists and chartists by introducing a noisy fundamental price. By application of stochastic bifurcation theory, the limiting market equilibrium distribution is examined numerically. It is shown that speculative behaviour of chartists can cause the market price to display different forms of equilibrium distributions. In particular, when chartists are less active, there is a unique equilibrium distribution which is stable. However, when the chartists become more active, a new equilibrium distribution will be generated and become stable. The corresponding stationary density will change from a single peak to a crater-like density. The change of stationary distribution is characterized by a bimodal logarithm price distribution and fat tails. The paper demonstrates that stochastic bifurcation theory is a useful tool in providing insight into various types of financial market behaviour in a stochastic environment.
Chiarella, C. & Szidarovszky, F. 2008, 'Dynamic oligopolies with production adjustment costs', Scientia Iranica, vol. 15, no. 1, pp. 120-124.
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Single-product oligopolies, without product differentiation, are examined under the assumption that any increase in production levels has additional cost to the rms. Therefore, the best response of each firm depends on the current output of the rest of the industry and on the previous output of the firm. Two dynamic models are introduced. In the first case, the firms form adaptive expectations on the output of the rest of the industry and select the best response output levels and, in the second case, it is assumed that they adjust their output levels adaptively. Conditions are derived in both cases for the asymptotic stability of the equilibrium.
Chiarella, C., Hsiao, C. & Semmler, W. 2007, 'Intertemporal Asset Allocation when the Underlying Factors are Unobservable', Computational Economics, vol. 29, no. 3-4, pp. 383-418.
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The aim of this paper is to develop an optimal long-term bond investment strategy which can be applied to real market situations. This paper employs Mertons intertemporal framework to accommodate the features of a stochastic interest rate and the time-varying dynamics of bond returns.The long-term investors encounter a partial information problem where they can only observe the market bond prices but not the driving factors of the variability of the interest rate and the bond return dynamics.With the assumption of Gaussian factor dynamics, we are able to develop an analytical solution for the optimal long-term investment strategies under the case of full information. To apply the best theoretical investment strategy to the real market we need to be aware of the existence of measurement errors representing the gap between theoretical and empirical models. We estimate the model based on data for the German securities market and then the estimation results are employed to develop long-term bond investment strategies. Because of the presence of measurement errors, we provide a simulation study to examine the performance of the best theoretical investment strategy. We find that the measurement errors have a great impact on the optimality of the investment strategies and that under certain circumstance the best theoretical investmentstrategies may not perform so well in a real market situation. In the simulation study, we also investigate the role of information about the variability of the stochastic interest rate and the bond return dynamics. Our results show that this information can indeed be used to advantage in making sensible long-term investment decisions.
Chiarella, C., Nikitopoulos Sklibosios, C. & Schlogl, E. 2007, 'A Markovian Defaultable Term Structure Model with State Dependent Volatilities', International Journal of Theoretical and Applied Finance, vol. 10, no. 1, pp. 155-202.
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The defaultable forward rate is modelled as a jump diffusion process within the Schonbucher [26,27] general Heath, Jarrow and Morton [20] framework where jumps in the defaultable term structure fd(t, T) cause jumps and defaults to the defaultable bond prices Pd(t, T). Within this framework, we investigate an appropriate forward rate volatility structure that results in Markovian defaultable spot rate dynamics. In particular, we consider state dependent Wiener volatility functions and time dependent Poisson volatility functions. The corresponding term structures of interest rates are expressed as finite dimensional affine realizations in terms of benchmark defaultable forward rates In addition, we extend this model to incorporate stochastic spreads by allowing jump intensities to follow a square-root diffusion process. In that case the dynamics become non-Markovian and to restore path independence we propose either an approximate Markovian scheme or, alternatively, constant Poisson volatility functions. We also conduct some numerical simulations to gauge the effect of the stochastic intensity and the distributional implications of various volatility specifications.
Engel, A., Szidarovszky, F. & Chiarella, C. 2007, 'A Game Theoretical Coalition Model of International Fishing with Time Delay', Journal of Concrete and Applicable Mathematics, vol. 5, no. 2, pp. 115-131.
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The oligopoly model of international fishing of Szidarovszky and Okuguchi [7] where the harvesting countries form a coalition is re- visited with the additional assumption that there is a time lag in obtaining and implementing information on the fish stock. The introduction of continuously distributed time lags results in a special Volterra-type integro-differential equation. Since it is equivalent to a system of nonlinear ordinary differential equations, linearization and standard techniques are used to examine the local asymptotic behavior of the equilibrium. Stability conditions are derived and in the case of instability special cyclic behavior is analyzed.
Chiarella, C., Nikitopoulos Sklibosios, C. & Schlogl, E. 2007, 'A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton Models with Jumps', Applied Mathematical Finance, vol. 14, no. 5, pp. 365-399.
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This paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process. The pricing framework adapted was developed by Chiarella and Nikitopoulos to provide an extension of the Heath, Jarrow and Morton model to jump-diffusions and achieves Markovian structures under certain volatility specifications. Fourier Transform solutions for the price of a bond option under deterministic volatility specifications are derived and a control variate numerical method is developed under a more general state dependent volatility structure, a case in which closed form solutions are generally not possible. In doing so, a novel perspective is provided on control variate methods by going outside a given complex model to a simpler more tractable setting to provide the control variates.
Chiarella, C., Dieci, R. & He, X. 2007, 'Heterogeneous Expectations and Speculative Behavior in a Dynamic Multi-Asset Framework', Journal of Economic Behavior and Organization, vol. 62, no. 3, pp. 408-427.
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This paper develops a dynamic model of a financial market where heterogeneous agents invest among multiple risky assets and a risk-free asset, under a market maker scenario. Particular attention is paid to the case of two risky assets and two agent types, fundamentalists and trend chasers, whose beliefs on both first and second moments of the conditional distribution of returns are based on past observations. Conditions for the stability of the fundamental equilibrium are established and the effect of the correlation between the risky assets is examined. It turns out that investors anticipated correlation and dynamic portfolio diversification do not always have a stabilizing role, but rather may act as a source of complexity in the financial market.
Rothig, A. & Chiarella, C. 2007, 'Investigating Nonlinear Speculation in Cattle, Corn and Hog Futures Markets Using Logisitic Smooth Transition Regression Models', Journal Of Futures Markets, vol. 27, no. 8, pp. 719-737.
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This study explores nonlinearities in the response of speculators trading activity to price changes in live cattle, corn, and lean hog futures markets Analyzing weekly data from March 4, 1997 through December 27, 2005, the authors reject linearity in all of these markets. Using smooth transition regression models, the authors found a similar structure of nonlinearities with regard to the number of different regimes, the choice of the transition variable, and the value at which the transition occurs.
Chiarella, C., He, X. & Wang, D. 2006, 'A behavioral asset pricing model with a time-varying second moment', Chaos, Solitons and Fractals, vol. 29, no. 3, pp. 535-555.
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We develop a simple behavioral asset pricing model with fundamentalists and chartists in order to study price behavior in financial markets when chartists estimate both conditional mean and variance by using a weighted averaging process. Through a stabil
Chiarella, C., He, X. & Hommes, C. 2006, 'Moving average rules as a source of market instability', Physica A: Statistical Mechanics and its Applications, vol. 370, no. 1, pp. 12-17.
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Despite the pervasiveness of the efficient markets paradigm in the academic finance literature, the use of various moving average (MA) trading rules remains popular with financial market practitioners. This paper proposes a stochastic dynamic financial m
Chiarella, C. & Hsiao, C. 2006, 'The impact of short-sale constraints on asset allocation strategies via the backward Markov chain approximation method', Computational Economics, vol. 28, no. 2, pp. 113-137.
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This paper considers an asset allocation strategy over a finite period under investment uncertainty and short-sale constraints as a continuous-time stochastic control problem. Investment uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short-sale constraints, the optimal asset allocation strategy can be obtained analytically. We consider several kinds of short-sale constraints and employ the backward Markov chain approximation method to explore the impact of short-sale constraints on asset allocation decisions. Our results show that the short-sale constraints do indeed have a significant impact on these decisions.
Asada, T., Chen, P., Chiarella, C. & Flaschel, P. 2006, 'Keynesian dynamics and the wage-price spiral: a baseline disequilibrium model', Journal of Macroeconomics, vol. 28, no. 1, pp. 90-130.
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We reformulate the traditional AS-AD growth model of the Neoclassical synthesis, stage 1, as a disequilibrium approach to aggregate supply analysis. with sticky wages. sticky prices. myopic perfect foresight oil current inflation rates. and adaptively fo
Agliari, A., Chiarella, C. & Gardini, L. 2006, 'A re-evaluation of adaptive expectations in light of global nonlinear dynamic analysis', Journal of Economic Behavior and Organization, vol. 60, no. 4, pp. 526-552.
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We undertake an analysis of the dynamic behaviour of a discrete time nonlinear monetary dynamics model with adaptive expectation that is a basic mechanism in a broad class of descriptive macro-dynamic models. We consider in particular a variety of ways i
Chiarella, C., Dieci, R. & Gardini, L. 2006, 'Asset price and wealth dynamics in a financial market with heterogeneous agents', Journal of Economic Dynamics and Control, vol. 30, no. 9-10, pp. 1755-1786.
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This paper considers a discrete-time model of a financial market with one risky asset and one risk-free asset, where the asset price and wealth dynamics are determined by the interaction of two groups of agents, fundamentalists and chartists. In each per
Chiarella, C. 2006, 'My chaotic career - from billiard balls to economic dynamics and financial markets', Chaos, Solitions and Fractals, vol. 29, no. 3, pp. 517-519.
Chiarella, C. & Ziogas, A. 2006, 'A fourier transform analysis of the American call option on assets driven by jump-diffusion processes (QFRC paper #174)', Quantitative Finance Research Centre Working Paper Series, vol. 174.
Chen, P., Chiarella, C., Flaschel, P. & Semmler, W. 2006, 'Keynesian macrodynamics and the Phillips cuve: An estimated baseline macromodel for the US economy (F&E paper #147)', School of Finance & Economics Working Paper Series, vol. 147.
Chen, P., Chiarella, C., Flaschel, P. & Hung, H. 2006, 'Keynesian disequilibrium dynamics: Covergence roads to instability and the emergence of complex business (F&E paper #146)', School of Finance & Economics Working Paper Series, vol. 146.
Rothig, A. & Chiarella, C. 2006, 'Investigating non-linear speculation in cattle, corn and hog futures markets using logistics smooth transition regression models (QFRC paper #172)', Quantitative Finance Research Centre Working Paper Series, vol. 172.
Rothig, A. & Chiarella, C. 2006, 'Investigating non-linear speculation in cattle, corn and hog futures markets using logistics smooth transition regression models (CEM paper #101)', Centre for Empirical Macroeconomics, University of Bielefeld Working Paper Series, vol. 101.
Rothig, A. & Chiarella, C. 2006, 'Investigating non-linear speculation in cattle, corn and hog futures markets using logistics smooth transition regression models (IE paper #167)', Institute of Economics, Technical University of Darmstadt Working Paper Series, vol. 167.
Chiarella, C., Flaschel, P. & Hung, H. 2006, 'Interacting Business Cycle Fluctuations: A Two-Country Model', Singapore Economic Review, vol. 51, no. 3, pp. 365-394.
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In this paper, we develop a model of business cycle fluctuations between two interacting open economies within the disequilibrium or non-market clearing paradigm. We analyze the main feedback mechanisms (Keynes, Mundell, Rose and Dornbusch) driving the dynamics and the conflict between their stabilizing and destabilizing tendencies and how these depend on certain key speeds of adjustment in the real and foreign exchange sectors. We explore numerically a variety of situations of interacting price cycles in the two countries, where the steady state is locally repelling, but where the overall dynamics are bounded in an economically meaningful domain by assuming downward money wage rigidity.
Bhar, R., Chiarella, C., Hung, H. & Runggaldier, W.J. 2006, 'The volatility of the instantaneous spot interest rate implied by arbitrage pricing - a dynamic Bayesian approach', Automatica, vol. 42, no. 8, pp. 1381-1393.
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his paper considers the estimation of the volatility of the instantaneous short interest rate from a new perspective. Rather than using discretely compounded market rates as a proxy for the instantaneous short rate of interest, we derive a relationship between observed LIBOR rates and certain unobserved instantaneous forward rates. We determine the stochastic dynamics for these rates under the risk-neutral measure and propose a filtering estimation algorithm for a time-discretised version of the resulting interest rate dynamics based on dynamic Bayesian updating in order to estimate the volatility function. Our time discretisation can be justified by the fact that data are observed discretely in time. The method is applied to US Treasury rates of various maturities to compute a (posterior) distribution for the parameters of the volatility specification.
Chen, P., Chiarella, C., Flaschel, P. & Semmler, W. 2006, 'The feedback channels in macroeconomics: analytical foundations for structural econometric model building', Central European Journal of Operations Research, vol. 14, no. 3, pp. 261-288.
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We investigate important macroeconomic and macroeconometric feedback channels in models that concern the dynamic interaction of the labor market, product market and the monetary and financial sector. The core of our study is an applied disequilibrium model of monetary growth of a small open economy. After surveying the feedback channels we consider a compact description of the intensive form of the model. We consider various types of subsystems, the integration of which is subsequently compared from the perspective of bifurcation diagrams that separate cases of asymptotic stability from stable cyclical behavior as well as pure explosiveness. In this way we lay out a research strategy, which will show, in contrast to what is generally believed, that applied integrated macrodynamic systems can have a variety of interesting attractors and transient dynamics, which are obtained in particular when locally explosive situations are turned into bounded dynamics by the addition of specifically tailored extrinsic nonlinearities.
Chiarella, C., He, X., Hung, H. & Zhu, P. 2006, 'An analysis of the cobweb model with boundedly rational heterogeneous producers', Journal of Economic Behavior & Organization, vol. 61, no. 4, pp. 750-768.
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This paper considers the traditional cobweb model with heterogenous risk averse producers whose supply functions involve their estimates of the conditional mean and variance of the future price. The producers seek to learn these quantities by applying geometric decay processes (GDP) to past prices. The heterogeneity manifests itself in the lag lengths and memory parameters applied to past prices as well as in risk aversion coefficients. We find that each dimension of heterogeneity changes/enriches the cobweb dynamics with respect to the case of homogeneous producers.
Chiarella, C., He, X. & Hommes, C. 2006, 'A dynamic analysis of moving average rules', Journal of Economic Dynamics and Control, vol. 30, no. 9-10, pp. 1729-1753.
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The use of various moving average (MA) rules remains popular with financial market practitioners. These rules have recently become the focus of a number empirical studies, but there have been very few studies of financial market models where some agents
Chiarella, C. & To, T. 2006, 'The multifactor nature of the volatility of futures markets', Computational Economics, vol. 27, no. 2-3, pp. 163-183.
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This paper estimates a model of interest rate dynamics containing multi-factor Wiener and single-factor Poisson jump volatility components. Data from the highly liquid but short term futures markets are used. The difficult numerical problem of estimating such multi-factor models is resolved by using a genetic algorithm to carry out the optimization procedure. It is established that the multi-factor Wiener volatility components are adequate to model the interest rate dynamics without the need to incorporate Poisson jump components, the existence of which would create difficulties in the practical use of interest rate models.
CHIARELLA, C.A.R.L., FLASCHEL, P.E.T.E.R. & HUNG, H.I.N.G. 2006, 'INTERACTING BUSINESS CYCLE FLUCTUATIONS: A TWO-COUNTRY MODEL', The Singapore Economic Review, vol. 51, no. 03, pp. 365-394.
In this paper, we develop a model of business cycle fluctuations between two interacting open economies within the disequilibrium or non-market clearing paradigm. We analyze the main feedback mechanisms (Keynes, Mundell, Rose and Dornbusch) driving the dynamics and the conflict between their stabilizing and destabilizing tendencies and how these depend on certain key speeds of adjustment in the real and foreign exchange sectors. We explore numerically a variety of situations of interacting price cycles in the two countries, where the steady state is locally repelling, but where the overall dynamics are bounded in an economically meaningful domain by assuming downward money wage rigidity.
Chiarella, C. & Ziogas, A. 2005, 'Evaluation of American strangles', Journal Of Economic Dynamics & Control, vol. 29, no. 1-2, pp. 31-62.
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This paper presents a generalisation of McKean's free boundary value problem for American options by considering an American strangle position, where exercising one side of the payoff early knocks-out the remaining side. The Fourier transform technique i
Chiarella, C. & Szidarovszky, F. 2005, 'On the stability of price-adjusting oligopolies with incomplete information', International Journal Of Systems Science, vol. 36, no. 8, pp. 501-507.
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A general linear price-adjusting scheme is examined in non-linear Bertrand oligopolies that contains the models of Negishi and Jin as special cases among others. The existence of a unique equilibrium of the dynamic process is first proved, and then under
Chiarella, C., Dieci, R. & Gardini, L. 2005, 'The dynamic interaction of speculation and diversification', Applied Mathematical Finance, vol. 12, no. 1, pp. 17-52.
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Chiarella, C. & Platen, E. 2005, 'Special Issue: Introduction To Selected Proceedings From The Quantitative Methods In Finance 2004 Conference (QMF 2004)', Quantitative Finance, vol. 5, no. 3, pp. 235-235.
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Chiarella, C., Clewlow, L. & Musti, S. 2005, 'A Volatility Decomposition Control Variate Technique For Monte Carlo Simulations Of Heath Jarrow Morton Models', European Journal Of Operational Research, vol. 161, no. 2, pp. 325-336.
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The aim of this work is to develop a simulation approach to the yield curve evolution in the Heath, Jarrow and Morton [Econometrica 60 (1) (1992) 77] framework. The stochastic quantities considered as affecting the forward rate volatility function are th
Chiarella, C. & Szidarovszky, F. 2005, 'Cournot oligopolies with product differentiation under uncertainty', Computers & Mathematics With Applications, vol. 50, no. 38810, pp. 413-424.
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This paper considers Cournot oligopolies with product differentiation when the firms have inexact knowledge of the price functions and there are random time lags in obtaining and implementing information on the firms' own outputs and prices as well as on
Bohm, V. & Chiarella, C. 2005, 'Mean variance preferences expectations formation and the dynamics of random asset prices', Mathematical Finance, vol. 15, no. 1, pp. 61-97.
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This paper analyzes the dynamics of an explicit random process of prices and price expectations of finitely many assets in an economy with overlapping generations of heterogeneous consumers. They maximize expected utility with respect to subjective trans
Chiarella, C. & Szidarovszky, F. 2005, 'Cournot oligopolies with product differentiation under uncertainty', COMPUTERS & MATHEMATICS WITH APPLICATIONS, vol. 50, no. 3-4, pp. 413-424.
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Szidarovszky, F., Engel, A. & Chiarella, C. 2004, 'A game theoretical model of international fishing with time delay.', International Game Theory Review, vol. 6, no. 3, pp. 391-415.
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Chiarella, C. & Gao, S. 2004, 'The value of the S&P 500 - a macro view of the stock market adjustment process.', Global Finance Journal, vol. 15, no. 2, pp. 171-196.
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Bischi, G., Chiarella, C. & Kopel, M.O. 2004, 'The long run outcomes and global dynamics of a duopoly game with misspecified demand functions.', International Game Theory Review, vol. 6, no. 3, pp. 343-379.
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Agliari, A., Chiarella, C. & Gardini, L. 2004, 'A stability analysis of the perfect foresight map in nonlinear models of monetary dynamics.', Chaos, Solitions & Fractals, vol. 21, no. 2, pp. 371-386.
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Chiarella, C. & Szidarovszky, F. 2004, 'Dynamic oligopolies without full information and with continuously distributed time lags', Journal Of Economic Behaviour & Organization, vol. 54, no. 4, pp. 495-511.
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Dynamic oligopolies are examined without full information on the price function, with each firm using a perceived price function that usually differs from the actual inverse demand function of the market. It is assumed that firms experience time lags in obtaining and implementing information on the price and also on output. Under realistic assumptions we show that without time lags the steady state is always locally asymptotically stable whereas in the presence of time lags situations of local instability may occur. The possibility of limit cycles is examined, and some special cases are considered.
Szidarovszky, F. & Chiarella, C. 2004, 'The asymptotic behaviour of dynamic producer-consumer systems', Mathematical and Computer Modelling, vol. 39, no. 11-12, pp. 1297-1312.
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Bhar, R., Chiarella, C. & Runggaldier, W.J. 2004, 'Inferring the forward looking equity risk premium from derivative prices', Studies in NonLinear Dynamics and Econometrics, vol. 8, no. 1, pp. 1-24.
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This paper considers the measurement of the equity risk premium in financial markets from a new perspective that picks up on a suggestion from Merton (1980) to use implied volatility of options on a market portfolio as a direct 'ex-ante' estimate for market variance, and hence the risk premium. Here the time variation of the unobserved risk premium is modelled by a system of stochastic differential equations connected by arbitrage arguments between the spot equity market, the index futures and options on index futures. We motivate and analyse a mean-reverting form for the dynamics of the risk premium. Since the risk premium is not directly observable, information about its time varying conditional distribution is extracted using an unobserved component state space formulation of the system and Kalman filtering methodology. In order to cater for the time variation of volatility we use the option implied volatility in the dynamic equations for the index and its derivatives. This quantity is in a sense treated as a signal that impounds the market's 'ex-ante', forward looking, view on the equity risk premium. The results using monthly U.S. market data over the period January 1995 to June 2003 are presented and the model fit is found to be statistically significant using a number of measures. Comparisons with ex-post returns indicate that such historical measures may be understating the market risk premium.
Engel, A., Szidarovszky, F. & Chiarella, C. 2003, 'A game theoretical partially cooperative model of international fishing with time delay', Chaos Solitons & Fractals, vol. 18, no. 3, pp. 549-560.
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Chiarella, C. & Szidarovszky, F. 2003, 'Bounded continuously distributed delays in dynamic oligopolies', Chaos Solitons & Fractals, vol. 18, no. 5, pp. 977-993.
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Chiarella, C. & He, X. 2003, 'Heterogeneous beliefs, risk, and learning in a simple asset-pricing model with a market maker', Macroeconomic Dynamics, vol. 7, no. 4, pp. 503-536.
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Chiarella, C., Flaschel, P., Gong, G. & Semmler, W. 2003, 'Nonlinear Phillips curves, complex dynamics and monetary policy in a Keynesian macro model', Chaos Solitons & Fractals, vol. 18, no. 3, pp. 613-634.
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Chiarella, C. & To, T. 2003, 'The jump component of the volatility structure of interest rate futures markets: an international comparison', Journal Of Futures Markets, vol. 23, no. 12, pp. 1125-1158.
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Chiarella, C. & Szidarovszky, F. 2003, 'Dynamic oligopolies with pollution treatment cost sharing', Keio Economics Studies, vol. XL, no. 1, pp. 27-44.
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Chiarella, C., Craddock, M.J. & El-Hassan, N. 2003, 'An implementation of Bouchouev's method for a short time calibration of option pricing models', Computational Economics, vol. 22, no. 2-3, pp. 113-138.
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Chiarella, C., Flaschel, P., Groh, G. & Semmler, W. 2003, 'Reply to K Velupillai's review of Chiarella and Flaschel: The dynamics of Keynesian monetary growth: macro foundations (CF), and Chiarella, Flaschel, Groh and Semmler: Disequilibrium, growth and labor market dynamics: macro perspectives (CFGS)', Journal of Economics, vol. 78, no. 1, pp. 96-104.
Chiarella, C., Gallegati, M., Leombruni, R. & Palestrini, A. 2003, 'Asset price dynamics among heterogeneous interacting agents', Computational Economics, vol. 22, no. 2-3, pp. 213-223.
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Chiarella, C. & He, X. 2003, 'Dynamics of beliefs and learning under aL processes - the heterogeneous case', Journal of Economics Dynamics and Control, vol. 27, no. 3, pp. 503-531.
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Chiarella, C. & Kwon, O. 2003, 'Finite dimensional affine realisation of HJM models in terms of forward rates and yields', Review of Derivatives Research, vol. 6, no. 2, pp. 129-155.
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Chiarella, C. & Platen, E. 2003, 'Introduction To Selected Proceedings From Quantitative Methods In Finance 2002', Quantitative Finance, vol. 3, no. 1, pp. 0-0.
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Li, W., Rychlik, M., Szidarovszky, F. & Chiarella, C. 2003, 'On the attractivity of a class of homogeneous dynamic economic systems', Nonlinear Analysis: Theory, Methods & Applications, vol. 52, no. 6, pp. 1617-1636.
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Chiarella, C. & Nikitopoulos Sklibosios, C. 2003, 'A Class of Jump-Diffusion Bond Pricing Models within the HJM Framework', Asia - Pacific Financial Markets, vol. 10, no. 2-3, pp. 87-127.
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This paper considers a class of term structure models that is a parameterisation of the Shirakawa (1991) extension of the Heath et al. (1992) model to the case of jump-diffusions. We consider specific forward rate volatility structures that incorporate state dependent Wiener volatility functions and time dependent Poisson volatility functions. Within this framework, we discuss the Markovianisation issue, and obtain the corresponding affine term structure of interest rates. As a result we are able to obtain a broad tractable class of jump-diffusion term structure models. We relate our approach to the existing class of jump-diffusion term structure models whose starting point is a jump-diffusion process for the spot rate. In particular we obtain natural jump-diffusion versions of the Hull and White (1990, 1994) one-factor and two-factor models and the Ritchken and Sankarasubramanian (1995) model within the HJM framework. We also give some numerical simulations to gauge the effect of the jump-component on yield curves and the implications of various volatility specifications for the spot rate distribution.
Chiarella, C. & Platen, E. 2003, 'Introduction to Selected Proceedings from Quantitative Methods in Finance 2002', QUANTITATIVE FINANCE, vol. 3, no. 1, pp. C5-C5.
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Chiarella, C. & He, X. 2002, 'Heterogeneous beliefs, risk and learning in a simple asset pricing model', Computational Economics, vol. 19, no. 1, pp. 95-132.
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Chiarella, C. & Szidarovszky, F. 2002, 'The asymptotic behaviour of dynamic rent-seeking games', Computers and Mathematics with Applications, vol. 43, no. 1/2, pp. 169-178.
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Chiarella, C. & Iori, G. 2002, 'A simulation analysis of the microstructure of double auction markets', Quantative Finance, vol. 2, no. 5, pp. 346-353.
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Chiarella, C., Semmler, W., Mittnik, S. & Zhu, P. 2002, 'Stock market, interest rate and output: a model and estimation for US time series data', Studies in NonLinear Dynamics and Econometrics, vol. 6, no. 1 / Article 2, pp. 1-37.
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Stock market, interest rate and output: a model and estimation for US time series data
Chiarella, C., Dieci, R. & Gardini, L. 2002, 'Speculative behaviour and complex asset price dynamics: a global analysis', Journal of Economic Behaviour amd Organisation, vol. 49, no. 2, pp. 173-197.
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Chiarella, C. 2002, 'Attractors, Bifurcations, And Chaos. Nonlinear Phenomena In Economics.', Journal Of Economics-Zeitschrift Fur Nationalokonomie, vol. 75, no. 2, pp. 186-189.
Reviews the book "Attractors, Bifurcations and Chaos. Nonlinear Phenomena in Economics," by T. Puu
Chiarella, C. & Kwon, O. 2001, 'Classes of Interest Rate Models Under the HJM Framework', Asia-Pacific Financial Markets, vol. 8, no. 1, pp. 1-22.
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Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2001, 'Output Interest & the Stock Market: An Alternative to the Jump Variable Technique', The Bulletin of the Czech Econometric Society, vol. 7, no. 13, pp. 1-29.
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Szidarovszky, F. & Chiarella, C. 2001, 'Dynamic Oligopilies, Stability & Bifurcation', CUBO Matematica Educational, vol. 3, no. 2, pp. 269-284.
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Chiarella, C., Dieci, R. & Gardini, L. 2001, 'Asset Price Dynamics in a Financial Market with Fundamentalists & Chartists', Discrete Dynamics in Nature & Society, vol. 6, no. 2, pp. 69-99.
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Chiarella, C., Pasquali, S. & Runggaldier, W.J. 2001, 'On filtering in Markovian term structure models: an approximation approach', Advances in Applied Probability, vol. 33, no. 4, pp. 794-809.
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We consider a parametrization of the Heath-Jarrow-Morton (HJM) family of term structure of interest rate models that allows a finite-dimensional Markovian representation of the stochastic dynamics. This parametrization results from letting the volatility function depend on time to maturity and on two factors: the instantaneous spot rate and one fixed-maturity forward rate. Our main purpose is an estimation methodology for which we have to model the observations under the historical probability measure. This leads us to consider as an additional third factor the market price of interest rate risk, that connects the historical and the HJM martingale measures. Assuming that the information comes from noisy observations of the fixed-maturity forward rate, the purpose is to estimate recursively, on the basis of this information, the three Markovian factors as well as the parameters in the model, in particular those in the volatility function. This leads to a nonlinear filtering problem, for the solution of which we describe an approximation methodology, based on time discretization and quantization. We prove the convergence of the approximate filters for each of the observed trajectories.
Chiarella, C. & He, X. 2001, 'Asset Price & Wealth Dynamics Under Heterogeneous Expectations', Quantitative Finance, vol. 1, no. 5, pp. 509-526.
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Chiarella, C. & Szidarovszky, F. 2001, 'The Nonlinear Cournot Model Under Uncertainty with Continously Distributed Time Lags', Central European Journal of Operational Research, vol. 9, pp. 183-196.
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Chiarella, C., Flaschel, P. & Semmler, W. 2001, 'Price Flexibility & Debt Dynamics in a High Order AS-AD Model', Central European Journal of Operational Research, vol. 9, no. 1-29, pp. 119-145.
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Bhar, R., Chiarella, C. & Pham, T.M. 2001, 'Modelling the currency forward risk premium: A new perspective', Asia Pacific Financial Markets, vol. 8, no. 4, pp. 341-360.
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In this paper we seek to develop a new approach to the time series analysis of foreign exchange risk premia. We do so by assuming a geometric Brownian process for the spot exchange rate and expressing the no-arbitrage spot-forward price relationship under the historical probability measure. We are thereby able to obtain a stochastic differential equation system linking the spot exchange rate, the forward exchange rate and the risk premium (modelled directly as a mean-reverting diffusion process) which we estimate using Kalman filtering techniques. We are able to use observations at a range of frequencies since the framework we set up does not involve overlapping observations. The model is then applied to the French Franc/USD, DEM/USD, GBP/USD, and Japanese Yen/USD exchange rates from 1 January 1990 to 31 December 1998. For all currencies we find evidence that the forward risk premium is stationary and exhibits substantial positive time variation
Chiarella, C. & Kwon, O. 2001, 'Forward Rate Dependent Markovian Transformation of the Heath-Jarrow-Morton Term Structure Model', Finance & Stochastics, vol. 5, no. 2, pp. 237-257.
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In this paper, a class of forward rate dependent Markovian transformations of the Heath-Jarrow-Morton [16] term structure model are obtained by considering volatility processes that are solutions of linear ordinary differential equations. These transformations generalise the Markovian systems obtained by Carverhill [8], Ritchken and Sankarasubramanian [20], Bhar and Chiarella [1], and Inui and Kijima [18], and also generalise the bond price formulae obtained therein.
Chiarella, C. & Kwon, O.K. 2001, 'Forward rate dependent Markovian transformations of the Heath-Jarrow-Morton term structure model', vol. 5, no. 2, pp. 237-257.
In this paper, a class of forward rate dependent Markovian transformations of the Heath-Jarrow-Morton [16] term structure model are obtained by considering volatility processes that are solutions of linear ordinary differential equations. These transformations generalise the Markovian systems obtained by Carverhill [8], Ritchken and Sankarasubramanian [20], Bhar and Chiarella [1], and Inui and Kijima [18], and also generalise the bond price formulae obtained therein.
Bhar, R. & Chiarella, C. 2000, 'Expectations in monetary policy in Australia implied by the probability distributions of interest rate derivatives', The European Journal of Finance, vol. 6, no. 2, pp. 113-125.
Chiarella, C. & Kwon, O. 2000, 'A complete Markovian stochastic volatility model in the HJM framework', Asia-Pacific Financial Markets, vol. 7, no. 4, pp. 293-304.
Chiarella, C. & Flaschel, P. 2000, 'High order disequilibrium growth dynamics: theoretical aspects and numerical features', Journal of Economic Dynamics & Control, vol. 24, no. 5-7, pp. 935-963.
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We investigate an open monetary growth model with sluggish prices and quantities. The model combines the dynamics of Rose's employment cycle and Metzler's inventory cycle with internal nominal dynamics of Tobin and external nominal dynamics of Dornbusch type, implying eight laws of motion, four for the real sector and four for the nominal part. These intrinsically nonlinear 8D-dynamics are asymptotically stable for low adjustment speeds of prices and expectations, give rise to Hopf-bifurcations as adjustment parameters are increased and explosive behavior thereafter. Extrinsic nonlinearities are therefore added, one in capital flows and one in wage behavior. These nonlinearities modify the dynamics radically, limiting them to domains with economically plausible outcomes, also for extreme parameter choices, where the dynamics may become chaotic.
Bhar, R., Chiarella, C., El-Hassan, N. & Zheng, X. 2000, 'Reduction of forward rate dependent HJM models to Markovian form: pricing European bond options', Journal of Computational Finance, vol. 3, no. 3, pp. 47-72.
Chiarella, C. & Khomin, P. 1999, 'Adaptively evolving expectations in models of monetary dynamics: The fundamentalists forward looking', Annals Of Operations Research, vol. 89, pp. 21-34.
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In the basic Cagan model of monetary dynamics, we allow inflationary expectations to be formed as a weighted average of fundamentalist and chartists expectations. We allow the weights to evolve adaptively according to the mechanism of Brock and Hommes [3] and study the resulting dynamic behaviour.
Chiarella, C., El-Hassan, N. & Kucera, A. 1999, 'Evaluation Of American option prices in a path integral framework using Fourier-Hermite series expansions', Journal Of Economic Dynamics & Control, vol. 23, no. 9-10, pp. 1387-1424.
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In this paper we review the path integral technique which has wide applications in statistical physics and relate it to the backward recursion technique which is widely used for the evaluation of derivative securities. We formulate the pricing of equity
Chiarella, C. & Flaschel, P. 1999, 'Keynesian monetary growth dynamics in open economies', Annals Of Operations Research, vol. 89, pp. 35-59.
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We investigate an open economy monetary growth model with sluggish price and quantity adjustments. It integrates the real dynamics of Rose's employment cycle, an inflationary dynamics of Cagan type, Metzlerian inventory dynamics and Dornbusch's exchange rate dynamics, implying eight laws of motion, two for each subdynamics. These intrinsically nonlinear 8D dynamics are asymptotically stable for low adjustment speeds of prices and expectations, give rise to Hopf bifurications as these adjustment parameters are increased and lead to cyclically explosive behavior thereafter. Two extrinsic nonlinearities are therefore added, one in capital flows and the other a kinked Phillips curve. These two nonlinearities modify the dynamics radically, limiting them to economically meaningful domains even for extreme parameter choices.
Chiarella, C. & Flaschel, P. 1998, 'Dynamics of natural rates of growth and employment', Macroeconomic Dynamics, vol. 2, no. 3, pp. 345-368.
We investigate the dynamics of an integrated Keynesian disequilibriummodel of monetary growth that allows for a variety of labor-marketand employment-adjustment processes. The structure of the model isnaturally nonlinear, i.e., no extrinsic nonlinear economicbehavioral relationships are imposed at first. The dynamics of themodel are nine-dimensional and are investigated analytically byconsidering appropriate subdynamics. The model generates limit cycles(via Hopf bifurcations) and more complex dynamic behavior (when anatural kink in the money-wage Phillips curve is taken intoaccount). It exhibits hysteresis effects with respect to long-rununemployment as well as growth and implies the occurrence of steady-state depressions in particular.
Chiarella, C. & He, X.Z. 1998, 'Learning about the Cobweb', Complexity International, vol. 6.
In this paper we consider how suppliers in a cobweb model may learn about their economic environment. Instead of assuming the one step backward-looking expectation scheme of the traditional linear cobweb model, we consider the subjective estimates of the statistical distribution of the market prices based on L-step backward time series of market clearing prices. With constant risk aversion, the cobweb model becomes nonlinear. Sufficient conditions on the local stability of the unique positive equilibrium of the nonlinear model are derived and, consequently, we show that the local stability region (of the parameters of the equation) is proportional to the lag length L When the equilibrium loses its local stability, we show that, for L=2, the model has strong 1:3 resonance bifurcation and a family of fixed points of order 3 becomes unstable on both sides of criticality. The numerical simulations suggest that the model has a simple global structure, it has no complicated dynamics as claimed recently by Boussard. However, complicated dynamics do appear when the model is modified with constant elasticity supply and demand.
Chiarella, C. & Vlacic, L. 1997, 'Preface to the special section on modelling and control of national and regional economies', Control Engineering Practice, vol. 5, no. 4, pp. 517-518.
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Chiarella, C. & El-Hassan, N. 1997, 'Evaluation of derivative security prices in the Heath-Jarrow-Morton framework as path integrals using fast fourier transform techniques', Journal of Financial Engineering, vol. 6, no. 2, pp. 121-147.
Chiarella, C. & Khomin, A. 1996, 'An analysis of the complex dynamic behaviour of nonlinear oligopoly models with time delays', Chaos Solitons & Fractals, vol. 7, no. 12, pp. 2049-2065.
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We consider the fate of output in the Cournot oligopoly model when the equilibrium is locally unstable. We discuss types of nonlinearities which may be present to bound the motion and introduce time lags in production and information which serve as bifurcation parameters. We apply the Hopf bifurcation theorem to determine conditions under which limit cycle motion is born, and use computer simulations to investigate the nature of the attractors generated by such models.
Chiarella, C. 1996, 'Business Cycles: Theory And Empirical Methods .8 - Semmler,W', Journal Of Economics-zeitschrift Fur Nationalokonomie, vol. 63, no. 2, pp. 224-227.
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Chiarella, C. & Flaschel, P. 1996, 'Real and monetary cycles in models of Keynes-Wicksell type', Journal Of Economic Behavior & Organization, vol. 30, no. 3, pp. 327-351.
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We formulate a descriptive dynamic macroeconomic model of the Keynes-Wicksell type which incorporates goods, labour and financial markets. The model has well specified budget constraints with respect to the economic agents (households, firms and government) within it. We introduce some standard nonlinearities into the goods and labour markets. The dynamics of the general model consist of five differential equations; we analyse two- and three-dimensional subcases to show the existence of real and monetary cycles whose interaction will determine the full dynamics. We use numerical simulation to study the dynamics of the full model and the impact of various government fiscal and monetary policies.
Chiarella, C. & Flaschel, P. 1996, 'An integrative approach to 2D-macromodels of growth, price and inventory dynamics', Chaos Solitons & Fractals, vol. 7, no. 12, pp. 2105-2133.
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This paper investigates two variants of a Keynesian model of monetary growth with sluggish price and quantity adjustments. The first model integrates the real growth dynamics of Rose's employment cycle, an inflationary dynamics of the Cagan type and Metzler's inventory dynamics. This model is based on intrinsic nonlinearities solely and it implies for the private sector six laws of motion, two for each of the subdynamics stated above. It is shown that the integrated model does not at all preserve the insights obtained from the three prototype subdynamics. Since this model can give rise to global instabilities even for moderate adjustment speeds of prices and quantities, a variant of this model is then introduced which exhibits one fundamental `nonintrinsic nonlinearity in its wage adjustment mechanism. This nonlinearity makes the considered 6D-dynamics at the same time extremely `viable and complex, in particular for a high adjustment speed of nominal wages.
Chiarella, C. & El-Hassan, N. 1996, 'A preference free partial differential equation for the term structure of interest rates', Financial Engineering and the Japanese Markets, vol. 3, no. 4, pp. 217-238.
Chiarella, C. 1995, 'Nonlinear Dynamics And Evolutionary Economics - Day,RH, Chen,P', Economic Record, vol. 71, no. 214, pp. 303-305.
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Chiarella, C. 1992, 'Economic-dynamics - Zhang,WB', Journal Of Economic Behavior & Organization, vol. 18, no. 3, pp. 443-445.
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Chiarella, C. 1991, 'The bifurcation of probability distributions in a non-linear rational expectations model of monetary economy', European Journal of Political Economy, vol. 7, no. 1, pp. 65-78.
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Much has been written about the stability of rational expectations models and in particular about the dynamic instability of a saddlepoint nature. The problem posed by this type of instability is usually solved by the jump-variable technique of allowing one of the endogenous variables to move discontinuously onto a stable manifold. The lack of an economic mechanism in these models to justify the use of such a procedure has remained a nagging problem in this literature. The present paper analyses the stability of a rational expectations models of a monetary economy by taking account of certain non-linearities in the money demand function imposed by budget constraints. A continuous time framework is used and the non-linear stochastic differential equation governing the dynamics is analysed via the corresponding Fokker-Planck equation. The continuous time framework allows us to show clearly that whilst the jump-variable technique may stabilise the mean of the time path of the economic variables, it can still leave the variance following an exploding time path. We find that the non-linear model exhibits stable behaviour without the imposition of any extraneous assumptions. It is also found that the probability distribution of the endogenous variables undergoes a bifurcation from a unimodal to a bimodal one. The latter distribution is characterised by the sharp changes in asset prices that are imposed arbitrarily in the traditional style of analysis. © 1991.
Chiarella, C., Kemp, M. & Vanlong, N. 1989, 'Innovation and the transfer of technology - A leader-follower model', Economic Modelling, vol. 6, no. 4, pp. 452-456.
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There have been few attempts to model the interaction of R and D, the leakage of industrial technology and product pricing. In the present paper we develop a simple leaderfollower model of process innovation with leakage. The leader engages in R and D and sets the product price. The discoveries of the leader become available to the followers with delay. The task of the leader is to choose a time sequence of product prices and a time sequence of expenditures on R and D, knowing the supply function of the followers during each interval of time and knowing how that function changes through time in response to its own earlier expenditures on R and D. We describe the trajectories in qualitative terms and derive several comparative static results.
Chiarella, C. 1988, 'The cobweb model - Its instability and the onset of chaos', Economic Modelling, vol. 5, no. 4, pp. 377-384.
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We introduce a fairly general non-linear supply function into the traditional cobweb model under adaptive expectations. We find that the dynamics of the model are driven by a single hump map of the type that occurs in the chaos literature. By applying some recent results of Feigenbaum we are able to show that in its locally unstable region the cobweb model exhibits a regime of period doubling followed by a chaotic regime.
Chiarella, C. & Shannon, A.G. 1986, 'An example of diabetes compartment modeling', Mathematical Modelling, vol. 7, no. 9-12, pp. 1239-1244.
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A general biomedical two-compartment model is described and analyzed. An application in diabetes research is then illustrated by reference to a study which is comparing subcutaneous and intravenous insulin kinetcs.
Chiarella, C. 1986, 'Perfect foresight models and the dynamic instability problem from a higher viewpoint', Economic Modelling, vol. 3, no. 4, pp. 283-292.
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Dynamic macroeconomic models incorporating perfect foresight expectations can display a dynamic instability of the saddle point type. So that unless the initial values happen to place the system on the stable arm of the saddle point, the economic variables will diverge ever more from the equilibrium. We consider the dynamic instability problem in a simple model of monetary dynamics which is non-linear and assumes adaptive expectations which are characterized by an expectations time lag. This model is shown to have a stable limit cycle. By considering perfect foresight as the limit as the expectations time lag tends to zero we are able to view the perfect foresight model from a dimension higher than that from which is it is normally viewed. We are thus able to see that the stable limit cycle continues to exist for the perfect foresight model as well. In this framework there is no longer a dynamic instability problem since whatever the intial values time paths are tending to the stable limit cycle.
Chiarella, C., Kemp, M., Vanlong, N. & Okuguchi, K. 1984, 'On the economics of international fisheries', International Economic Review, vol. 25, no. 1, pp. 85-92.
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It has long been believed that when several countries share access to a fishery, the total catch is suboptimal; that, in particular, for each fish population the catch is too high and the steady-state population and catch too low. Recent careful analyses by Khalitbari [1977] and Levhari and Mirman [1980] show that the traditional view is valid under a variety of institutional arrangements and solution concepts. Thus Levhari and Mirman focussed their attention on the case of direct commonality, in which each country enjoys immediate access to the entire fish population and adopted a feedback or perfect closed-loop solution- concept; whereas Khalitbari examined the polar case of indi7ect commonality, in which each country has immediate access only to that part of the fish population in its coastal waters but in which fish move across international boundaries from regions of high population density to regions of low density, and adopted an open- loop solution-concept.
CHIARELLA, C. & BOOKER, J. 1975, 'TIME-SETTLEMENT BEHAVIOR OF A RIGID DIE RESTING ON A DEEP CLAY LAYER', QUARTERLY JOURNAL OF MECHANICS AND APPLIED MATHEMATICS, vol. 28, no. AUG, pp. 317-328.
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CHIARELLA, C., CHARLTON, W. & ROBERTS, A. 1975, 'OPTIMUM CHUTE PROFILES IN GRAVITY FLOW OF GRANULAR MATERIALS - DISCRETE SEGMENT SOLUTION METHOD', JOURNAL OF ENGINEERING FOR INDUSTRY-TRANSACTIONS OF THE ASME, vol. 97, no. 1, pp. 10-13.
CHARLTON, W., CHIARELLA, C. & ROBERTS, A. 1975, 'GRAVITY FLOW OF GRANULAR MATERIALS IN CHUTES - OPTIMIZING FLOW PROPERTIES', JOURNAL OF AGRICULTURAL ENGINEERING RESEARCH, vol. 20, no. 1, pp. 39-45.
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Chiarella, C., Kang, B., To, T. & Nikitopoulos Sklibosios, C., 'The return-volatility relation in commodity futures markets'.
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Other

Chiarella, C. & Di Guilmi, C. 2016, 'MONETARY POLICY AND DEBT DEFLATION: SOME COMPUTATIONAL EXPERIMENTS', pp. 1-29.
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Copyright © Cambridge University Press 2016 The paper presents an agent-based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule that includes the financial position of firms as a target. Monte Carlo simulations provide a representation of the complex feedback effects generated by the interaction among the different transmission channels of monetary policy. The model also reproduces the evidence of low inflation during stock market booms and shows how it can lead to overinvestment and destabilize the system. The paper also investigates the possible reasons behind this stylized fact by testing different behavioral rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit creation can be identified as the main source of the divergent dynamics of prices in the real and financial sectors.
Chiarella, C., He, X.-.Z., Shi, L. & Wei, L. 2014, 'A Behavioural Model of Investor Sentiment in Limit Order Markets'.
This paper examines the effect of behavioral sentiment in a limit order market when agents are risk averse and arrive in the market with different time horizons. The order submission rules with respect to order type and size are determined by maximizing the expected utility of agents with heterogeneous beliefs on the fundamental price and investment horizon. We show that behavioral sentiment has a double-edge impact on market quality: it improves market liquidity by reducing bid-ask spread and market volatility but increasing trading volume; however, it reduces pricing ef?ciency by increasing the price deviation from the fundamental value. Consistent with empirical observations, the model is able to replicate a number of stylized facts and limit book phenomena, including insigni?cant autocorrelations in returns, but signi?cant and decaying autocorrelations in the absolute returns, the bid-ask spread and the trading volume, hump shaped order books, a concave relationship between trade imbalance and average mid-price returns, and event clustering in order submissions. More important, the behavioral sentiment plays a very important role in explaining the positive autocorrelation in trading volume and also event clustering.
Adolfsson, T., Chiarella, C., Ziogas, A. & Ziveyi, J. 2013, 'Representation and Numerical Approximation of American Option Prices under Heston Stochastic Volatility Dynamics'.
In this paper we consider the evaluation of American call options on dividend paying stocks in the case where the underlying asset price evolves according to Heston's (1993) stochastic volatility model. We solve the Kolmogorov partial differential equation associated with the driving stochastic processes using a combination of Fourier and Laplace transforms and so obtain the joint transition probability density function for the underlying processes. We then use Duhamel's principle to obtain the expression for the American option price, which depends upon the unknown early exercise surface. By evaluating the pricing equation along the free surface boundary, we obtain the corresponding integral equation for the early exercise surface. An algorithm is proposed for solving the integral equation system, based upon numerical integration techniques for Volterra integral equations. The method is used to explore the impact of stochastic volatility on the price and free boundary of American call options.
Chiarella, C., Griebsch, S. & Kang, B. 2013, 'Investigating Time-Efficient Methods to Price Compound Options in the Heston Model'.
The primary purpose of this paper is to provide an in-depth analysis of a number of structurally different methods to numerically evaluate European compound option prices under Heston's stochastic volatility dynamics. Therefore, we first outline several approaches that can be used to price these type of options in the Heston model: a modified sparse grid method, a fractional fast Fourier transform technique, a (semi-)analytical valuation formula using the Green's function of logarithmic spot and volatility and a Monte Carlo simulation. Then we compare the methods on a theoretical basis and report on their numerical properties with respect to computational times and accuracy. One key element of our analysis is that the analyzed methods are extended to incorporate piecewise time-dependent model parameters, which allows for a more realistic compound option pricing.
Beyna, I., Chiarella, C. & Kang, B. 2012, 'Pricing Interest Rate Derivatives in a Multifactor HJM Model with Time'.
We investigate the partial differential equation (PDE) for pricing interest derivatives in the multi-factor Cheyette Model, which involves time-dependent volatility functions with a special structure. The high dimensional parabolic PDE that results is solved numerically via a modified sparse grid approach, that turns out to be accurate and efficient. In addition we study the corresponding Monte Carlo simulation, which is fast since the distribution of the state variables can be calculated explicitly. The results obtained from both methodologies are compared to the known analytical solutions for bonds and caplets. When there is no analytical solution, both European and Bermudan swaptions have been evaluated using the sparse grid PDE approach that is shown to outperform the Monte Carlo simulation.
Chiarella, C., Lo, C.-.F. & Huang, M.X. 2012, 'Modelling Default Correlations in a Two-Firm Model with Dynamic Leverage Ratios'.
This article provides a generalized two-firm model of default correlation, based on the structural approach that incorporates interest rate risk. In most structural models default is driven by the firms' asset dynamics. In this article, a two-firm model of default is instead driven by the dynamic leverage ratios, which combines the measure of risks of the firms' total liabilities and assets. This article investigates analytical methods and numerical tools to solve the two-dimensional first passage time problem with time-dependent parameters. We carry out a comparative analysis of the impact of model parameters and provide some insights of their effects on joint survival probabilities and default correlations.
Cheang, G.H. & Chiarella, C. 2011, 'A modern view on Merton's jump-diffusion model', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 287 Abstract: erton has provided a formula for the price of a European call option on a single stock where the stock price process contains a continuous Poisson jump component, in addition to a continuous log-normally distributed component. In Merton's analysis, the jump-risk is not priced. Thus the distribution of the jump-arrivals and the jump-sizes do not change under the change of measure. We go onto introduce a Radon-Nikodym derivative process that induces the change of measure from the market measure to an equivalent martingale measure. The choice of parameters in the Radon-Nikodym derivative allows us to price the option under different financial-economic scenarios. We introduce a hedging argument that eliminates the jump-risk in some sort of averaged sense, and derive an integro-partial differential equation of the option price that is related to the one obtained by Merton.
Chiarella, C. & Ziveyi, J. 2011, 'Two Stochastic Volatility Processes - American Option Pricing'.
In this paper we consider the pricing of an American call option whose underlying asset dynamics evolve under the influence of two independent stochastic volatility processes of the Heston (1993) type. We derive the associated partial differential equation (PDE) of the option price using hedging arguments and Ito's lemma. An integral expression for the general solution of the PDE is presented by using Duhamel's principle and this is expressed in terms of the joint transition density function for the driving stochastic processes. We solve the Kolmogorov PDE for the joint transition density function by first transforming it to a corresponding system of characteristic PDEs using a combination of Fourier and Laplace transforms. The characteristic PDE system is solved by using the method of characteristics. With the full price representation in place, numerical results are presented by first approximating the early exercise surface with a bivariate log linear function. We perform numerical comparisons with results generated by the method of lines algorithm and note that our approach is very competitive in terms of accuracy.
Chiarella, C., Kang, B. & Meyer, G. 2010, 'The evaluation of barrier option prices under stochastic volatility', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 266 Abstract: This paperc onsiders the problem o fnumerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston (1993). We develop a method of lines approach to evaluate the price as well as the delta and gamma of the option. The method is able to effciently handle bothc ontinuously monitored and discretely monitored barrier options and can also handle barrier options with early exercise features. In the latter case, we can calculate the early exercise boundary of an American barrier option in both the continuously and discretely monitored cases.
Chiarella, C., Hung, H. & Flaschel, P. 2010, 'Keynesian disequilibrium dynamics: Estimated convergence, roads to instability and the emergence of complex business fluctuations', QFRC Research Paper.
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We reformulate the traditional AS-AD growth model of the Neoclassical Synthesis (stage I) with a Taylor policy rule replacing the conventional LM-curve, with gradually adjusting wages as well as prices, and with perfect foresight on current inflation rates and an adaptively revised notion of an inflationary climate in which the economy is operating. We compare this approach with the New Keynesian approach, the Neoclassical Synthesis, stage II, with staggered price and wage setting and find various common components, yet with radically different dynamic implications due to our treatment of the forward-looking part of our wage-price spiral. We show for a system estimate of our model that it implies qualitatively local asymptotic stability and when its estimated form is simulated in response to isolated shocks strongly damped business fluctuations, due to a stable interaction of goods market dynamics with the interest rate policy of the central bank and due to a normal working of a real-wage feedback chain. These results are however endangered â leading in fact to economic breakdown â when there is a global floor to money wage inflation rates. In this case, the return of some money wage flexibility in deep depressions is of help in restoring viability of the model, thereby even avoiding explosive dynamics and the collapse of the economy. This situation leads to viable, but complex business fluctuations
Chiarella, C., Maina, S.C. & Nikitopoulos Sklibosios, C. 2010, 'Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 283 <p>Abstract: This paper presents a class of defaultable term structure models within the HJM framework with stochastic volatility. Under certain volatility speci&not;cations, the model admits &not;nite dimensional Markovian structures and consequently provides tractable solutions for defaultable bond prices. Furthermore, a bond pricing formula is obtained in terms of market observable quantities, speci&not;cally in terms of discrete tenor forward rates. The effect of stochastic volatility and of correlations between the stochastic volatility, defaultable short rate and credit spreads on the defaultable bond prices and returns is also investigated.
Chiarella, C. & Hsiao, C.-.Y. 2010, 'Optimal Investment Strategies under Stochastic Volatility - Estimation and Applications'.
This paper studies the impact of stochastic volatility (SV) on optimal investment decisions. We consider three different SV models: an extended Stein/Stein model, the Heston Model and an extended Heston Model with a constant elasticity variance (CEV) process and derive the the long-term optimal investment strategies under each of these processes. Since volatility is not a directly observable quantity, extended Kalman filter techniques are adopted to deal with this partial information problem. Optimal investment strategies based on the CEV volatility model are obtained by adopting the Backward Markov Chain approximation method since analytical solutions are no longer available. We find in the empirical investigation that the Heston model is favored as a more parsimonious model compared with the other two models. All three investment strategies based on the three SV models contain a positive intertemporal hedging term in addition to the static mean-variance portfolio. However, in their details the three investment strategies differ from each other. We also ?nd that the investment strategies are sensitive to the CEV parameter.
Chiarella, C., Hsiao, C.-.Y. & Huang, M.X. 2010, 'A Survey of Non-linear Methods for No-arbitrage Bond Pricing'.
Chiarella, C., He, X. & Zheng, M. 2009, 'Heterogeneous Expectations and Exchange Rate Dynamics (243)', Quantitative Finance Research Paper Series.
This paper presents a continuous-time model of exchange rates relying not only on macroeconomic factors but also having a market microstructure component. The driving macroeconomic factor is the interest rate differential, while the market microstructure element is described by the expectations of boundedly rational portfolio managers who use a weighted average of the expectations of fundamentalists and chartists. Within this framework, the different roles of the macroeconomic factors and market microstructure elements on the determination of the exchange rate are examined explicitly. We show that this simple model generates very complicated market behaviour, including the existence of multiple steady state equilibria, the deviations of the market exchange rate from the fundamental, and market fluctuations. Numerical simulation of the corresponding stochastic version of the model shows that the model is able to generate typical time series and volatility clustering patterns observed in exchange rate markets.
Chiarella, C. & Kang, B. 2009, 'The Evaluation of American Compound Option Prices Under Stochastic Volatility Using the Sparse Grid Approach (245)', Quantitative Finance Research Paper Series.
A compound option (the mother option) gives the holder the right, but not obligation to buy (long) or sell (short) the underlying option (the daughter option). In this paper, we demonstrate a partial differential equation (PDE) approach to pricing American-type compound options where the underlying dynamics follow Heston&acirc;s stochastic volatility model. This price is formulated as the solution to a two-pass free boundary PDE problem. A modified sparse grid approach is implemented to solve the PDEs, which is shown to be accurate and efficient compared with the results from Monte Carlo simulation combined with the Method of Lines.
Chiarella, C., Kang, B., Meyer, G. & Ziogas, A. 2009, 'The Evaluation of American Option Prices Under Stochastic Volatility and Jump-Diffusion Dynamics Using the Method of Lines (219)', Quantitative Finance Research Paper Series.
This paper considers the problem of numerically evaluating American option prices when the dynamics of the underlying are driven by both stochastic volatility following the square root process of Heston (1993), and by a Poisson jump process of the type originally introduced by Merton (1976). We develop a method of lines algorithm to evaluate the price as well as the delta and gamma of the option, thereby extending the method developed by Meyer (1998) for the case of jump-diffusion dynamics. The accuracy of the method is tested against two numerical methods that directly solve the integro-partial differential pricing equation. The first is an extension to the jump-diffusion situation of the componentwise splitting method of Ikonen & Toivanen (2007). The second method is a Crank-Nicolson scheme that is solved using projected successive over relaxation which is taken as the benchmark. The relative efficiency of these methods for computing the American call option price, delta, gamma and free boundary is analysed. If one seeks an algorithm that gives not only the price but also the delta and gamma to the same level of accuracy for a given computational effort then the method of lines seems to perform best amongst the methods considered.
Chiarella, C., He, X. & Pellizzari, P. 2009, 'A dynamic analysis of the microstructure of moving average rules in a double auction market', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 251 Abstract: Inspired by the theoretically oriented dynamic analysis of moving average rules in Chiarella, He and Hommes (CHH) (2006a) model, this paper conducts a dynamic analysis of a microstructure model of continuous double auctions in which the probability of heterogeneous agents to trade is determined by the rules of either fundamentalists mean-reverting to the fundamental or chartists choosing moving average rules based their relative performance. With such a realistic market microstructure, the model is able not only to obtain the results of the CHH model but also to characterise most of the stylized facts including the power-law behaviour of volatility. The results seem to suggest that a comprehensive explanation of several statistical properties of returns is possible in a framework where both behavioral traits and realistic microstructure have a role.
Chiarella, C., Iori, G. & Perello, J. 2009, 'The impact of heterogeneous trading rules on the limit order book and order flows', Discussion Paper Series, Department of Economics, City University, London.
Discussion Paper Number: 08/04 <p>Abstract: In this paper we develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to exogenously fixed rules. Agents are assumed to have three components to the expectation of future asset returns, namely-fundamentalist, chartist and noise trader. Furthermore agents differ in the characteristics describing these components, such as time horizon, risk aversion and the weights given to the various components. The model developed here extends a great deal of earlier literature in that the order submissions of agents are determined by utility maximisation, rather than the mechanical unit order size that is commonly assumed. In this way the order flow is better related to the ongoing evolution of the market. For the given market structure we analyze the impact of the three components of the trading strategies on the statistical properties of prices and order flows and observe that it is the chartist strategy that is mainly responsible of the fat tails and clustering in the artificial price data generated by the model. The paper provides further evidence that large price changes are likely to be generated by the presence of large gaps in the book.
Chiarella, C., Clewlow, L. & Kang, B. 2009, 'Modelling and estimating the forward price curve in the energy market', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 260 Abstract: The stochastic or random nature of commodity prices plays a central role in models for valuing ?nancial contingent claims on commodities. In this paper, by enhancing a multifactor framework which is consistent not only with the market observable forward price curve but also the volatilities and correlations of forward prices, we propose a two factor stochastic volatility model for the evolution of the gas forward curve. The volatility is stochastic due to a hidden Markov Chain that causes it to switch between &acirc;on peak&acirc; and &acirc;off peak&acirc; states. Based on the structure functional forms for the volatility, we propose and implement the Markov Chain Monte Carlo (MCMC) method to estimate the parameters of the forward curve model. Applications to simulated data indicate that the proposed algorithm is able to accommodate more general features, such as regimes witching and seasonality. Applications to the market gas forward data shows that the MCMC approach provides stable estimates.
Cheang, G.H., Chiarella, C. & Ziogas, A. 2009, 'The representation of American options prices under stochastic volatility and jump-diffusion dynamics', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 256 Abstract: This paper considers the problem of pricing American options when the dynamics of the underlying are driven by both stochastic volatility following a square root process as used by Heston(1993), and by a Poisson jump process as introduced by Merton (1976). Probability arguments are invoked to find a representation of the solution in terms of expectations over the joint distribution of the underlying process. A combination of Fourier transform in the log stock price and Laplace transform in the volatility is then applied to find the transition probability density function of the underlying process.It turns out that the price is given by an integral dependent upon the early exercise surface, for which a corresponding integral equation is obtained. The solution generalises in an intuitive way the structure of the solution to the corresponding European option pricing problem in the case of a call option and constant interest rates obtained by Scott (1997).
Chiarella, C., Dieci, R. & He, X. 2009, 'A framework for CAPM with heterogenous beliefs', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 254 Abstract: We introduce heterogeneous beliefs in to the mean-variance framework of the standard CAPM, in contrast to the standard approach which assumes homogeneous beliefs. By assuming that agents form optimal portfolios based upon their heterogeneous beliefs about conditional means and covariances of the risky asset returns, we set up a framework for the CAPM that incorporates the heterogeneous beliefs when the market is in equilibrium. In this framework we first construct a consensus belief (with respect to the means and covariances of the risky asset returns) to represent the aggregate market belief when the market is in equilibrium. We then extend the analysis to a repeated one-period set-up and establish a framework for a dynamic CAPM using a market fraction model in which agents are grouped according to their beliefs. The exact relation between heterogeneous beliefs, the market equilibrium returns and the ex-ante beta-coeffcients is obtained. CAPM and Heterogeneous beliefs.
Cheang, G., Chiarella, C. & Ziogas, A. 2009, 'An Analysis of American Options under Heston Stochastic Volatility and Jump-Diffusion Dynamics'.
This paper considers the problem of pricing American options when the dynamics of the underlying are driven by both stochastic volatility following a square root process as used by Heston (1993), and by a Poisson jump process as introduced by Merton (1976). Probability arguments are invoked to find a representation of the solution in terms of expectations over the joint distribution of the underlying process. A combination of Fourier transform in the log stock price and Laplace transform in the volatility is then applied to find the transition probability density function of the underlying process. It turns out that the price is given by an integral dependent upon the early exercise surface, for which a corresponding integral equation is obtained. The solution generalises in an intuitive way the structure of the solution to the corresponding European option pricing problem in the case of a call option and constant interest rates obtained by Scott (1997).
Chiarella, C., Dieci, R. & He, X. 2008, 'Heterogeneity, Market Mechanisms, and Asset Price Dynamics', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydnet.
Research Paper Number: 231 Abstract: This chapter surveys the boundedly rational heterogeneous agent (BRHA) models of financial markets, to the development of which the authors and several co-authors have contributed in various papers. We give particular emphasis to role of the market clearing mechanism used, the utility function of the investors, the interaction of price and wealth dynamics, portfolio implications, the impact of stochastic elements on the markets dynamics, and calibration of this class of models. Due to agents&acirc; behavioural features and market noise, the BRHA models are both nonlinear and stochastic. We show that the BRHA models produce both a locally stable fundamental equilibrium corresponding to that of standard paradigm, as well as instability with a consequent rich range of possible complex behaviours characterised both indirectly by simulation and directly by stochastic bifurcations. A calibrated model is able to reproduce quite well the stylized facts of financial markets. The BRHA framework is thus able to accommodate market features that seem not easily reconcilable for the standard financial market paradigm, such as fat tail, volatility clustering, large excursions from the fundamental and bubbles.
Chiarella, C., Fanelli, V. & Musti, S. 2008, 'Modelling the evolution of credit spreads using the Cox process within the HUM Framework: A CDS option pricing model', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 232 Abstract: In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and CDS option price in a probability setting equipped with a subfiltration structure. The Euler-Maruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical algorithm for pricing. Finally, the Antithetic Variables technique is used to reduce the variance of CDSO estimations.
Chiarella, C. & Cheang, G.H. 2008, 'Hedge portfolios in markets with price discontinuities', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 218 Abstract: We consider a market consisting of multiple assets under jump-diffusion dynamics with European style options written on these assets. It is well-known that such markets are incomplete in the Harrison and Pliska sense. We derive a pricing relation by adopting a Radon-Nikodym derivative based on the exponential martingale of a correlated Brownian motion process and a multivariate compound Poisson process. The parameters in the Radon-Nikodym derivative define a family of equivalent martingale measures in the model, and we derive the corresponding integro-partial differential equation for the option price. We also derive the pricing relation by setting up a hedge portfolio containing an appropriate number of options to "complete" the market. The market prices of jump-risks are priced in the hedge portfolio and we relate these to the choice of the parameters in the Radon-Nikodym derivative used in the alternative derivation of the integro-partial differential equation.
Cheang, G.H. & Chiarella, C. 2008, 'Exchange options under jump-diffusion dynamics', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 235 Abstract: Margrabe provides a pricing formula for an exchange option where the distributions of both stock prices are log-normal with correlated Wiener components. Merton has provided a formula for the price of a European call option on a single stock where the stock price process contains a continuous Poisson jump component, in addition to a continuous log-normally distributed component. We use Merton&acirc;s analysis to extend Margrabe&acirc;s results to the case of exchange options where both stock price processes also contain compound Poisson jump components. A Radon-Nikod&Acirc;&acute;ym derivative process that induces the change of measure from the market measure to an equivalent martingale measure is introduced. The choice of parameters in the Radon-Nikod&Acirc;&acute;ym derivative allows us to price the option under different financial-economic scenarios. We also consider American style exchange options and provide a probabilistic intepretation of the early exercise premium.
Chiarella, C., He, X. & Zheng, M. 2007, 'The Stochastic Dynamics of Speculative Prices (208)', Quantitative Finance Research Paper Series.
Within the framework of the heterogeneous agent paradigm, we establish a stochastic model of speculative price dynamics involving of two types of agents, fundamentalists and chartists, and the market price equilibria of which can be characterised by the invariant measures of a random dynamical system. By conducting a stochastic bifurcation analysis, we examine the market impact of speculative behaviour. We show that, when the chartists use lagged price trends to form their expectations, the market equilibrium price can be characterised by a unique and stable invariant measure when the activity of the speculators is below a certain critical value. If this threshold is surpassed, the market equilibrium can be characterised by more than two invariant measures, of which one is completely stable, another is completely unstable and the remaining ones may exhibit various types of stability. Also, the corresponding stationary measure displays a significant qualitative change near the threshold value. We show that the stochastic model displays behaviour consistent with that of the underlying deterministic model. However, when the time lag in the formation of the price trends used by the chartists approaches zero, such consistency breaks down. In addition, the change in the stationary distribution is consistent with a number of market anomalies and stylised facts observed in financial markets, including a bimodal logarithmic price distribution and fat tails.
Chiarella, C., Hsiao, C. & Semmler, W. 2007, 'Intertemporal investment strategies under inflation risk', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 192 Abstract: This paper studies intertemporal investment strategies under inflation risk by extending the intertemporal framework of Merton (1973) to include a stochastic price index. The stochastic price index gives rise to a two-tier evaluation system: agents maximize their utility of consumption in real terms while investment activities and wealth evolution are evaluated in nominal terms. We include inflation-indexed bonds in the agents&acirc; investment opportunity set and study their effectiveness in hedging against inflation risk. A new multifactor term structure model is developed to price both inflation-indexed bonds and nominal bonds, and the optimal rules for intertemporal portfolio allocation, both with and without inflation-indexed bonds are obtained in closed form. The theoretical model is estimated using data of US bond yield, both real and nominal, and S&P 500 index. The estimation results are employed to construct the optimal investment strategy for an actual real market situation. Wachter (2003) pointed out that without inflation risk, the most risk averse agents (with an infinite risk aversion parameter) will invest all their wealth in the long term nominal bond maturing at the end of the investment horizon. We extend this result to the case with inflation risk and conclude that the most risk averse agents will now invest all their wealth in the inflation-indexed bond maturing at the end of the investment horizon.
Chiarella, C. & Platen, E. 2007, 'The history of the Quantitative Methods in Finance Conference Series. 1992-2007', Research Paper Series, Qunatitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 207 Abstract: This report charts the history of the Quantitative Methods in Finance (QMF) conference from its beginning in 1993 to the 15th conference in 2007. It lists alphabetically the 1037 speakers who presented at all 15 conferences and the titles of their papers.
Asada, T., Chiarella, C., Flaschel, P. & Proaño, C.R. 2007, 'Keynesian AD-AS, Quo Vadis?'.
We formulate a dynamic AD-AS model based on gradually adjusting wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. The model consists of a wage and a price Phillips curve, a dynamic IS curve as well as a dynamic employment adjustment equation (Okun's law) and a Taylor interest rate rule. The model can be reduced to a 3D dynamical system by a suitable choice of the Taylor rule and implies strong stability results, in particular for an appropriately chosen interest rate policy rule. Through instrumental variables GMM system estimation with aggregate time series data for the U.K. economy, we obtain parameter estimates which support the specification of our theoretical model and its stability implications. We contrast these results with the standard (formally similarly structured) New Keynesian model with staggered wage and price setting where determinacy of the dynamics represents a severe problem and where (if determinacy can be achieved) inertia-free stability is obtained by the very choice of the solution method.
Chiarella, C. & He, X. 2006, 'Aggregation of heterogeneous beliefs and asset pricing theory: A mean-variance analysis', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Paper Number: 186
Chiarella, C. & Ziogas, A. 2006, 'American call options on jump-diffusion processes: A Fourier transform approach', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 174 Abstract: This paper considers the Fourier transform approach to derive the implicit integral equation for the price of an American call option in the case where the underlying asset follows a jump-diffusion process. Using the method of Jamshidian (1992), we demonstrate that the call option price is given by the solution to an inhomogeneous integro-partial differential equation in an unbounded domain, and subsequently derive the solution using Fourier transforms. We also extend McKean&acirc;s incomplete Fourier transform approach to solve the free boundary problem under Merton&acirc;s framework, for a general jump size distribution. We show how the two methods are related to each other, and also to the Geske-Johnson compound option approach used by Gukhal (2001). The paper also derives results concerning the limit for the free boundary at expiry, and presents a numerical algorithm for solving the linked integral equation system for the American call price, delta and early exercise boundary. This scheme is applied to Merton&acirc;s jump-diffusion model, where the jumps are log-normally distributed.
Rothig, A. & Chiarella, C. 2006, 'Investigating nonlinear speculation in cattle, corn and hog futures markets using logistic smooth transition regression models', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 172 Abstract: This article explores nonlinearities in the response of speculators&acirc; trading activity to price changes in live cattle, corn, and lean hog futures markets. Analyzing weekly data from March 4, 1997 to December 27, 2005, we reject linearity in all of these markets. Using smooth transition regression models, we find a similar structure of nonlinearities with regard to the number of different regimes, the choice of the transition variable, and the value at which the transition occurs.
Chiarella, C., Dieci, R. & He, X. 2005, 'Heterogeneous expectations and speculative behaviour in a dynamic multi-asset framework (QFRC paper #166)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp166.pdf
Chiarella, C., Hung, H. & To, T. 2005, 'The volatility structure of the fixed income market under the HJM framework: a non-linear filtering approach (QFRC paper #151)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp151.pdf
Chiarella, C. & Iori, G. 2005, 'The impact of heterogeneous trading rules on the limit order book and order flows (QFRC paper #152)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp152.pdf
Chiarella, C., Nikitopoulos Sklibosios, C. & Schlogl, E. 2005, 'A control variate method for Monte Carlo simulations of Heath-Jarrow-Morton with jumps (QFRC paper #167)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp167.pdf
Chiarella, C. & To, T. 2005, 'The multifactor nature of the volatility of the Eurodollar futures market (QFRC paper #150)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp150.pdf
Chiarella, C. & Ziogas, A. 2005, 'Pricing American options on jump-diffusion processes using Fourier Hermite series expansions (QFRC paper #145)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp145.pdf
Chiarella, C. & Hsiao, C. 2005, 'The impact of short-sale constraints on asset allocation strategies via the backward Markov chain approximation method', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 171 Abstract: This paper considers an asset allocation strategy over a finite period under investment uncertainty and short-sale constraints as a continuous time stochastic control problem. Investment uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short-sale constraints, the optimal asset allocation strategy can be solved analytically. We consider several kinds of short-sale constraints and employ the backward Markov chain approximation method to explore the impact of short-sale constraints on asset allocation decisions. Our results show that the short-sale constraints do indeed have a significant impact on the asset allocation decisions.
Chiarella, C., He, T. & Hommes, C.H. 2005, 'A Dynamic Analysis of Moving Average Rules'.
The use of various moving average (MA) rules remains popular with financial market practitioners. These rules have recently become the focus of a number empirical studies, but there have been very few studies of financial market models where some agents employ technical trading rules of the type used in practice. In this paper we propose a dynamic financial market model in which demand for traded assets has both a fundamentalist and a chartist component. The chartist demand is governed by the difference between current price and a (long-run) MA. Both types of traders are boundedly rational in the sense that, based on a fitness measure such as realized capital gains, traders switch from a strategy with low fitness to the one with high fitness. We characterize the stability and bifurcation properties of the underlying deterministic model via the reaction coefficient of the fundamentalists, the extrapolation rate of the chartists and the lag length used for the MA. By increasing the intensity of choice to switching strategies, we then examine various rational routes to randomness for different MA rules. The price dynamics of the moving average rule are also examined and one of our main findings is that an increase of the window length of the MA rule can destabilize an otherwise stable system, leading to more complicated, even chaotic behaviour. The analysis of the corresponding stochastic model is able to explain various market price phenomena, including temporary bubbles, sudden market crashes, price resistance and price switching between different levels.
Asada, T., Chen, P., Chiarella, C. & Flaschel, P. 2004, 'Keynesian dynamics and the wage price spiral: a baseline disequilibrium approach (Centre for Empirical Macroeconomics, University of Bielefeld, paper #69)'.
Bhar, R., Chiarella, C., Hung, H. & Runggaldier, W.J. 2004, 'The volatility of the instantaneous spot interest rate implied by arbitrage pricing - a dynamic Bayesian approach (School of Banking & Finance, UNSW, paper #2004-6)'.
Bhar, R., Chiarella, C. & To, T. 2004, 'Estimating the volatility structure of an arbitrage-free interest rate model via the futures markets (School of Banking & Finance, UNSW, paper #2004-5)'.
Chiarella, C., Dieci, R. & Gardini, L. 2004, 'Asset price and wealth dynamics in a financial market with heterogeneous agents (QFRC paper #134)'.
Chiarella, C., El-Hassan, N. & Kucera, A. 2004, 'Evaluation of point barrier options in a path integral framework using fourier-hermic expansion (QFRC paper #126)'.
Chiarella, C., He, X. & Hommes, C. 2004, 'A dynamic analysis of moving average rules (QFRC paper #133)'.
Chiarella, C., Kucera, A. & Ziogas, A. 2004, 'A survey of the integral representation of American option prices (QFRC paper #118)'.
Chiarella, C. & Nikitopoulos Sklibosios, C. 2004, 'A class of jump-diffusion bond pricing models within the HJM framework (QFRC paper #132)'.
Chiarella, C., Schlogl, E. & Nikitopoulos Sklibosios, C. 2004, 'A Markovian defaultable term structure model with state dependent volatilities (QFRC paper #135)'.
Chiarella, C. & Ziogas, A. 2004, 'Mckean's methods applied to American option prices (QFRC paper #117)'.
Hsiao, C., Chiarella, C. & Semmler, W. 2004, 'Strategic asset allocation with arbitrage-free bond market using dynamic programing (Centre for Empirical MacroEconomics, University of Bielefeld, paper #76)'.
Chiarella, C., He, X. & Hommes, C. 2004, 'A dynamic analysis of moving average rules (Centre for Nonlinear Dynamics in Economics & Finance, University of Amsterdam, paper #04-14)', 10th International conference on computing in economics and finance.
Chiarella, C., He, X. & Wang, D. 2004, 'Statistical Properties of a Heterogeneous Asset Price Model with Time-Varying Second Moment', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 142 Abstract: Stability and bifurcation analysis of deterministic systems has been widely used in modeling financial markets. However, the impact of such dynamic phenomena on various statistical properties of the corresponding stochastic model, including skewness and excess kurtosis, various autocorrelation (AC) patterns of under and over reactions, and volatility clustering characterised by the long-range dependence of ACs, is not clear and has been very little studied. This paper aims to study this issue. Through a simple behavioural asset pricing model with fundamentalists and chartists, we examine the statistical properties of the model and their connection to the dynamics of the underlying deterministic model. In particular, our analysis leads to some insights into the type of mechanism that may be generating some of the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data.
Chiarella, C., He, X. & Wang, D. 2004, 'A behavioural asset pricing model with a time-varying second moment', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 141 Abstract: We develop a simple behavioural asset pricing model with fundamentalists and chartists to study price behaviour in financial markets. Within our model, the market impact of the weighting process of the conditional mean and variance of the chartists and investors' reactions are analysed. Price dynamics of the deterministic model under/over-reactions are analyzed. It shows different price dynamics and routes to complicated price behaviour when the chartists act as either trend followers or contrarians. It is found that (in a separate paper Chiarella et al (2004)) this analysis can be used to establish some connections between the statistical properties of the nonlinear stochastic system (such as distribution density and autocorrelation patterns of returns, in particular the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data) and the stability and bifurcation of the underlying deterministic system are established.
Chiarella, C., Kucera, A. & Ziogas, A. 2004, 'A Survey of the Integral Representation of American Option Prices'.
This paper surveys some of the literature on American option pricing, in particular the representations of McKean (1965), Kim (1990) and Carr, Jarrow and Myneni (1992). It is proposed that the approach regarding the problem as a free boundary value problem, and solving this via incomplete Fourier transforms, is the most robust for further developments involving more complex payo structures, and higher dimensional problems such as multi-asset American options. Some comparison of di erent numerical solution methods is also provided.
Chiarella, C. & Gao, S. 2004, 'Continuous Time Model Estimation'.
This paper introduces an easy to follow method for continuous time model estimation. It serves as an introduction on how to convert a state space model from continuous time to discrete time, how to decompose a hybrid stochastic model into a trend model plus a noise model, how to estimate the trend model by simulation, and how to calculate standard errors from estimation of the noise model. It also discusses the numerical difficulties involved in discrete time models that bring about the unit roots illusion in econometrics.
Bhar, R., Chiarella, C. & To, T.-.D. 2004, 'Estimating the Volatility Structure of an Arbitrage-Free Interest Rate Model Via the Futures Markets'.
This paper considers a class of Heath-Jarrow-Morton (1992) term structure models, characterized by time deterministic volatilities for the instantaneous forward rate. The bias that arises from using observed futures yields as a proxy for the unobserved instantaneous forward rate is analyzed. The fact that futures contracts can be viewed as derivative instruments on the forward rate is used to determine the likelihood function for futures prices. The likelihood transformation method of Duan (1994) is then used to obtain the full information maximum likelihood estimator for the observable futures prices. The approach is applied to estimate the volatility structure implied by futures contracts traded on the Chicago Mercantile Exchange.
Asada, T., Chiarella, C. & Flaschel, P. 2003, 'Keynes-Metzler-Goodwin model building: the closed economy (F&E paper #124)'.
Asada, T., Chiarella, C., Flaschel, P. & Franke, R. 2003, 'Interacting two-country business fluctuations (F&E paper #128)'.
Chiarella, C., Dieci, R. & Gardini, L. 2003, 'A dynamic analysis of speculation across two markets (QFRC paper #89)'.
Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2003, 'Output and the term structure of interest rates: Ways out of the jump-variable conundrum (F&E paper #125)'.
Chiarella, C., Flaschel, P. & Semmler, W. 2003, 'Real-financial interaction: implications of budget equations and capital accumulation (F&E paper #127)'.
Chiarella, C., Flaschel, P. & Zhu, P. 2003, 'The structure of Keynesian macrodynamics: a frame work for future research (F&E paper #129)'.
Chiarella, C., Flaschel, P., Groh, G., Koper, C. & Semmler, W. 2003, 'Toward applied disequilibrium growth theory: IV housing investment cycles, private debt accumulation and deflation (F&E paper #96)'.
Chiarella, C., Flaschel, P., Groh, G., Koper, C. & Semmler, W. 2003, 'Towards applied disequilibrium growth theory: V housing investment cycles, private debt accumulation and deflation (F&E paper #97)'.
Chiarella, C., He, X. & Zhu, P. 2003, 'Fading memory learning in the cobweb model with risk averse heterogeneous producers (QFRC paper #108)'.
Chiarella, C., Flaschel, P. & Zhu, P. 2003, 'Towards Applied Disequilibrium Growth Theory: IV Numerical Investigations of the Core 18D Model'.
In this paper we investigate, from the numerical perspective, the 18D core dynamics of a theoretical 39D representation of an applied disequilibium model of monetary growth of a small open economy. After considering the model from the viewpoint of national accounting, we provide a compact description of the intensive form of the model, its laws of motion and accompanying algebraic expressions and its unique interior steady state solution. We then give a survey of various types of subsystems that can be decomposed from the integrated 18D dynamics by means of suitable assumptions and also survey the feedback channels that can typically be found in these decomposed or re-integrated model types. These subsystems and their partial or full integration are investigated and compared in the remainder of the paper from the perspective of bifurcation diagrams that separate situations of asymptotic stability from stable cyclical behavior as well as pure explosiveness. In this way we lay the foundations for future extensions of the paper, which will show, in contract to what is generally believed to characterize structural macroeconomic models, that applied integrated macrodynamical systems can have a variety of interesting attractors and transients to them. Such attractors are obtained in particular when locally explosive situations are turned into bounded dynamics by the addition of specifically tailored extrinsic nonliearities.
Chiarella, C. & Gao, S. 2002, 'Solving the price earnings puzzle'.
Chiarella, C. & Gao, S. 2002, 'Type 1 spurious regression in economics'.
Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2002, 'Stability analysis of a high-dimension macrodynamic model of real-financial interaction: a cascade of matrices approach'.
Chiarella, C. & He, X. 2002, 'An adaptive model on asset pricing and wealth dynamics with heterogeneous trading strategies', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 84 Abstract: This paper develops an adaptive model on asset pricing and wealth dynamic of a financial market with heterogeneous agents and examines the profitability of momentum and contrarian trading strategies. In order to characterize asset price, wealth dynamics and rational adaptiveness arising from the interaction of heterogeneous agents with CRRA utility, an adaptive discrete time equilibrium model in terms of return ad wealth proportions (among heterogeneous representative agents) is established. Taking trend followers and contrarians as the main hetergeneous agents in the model, the profitability of momentum and contrarian trading strategies is analyzed. Our results show the capability of the model to characterize some of the existing evidence on many of anomailies observed in financial markets, including the profitability of momentum trading strategies over short time intervals, rational adaptiveness of agents, overconfidence and underreaction, overreaction and herd behavior, excess volatility, and volatility clustering.
Chiarella, C. & Ziogas, A. 2002, 'Evaluation of American strangles', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 83 Abstract: This paper presents a generalisation of McKean's free boundary value problem for American options by considering an American strangle position, where the early exercise of one side of the payoff will knock-out the out-of-the-money side. When attempting to evaluate the price of this American strangle, it is not correct to simply price the component American call and put options which make up the strangle, and take the sum of their values. The Fourier transform technique is used to derive the integral equation for the price of our American strangle. From this expression, a coupled integral equation system for the strangle's call- and put-side free boundaries is found. While the equation for the price of the strangle is simply the sum of its component American call and put option equations, the free boundary for each side is shown to have a more complex nature. Anumerical algorithm for solving the coupled integral equation system for the free boundaries is provided, and the resulting approximations are used to determine the price of the American strangle position. Numerical comparisons between the strangle price and the price of a portfolio formed from a long position in both an American call an American put option are presented.
Bhar, R., Chiarella, C. & To, T. 2002, 'A maximum likelihood approach to estimation of Heath-Jarrow-Morton models', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 80 Abstract: Research on the Heath-Jarrow-Morton (1992) term structure models so far has focused on the class having time-deterministic instantaneous forward rate volatility. In this case the forward rate is Markovian, even if the spot rate process is not. However, this Markovian feature can only be used under the historical measure, involving two unsatisfactory assumptions: one on market price risk, usually made for pure mathematical tractability, the other to use futures yields as a proxy for the instantaneous forward rate, which may result in estimation bias. This paper circumvents both of these assumptions. First, the bias is quantified and shown to be non-negligible. Then futures contracts are treated as derivative instruments written on forward rates to derive the full information maximum likelihood estimator for observable futures prices, using both time series and cross-sectional data, without the need to assume and estimate any functional forms for the market price of interest rate risk. The derivation involves the likelihood transformation method of Duan (1994). The method is then applied to the estimation of a humped forward rate volatility model for Eurodollar futures series traded on the Chicago Mercantile Exchange.
Chiarella, C. & Gao, S. 2002, 'Modelling the Value of the S&P 500 - A System Dynamics Perspective'.
This paper seeks to model the adjustment process in the stock market by a continuous time state space model focusing on input-out relations. The value of the S&P 500 is generated as the output of the model with earnings and the interest rate as input. The model is found to fit the data well, and indicates that the stock price dynamics can be considered as a price-following-value process. The value determines the time varying trend of price, and random buy-sell pressure drives price fluctuations about value. The 1987 stock price bubble shows up clearly as a gap between price and value.
Chiarella, C., Pasquali, S. & Runggaldier, W.J. 2001, 'On filtering in Markovian yerm structure models (An approximation approach)', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 65 Abstract: We study a nonlinear filtering problem to estimate, on the basis of noisy observations of forward rates, the market price of interest rate risk as well as the parameters in a particular term structure model within the Heath-Jarrow-Morton family. An approximation approach is described for the actual computation of the filter.
Bhar, R., Chiarella, C. & Runggaldier, W.J. 2001, 'Filtering equity risk premia from derivative prices', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 69 Abstract: This paper considers the measurement of the equity risk premium in financial markets. While there exists a vast amount of research into its behaviour, particularly in US markets, this is largely based on regression based techniques which do not capture well the dynamic and forward looking nature of the risk premium. In this paper the time variation of the unobserved risk premium is modelled by a system of stochastic differential equations connected by arbitrage arguments between the spot equity market, the index futures and options on index futures. Although various processes for the dynamics of the risk premium may be considered, we motivate and analyse a mean-reverting form. Since the risk premium is not directly observable, information on it is extracted using an unobserved component state space formulation of the system and Kalman filtering methodology. In order to cater for the time variation of volatility we use the option implied volatility in the dynamic equations for the index and its derivatives. This quantity is in a sense treated as a signal that impounds the market's forward looking view on the equity risk premium. The results using monthly Australian and U.S. market data over a period of five years are presented. The model fit is found to be statistically significant for both markets. The time series of the mean and standard deviation of the risk premia generated by the Kalman filter are compared with premia computed from ex-post returns. It is found that the ex-post risk premia have a general tendency to lie within a two standard deviations band around the filteredmean. However there are frequent movements outside the band, particularly on the downside, indicating that the ex-post measure may be understating the risk premium.
Bhar, R., Chiarella, C. & Runggaldier, W.J. 2001, 'Estimation in models of the instantaneous short term interest rate by use of a dynamic Bayesian algorithm', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 68 Abstract: This paper considers the estimation in models of the instantaneous short interest rate from a new perspective. Rather than using discretely compounded market rates as a proxy for the instantaneous short rate of interest, we set up the stochastic dynamics for the discretely compounded market observed rates and propose a dynamic Bayesian estimation algorithm (i.e. a filtering algorithm) for a time-discretised version of the resulting interest rate dynamics. The filter solution is computed via a further spatial discretization (quantization) and the convergence of the latter to its continuous counterpart is discussed in detail. The method is applied to simulated data and is found to give a reasonable estimate of the conditional density function and to be not too demanding computationally.
Chiarella, C. & He, X. 2001, 'Asset price and wealth dynamics under heterogeneous expectations', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 56 Abstract: In order to characterize asset price and wealth dynamics arising from the interaction of heterogeneous agents with CRRA utility, a discrete time stationary model in terms of return and wealth proportions (among different types of agents) is established. When fundamentalists and chartists are the main heterogeneous agents in the model, it is found that in the presence of heterogeneous agents the stationary model can have multiple steady-states. The steady-state is unstable when the chartists extrapolate strongly and (locally) stable when they extrapolate weakly. The convergence to steady-state follows an optimal selection principle - the return and wealth proportions tend to the steady-state which has relatively higher return. More importantly, heterogeneity can generate instability which, under the stochastic processes of the dividend yield and extrapolation rates, results in switching of the return among different states, such as steady-state, periodic and aperiodic cycles from time to time. To model that is finally developed displays the essential characteristics of the standard asset price dynamics model assumed in continuous time finance, in that the asset price is fluctuating around a geometrically growing trend. The model also displays the volatility clustering that is an essential feature of empirically observed assets returns.
Chiarella, C. & He, X. 2001, 'Dynamics of beliefs and learning under aL processes - The heterogeneous case', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 55 Abstract: This paper studies a class of models in which agents' expectations influence the actual dynamics while the expectations themselves are the outcome of some recursive processes with bounded memory. Under the assumptions of heterogeneous expectations (or beliefs) and that the agents update their expectations by recursive L- and general aL-processes, the dynamics of the resulting expectations and learning schemes are analyzed. It is shown that the dynamics of the system, including stability, instability and bifurcation, are affected differently by the recursive processes. The cobweb model with a simple heterogeneous expectation scheme is employed as an example to illustrate the stability results, the various types of bifurcations and the routes to complicated price dynamics. In particular, the double edged effect of heterogeneity on the dynamics of the model is demonstrated.
Chiarella, C. & He, X. 2001, 'Dynamics of beliefs and learning under aL processes - The homogeneous case', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 53 Abstract: This paper studies a class of models in which agents' expectations influence the actual dynamics while the expectations themselves are the outcome of some learning process. Under the assumptions that agents have homogeneous expectations (or beliefs) and that they update their expectations by least-squares L- and general aL - processes, the dynamic of the resulting expectations and learning schemes are analyzed. It is shown how the dynamics of the system, including stability, instability and bifurcation, are affected by the learning processes. The cobweb model with a simple homogeneous expectation scheme is employed as an example to illustrate the stability results, the various types of bifurcations and the routes to complicated price dynamics.
Chiarella, C. & Kwon, O. 2001, 'State variables and the affine nature of Markovian HJM term structure models', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 52 Abstract: Finite dimensional Markovian HJM term structure models provide an ideal setting for the study of term structure dynamics and interest rate derivatives where the flexibility of the HJM framework and the tractability of Markovian models coexist. Consequently, these models became the focus of a series of papers including Carverhill (1994), Ritchken and Sankarasuramanian (1995), Bhar and Chiarella (1997), Inui and Kijima (1998) and de Jong and Santa-Clara (1999). In Chiarella and Kwon (2001b), a common generalisation of these models was obtained in which the components of the forward rate volatility process satisfied ordinary differential equations in the maturity variable. However, the generalised models require the introduction of a large number of state variables which, at first sight, do not appear to have clear links to market observed quantities. In this paper, it is shown that the forward rate curves for these models can often be expressed as affine functions of the state variables, and conversely that the state variables in these models can often be expressed as affine functions of a finite number of benchmark forward rates. Consequently, for these models, the entire forward rate curve is not only Markov but affine with respect to a finite number of benchmark forward rates. It is also shown that the forward rate curve can be expressed as an affine function of a finite number of yields which are directly observed in the market. This property is useful, for example, in the estimation of model parameters. Finally, an explicit formula for the bond price in terms of the state variables, generalising the formula given in Inui and Kijima (1998), is provided for the models considered in this paper.
Chiarella, C., Dieci, R. & Gardini, L. 2001, 'Speculative behaviour and complex asset price dynamics', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 49 Abstract: This paper analyses the dynamics of a model of a share market consisting of two groups of traders: fundamentalists, who form rational expectations on the fundamental value of the asset, and chartists, who base their trading decisions on an analysis of past price trends. The model is reduced to a two-dimensional map whose dynamic behaviour is analysed in detail, particularly with respect to global dynamical behaviour. The dynamics are affected by parameters measuring the strength of fundamentalist demand and the speed with which chartists adjust their estimate of the trend to past price changes. The parameter space is characterized according to the local stability/instability of the equilibrium point as well as the noninvertibility of the map. The method of critical curves of noninvertible maps is used to understand and describe the range of global bifurcations that can occur. It is also shown how the knowledge of deterministic dynamics uncovered here can aid in understanding stochastic versions of the model.
Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2001, 'Real-Financial Interaction: Integrating Supply Side Wage-Price Dynamics and the Stock Market'.
The paper put forward a macrodynamic model of the real-financial interaction. Regarding the financial sector it focuses on the stock market dynamics, for real sector it details goods market disequilibrium and two Phillips curves for prices as well as wages. The central link between the two sectors is constituted by Tobin's (average) q. After highlighting the main feedback mechanisms in the real and financial subdynamics, the long-run equilibrium of the integrated 7th-order dynamic system is shown to be locally stable if certain adjustments are sufficiently sluggish, while large values of some reaction parameters can destabilize the economy. Lastly, the analysis reveals the potential for cyclical motion.
Chiarella, C. & Kwon, O. 2000, 'A class of Heath-Jarrow-Morton term structure models with stochastic volatility', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 34 Abstract: A Class of Heath-Jarrow-Morton Term Structure Models with Stochastic Volatility Abstract: This paper considers a class of Heath-Jarrow-Morton term structure models with stochastic volatility. These models admit transformations to Markovian systems, and consequently lend themselves to well-established solution techniques for the bond and bond option prices. Solutions for certain special cases are obtained, and compared against their non-stochastic counterparts.
Bohm, V. & Chiarella, C. 2000, 'Mean variance preferences, expectations formation, and the dynamics of random asset prices', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 46 Abstract: This paper analyzes the dynamics of a general explicit random price process of finitely many assets in an economy with overlapping generations of heterogeneous consumers forming optimal portfolios, extending the one dimensional investigation of Bohm, Deutscher and Wenzelburger (2000). Consumers maximize expected utility with respect to subjective transition probabilities defined by Markov kernels. Given a forecasting rule (predictor) and an exogeneous stochastic process of producer dividends, the dynamics of the economy is described as a random dynamical system in the sense of Arnold (1998). The paper investigates existence and stability of random fixed points (invariant measures) for mean-variance preferences under various forecasting schemes, including unbiased predictions as well as OLS forecasting. Numerical simulations show the stability and the performance of the different predictors for linear mean-variance preferences. Alternative random dividend processes are provided.
Chiarella, C. & Kwon, O. 2000, 'A complete stochastic volatility model in the HJM framework', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 43 Abstract: This paper considers a stochastic volatility version of the Heath, Jarrow and Morton (1992) term structure model. Market completeness is obtained by adapting the Hobson and Rogers (1998) complete stochastic volatility stock market model to the interest rate setting. Numerical simulation for a special case is used to compare the stochastic volatility model against the traditional Vasicek (1977) model.
Bhar, R. & Chiarella, C. 2000, 'Infering forward looking financial market risk premia from derivatives prices', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 42 Abstract: This paper focuses on a topical and important area of theory and practice ie. The risk premium in financial markets. While there exists a vast amount of research into its behaviour, particularly in US markets, this is largely based on regression based techniques which do not capture well the dynamic and forward looking nature of the risk premium. In this paper the variation of the unobserved risk premium is modelled by a system of stochastic differential equations connected by arbitrage arguments between the spot equity market, the index futures and options on index futures. Although various processes for the dynamic of the risk premium may be considered, we motivate and analyse a mean-reverting form. The diffusion part is specified such that the risk premium remains positive. Since the risk premium is not directly observable, information on it is extracted using an unobserved component state space formulation of the system and filtering methodology. As an initial application of the methodology, the results from daily Australian market data from the SFE over a period of twelve months are presented. The small sample properties of the parameter estimates are also examined by bootstrapping the state space system. It is well known in the filtering literature that the estimation of state space system by Kalman filter is sensitive to the specification of the quantities such as initial state variables and the prior covariance matrix. The paper also carries out approximate sensitivity analysis in this respect.
Bhar, R., Chiarella, C. & Pham, T.M. 2000, 'Modeling the currency forward risk premium: Theory and evidence', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 41 Abstract: There is a huge literature on the existence of risk premia in the foreign exchange markets and its influence in explaining the divergence between the forward exchange rate and the subsequently realised spot exchange rate. In this paper, we seek to model directly the risk premium as a mean-reverting diffusion process. This is done by making use of the spot-forward price relationship and assuming a geometric Brownian process for the spot exchange rate. We are able to obtain a stochastic differential equation system for the spot exchange rate, the forward exchange rate and the risk premium which we estimate using Kalman filtering techniques. The model is then applied to the French Franc/USD and Japanese Yen/USD exchange rates from 1 January 1990 to 31 December 1998. For both currencies our main findings show (I) the persistence of substantial positive time variation in the forward risk premium and its alternating regimes; and (ii) the presence of a term structure of the forward risk premia.
Chiarella, C., Craddock, M.J. & El-Hassan, N. 2000, 'The calibration of stock option pricing models using inverse problem methodology', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 39 Abstract: We analyse the procedure for determining volatility presented by Lagnado and Osher, and explain in some detail where the scheme comes from. We present an alternative scheme which avoids some of the technical complications arising in Lagnado and Osher's approach. An algorithm for solving the resulting equations is given, along with a selection of numerical examples.
Chiarella, C. & He, X. 2000, 'Stability of competitive equilibria with heterogeneous beliefs and learning', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 37 Abstract: The paper studies a class of models in which agents' expectations influence the actual dynamics while the expectations themselves are the outcome of some learning processes. Situations of both homogeneous and heterogeneous beliefs are considered. In both cases agents update their expectations by general ah - and least-squares h-processes and the stability of the resulting dynamics in both cases is analysed. It is shown how the stability of the actual dynamics is affected by the heterogeneous expectations and different least-squares h-processes.
Bhar, R., Chiarella, C., El-Hassan, N. & Zheng, X. 2000, 'The reduction of forward rate dependent volatility HJM models to Markovian form: Pricing European bond option', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 36 Abstract: We consider a single factor Heath-Jarrow-Morton model with a forward rate volatility function depending upon a function of time to maturity, the instantaneous spot rate of interest and a forward rate to a fixed maturity. With this specification the stochastic dynamics determining the prices of interest rate derivatives may be reduced to Markovian form. Furthermore, the evolution of the forward rate curve is completely determined by the two rates specified in the volatility function and it is thus possible to obtain a closed form expression for bond prices. The prices of bond options are determined by a partial differential equation involving two spatial variables. We discuss the evaluation of European bond options in this framework by use of the ADI method.
Chiarella, C. & He, X. 2000, 'Heterogeneous beliefs, risk and learning in a simple asset pricing model with a market maker', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
Research Paper Number: 35
Bhar, R. & Chiarella, C. 2000, 'Approximating Heath-Jarrow-Morton Non-Markovian Term Structure of Interest Rate Models with Markovian Systems'.
We consider a Heath-Jarrow-Morton models for the term structure of interest rates in which the forward rate volatility is a function of the instantaneous spot rate of interest, a set of dicrete forward rates and time to maturity of the bond. We show how the stochastic dynamics may be expressed as a system of Markovian stochastic differential equations. We obtain the partial differential equation which allows the pricing of contingent claims in this framework.
Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2000, 'Output, Financial Markets and Growth'.
In this paper we reconsider a macrodynamic model of Blanchard, which integrates output and stock market dynamics in a fundamental way. We add budget equations (and their implications) to all sectors of the economy, and also capital accumulation and growth (but not yet proper wage-price dynamics) and obtain a model of the real-financial interaction with quite different steady state characteristics as compared to the Blanchard approach. We furthermore allow for somewhat sluggish adjustment of share prices and capital gain expectations in place of perfect substitutes and perfect foresight. This brings our approach closer to completion and also makes it much more involved. Instead of the originally only 2D dynamics we now obtain a 4D dynamical system with two real and two financial variables and specific stability properties. However, by setting certain secondary expressions equal to their trend values, we can regain the mathematical form of the original 2D dynamics of Blanchard type. This form is now based on variables that allow for stationarity, when estimated, that therefore permit to estimate the model to get information about the magnitude of its adjustment speeds, the size of which is crucial for the stability of instability of this dynamical system.
Chiarella, C. & El-Hassan, N. 1999, 'Pricing American Interest Rate Options in a Heath-Jarrow-Morton Framework Using Method of Lines'.
We consider the pricing of American bond options in a Heath-Jarrow-Morton framework in which the forward rate volatility is a function of time to maturity and the instantaneous spot rate of interest. We have shown in Chiarella and El-Hassan (1996) that the resulting pricing partial differential operators are two dimensional in the spatial variables. In this paper we investigate an efficientnumerical method to solve there partial differential equations for American option prices and the corresponding free exercise surface. We consider in particular the method of lines which other investigators (eg Carr and Faguet (1994) and Van der Hoek and Meyer (1997)) have found to be efficient for American option pricing when there is one spatial variable. In extending this method for the two dimensional case, we solve the pricing equation by discretising the time variable and one state varialbe and using the spot rate of interest as a continuous variable. We compare our method with the lattice method of Li, Ritchken and Sankarasubramanian (1995).
Chiarella, C. & Flaschel, P. 1999, 'Towards Applied Disequilibrium Growth Theory: III Basic Partial Feedback Structures and Stability Issues'.
In this paper we consider the 18D case model of applied disequilibrium growth whose extensive and intensive form dynamics we derived in earliier work. Here we analyze in particular the basic partial feedback mechanisms whose interaction drives the dynamics of the overall model. We relate these mechanisms with the names of the economists who originally identified them (usually as isolated mechanisms) e.g., Goodwin, Rose, Keynes, Tobin, Dornbusch and Blanchard. A large part of our analysis is devoted to a study of the factors causing these mechanisms to display stabilizing or destabilizing tendencies. We also discuss some nonlinear mechanisms which may 'tame' the explosive tendencies of the economy in situations of local instability.
Chiarella, C. & Flaschel, P. 1999, 'Towards Applied Disequilibrium Growth Theory: II Intensive Form and Steady State Analysis of the Model'.
In this paper we investigate further the 34D applied structural model whose extensive form we introduced in Chiarella and Flaschel (1999c). Here we express the model in terms of intensive form state variables, thereby abstracting from the underlying growth trend. We explain the dynamic (and static) laws of the model directly in terms of the intensive form variables, and then determine the steady state and its characteristics. Finally we show how a small number of simplifying assumptions, concerning in particular consumption of asset holders and some secondary adjustment processes, reduce the 34D model to an 18D core model. It is this latter core model whose detailed structure, steady state characteristics and dynamical behavior will become the object of study in the remaining papers of this sequence.
Chiarella, C. & Flaschel, P. 1999, 'Towards Applied Disequilibrium Growth Theory: I The Starting Model'.
In this paper we build a hierarchically structured continuous-time model of Keynesian monetary growth. The model is sufficiently rich with respect to markets, sectors and agents and consistent with respect to budget constraints to capture sufficient broad details of actual macroeconomies and so serve as a macrotheoretic basis for many large scale models. We describe the model at the level of national accounts and then derive its extensive form dynamics. We also give detailed discussion as to how our model is related to the large scale Murphy model of the Australian economy. Our model provides a basis for understanding the various economic feedback chains contained in such models and their dynamic interaction.
Chiarella, C. & Flaschel, P. 1999, 'Disequilibrium Growth Theory: Foundations, Synthesis, Perspectives'.
In this paper we survey, also for the general reader interested in the non-market cleaning approach to growth and fluctuations, the foundations, the core model and the general framework underlying our joint work on integrated disequilibrium models of monetary growth, drawing also on joint work with further co-authors in various places. We found the basic working model of this type on appropriately reformulated and extended partial dynamic models already existing in the literature. We then develop the obtained working model further into a theoretical continuous-time disequilibrium growth model of a very general nature. We then show that there are strong relationships between our general model and models currently used for structural macroeconomic model-building and their applications. In this way we want to contribute both to the further development and analysis of full-sized theoretical models of disequilibrium growth and to the theoretical penetration of their modern counterparts in the applied literature. Such development and analysis is based on detailed steady state analyses, on use of theoretical investigations of all important subdynamics that are there involved (in isolation as well as in their interaction) and, on computer simulations based on a variety of modern numerical tools of nonlinear dynamical analysis.
Chiarella, C., Flaschel, P., Groh, G., Köper, C. & Semmler, W. 1999, 'Towards Applied Disequilibrium Growth Theory: VII Intensive Form and Steady State Calculation in the Case of Substitution'.
In this paper we consider the applied structural model of diequilibrium growth that we introduced in a previous paper. In particular we express the model in terms of intensive form variables which turn out to be governed by a set of 39D dynamic equations. We consider the model from the perspective of national accounts and also determine and analyze the model's steady state. The model allows for smooth input and output substitution (via a neoclassical production function) between its three inputs (capital, imported commodities and labor) and two outputs (domestically traded goods and exported commodities).
Chiarella, C., Flaschel, P., Groh, G., Köper, C. & Semmler, W. 1999, 'Towards Applied Disequilibrium Growth Theory: VI Substitution, Money-Holdings, Wealth-Effects and Further Extensions'.
In this paper we present a theoretical disequilibrium growth model of an open economy with a full set of markets and sectors and with heterogeneous agents in the household sector. This model allows, on the one hand, for basic consistency checks, such as fully specified bedget identities and a well-defined steady state refernce path and is therefore carefully specified from the theoretical point of view. On the other hand, the model is already fairly close to applied modern structural model building and thus is rich in descriptive detail. The model exhibits five real and five financial markets. Consumption behavior is formulated by way of the life cycle hypothesis and savings of worker households are allocated to money and short-term bonds, while savings of pure asset holders concern all financial assets considered (equities and long-term bonds, domestic and foreign ones). Firms use three inputs (labor, capital and imports) to produce two outputs (domestic goods and export commodities) by way of a nested CES/CET technology and they produce in a cost-minimizing way subject to a domestic demand constraint, also formulating medium run targets that guide their investment and pricing decision. The government sector is described in a very detailed way, including a variety of taxation schemes in particular and also a debt target according to which taxes are adjusted. We consider sluggishly adjusting wages and prices, coupled with heterogeneous expectations formation, and have on this basis fluctuating rates of capacity utilization on the labor market as well as on the market for goods. Financial markets, finally, are described by delayed adjustment processes towards interest rate parity conditions. The paper itself presents only the extensive form of the model with all of its details and compares it to the Murphy model for the Australian economy and also with the Multimod model, Mark III of the IMF. In subsequent papers we derive the intensive form of ...
Chiarella, C. & El-Hassan, N. 1997, 'A Survey of Models for the Pricing of Interest Rate Derivatives'.
Chiarella, C. & Khomin, A. 1996, 'Learning Dynamics in a Nonlinear Stochastic Model of Exchange Rates'.
This paper considers a version of the Dornbusch model of exchange rate dynamics which allows a nonlinear domestic demand for foreign assets function and imperfect substitutability between domestic and foreign interest bearing assets. Expectations of exchange rate changes are modelled as adaptive with perfect foresight being obtained as a limiting case. For sufficiently rapid speed of adjustment of expectations the model is able to generate cyclical behaviour of the exchange rate and expectations of its change. In the perfect foresight limit the cycles become relaxation cycles. To this underlying model of the fundamentals a white noise "news" process is added. Agents are assumed to attempt to learn about the system dynamics and the link between such learning and exchange rate volatility is studied. Two learning scenarios are considered. In the first scenario economic agents are regarded as a uniformly well-informed group of sophisticated traders. In the second scenario a group of "naive" traders coexist with the sophisticated traders. We find that both learning scenarios lead to increased volatility. However this effect increases in proportion to the weight of the "naive" traders.
Bhar, R. & Chiarella, C. 1996, 'Bootstrap Results From the State Space From Representation of the Heath-Jarrow-Morton Model'.
This paper builds upon the authors' previous work on transformation of the Heath-Jarrow-Morton (HJM) model of the term structure of interest rates to state space form for a fairly general class of volatility specification including stochastic variables. Estimation of this volatility function is at the heart of the identification of the HJM model. The paper develops a bootstrap procedure for the HJM model cast into the non-linear filtering framework to analyse the statistical significance of the estimators. It is shown that not all combinations of the parameters of the volatility function are equally likely. The procedure also reveals distributional properties of the instantaneous spot rate of interest implied by the HJM model.
Bhar, R. & Chiarella, C. 1996, 'Construction of Zero-Coupon Yield Curve From Coupon Bond Yield Using Australian Data'.
This paper briefly surveys the various approaches to modelling the zero coupon yield curve is the starting point for much finance research. The method adopted here for the Australian Treasury bond data is based upon polynomial spline fitting, but with the constraint that the long end of the term structure is stable. This approach has also been successfully applied to the Danish bond market (Tanggaard and Jakobsen (1988)). The forward rate curve then becomes the important input data for the modelling of the term structure of interest rates and pricing of interest rate contingent claims using the Heath-Jarrow-Morton (1992) model.
Chiarella, C. & Flaschel, P. 1995, 'Keynesian Monetary Growth Dynamics: The Missing Prototype'.
Chiarella, C. & Okuguchi, K. 1995, 'A Dynamic Analysis of Cournot Duopoly in Imperfectly Competitive Product and Factor Markets'.
Assuming identical firms, a linear market demand function and a single factor of production, labour, we analyse the existence and stability of a homogeneous Cournot duopoly facing imperfect competition in both product and factor markets. Under the assumption of a fairly general wage function we are able to demonstrate local stability of the unique equilibrium, and global stability under the assumption of a convex reaction function.
Bhar, R. & Chiarella, C. 1995, 'Transformation of Heath-Jarrow-Morton Models to Markovian Systems'.
A class of volatility functions for the forward rate process is considered, which allows the bond price dynamics in the Heath-Jarrow-Morton (HJM) framework to be reduced to a finite dimensional Markovian system. The use of this Markovian system in estimation of parameters of the volatility function via use of the Kalman filter is discussed. Further, the Markovian system allows the link to be drawn between the HJM and the Vasicek/Cox-Ingersoll-Ross (CIR) frameworks for modelling the term structure of interest rates.
Bhar, R. & Chiarella, C. 1995, 'Estimating the Term Structure of Volatility in Futures Yield - A Maximum Likelihood Approach'.
The volatility structure of 90-day bill futures traded on the the Sydney Futures Exchange is analysed within the framework of the Heath-Jarrow-Morton model. The method involves characterisation of the transition probability density function for the forward rate process represented by the stochastic differential equation in the arbitrage-free economy. Maximisation of the likelihood function then results in the estimates of the parameters of the volatility function. The volatility function is also used in a simulation of the preference-free stochastic differential equation for bill prices.
Chiarella, C. 1992, 'The dynamics of speculative behaviour', pp. 101-123.
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A number of recent empirical studies cast some doubt on the random walk theory of asset prices and suggest these display significant transitory components and complex chaotic motion. This paper analyses a model of fundamentalists and chartists which can generate a number of dynamic regimes which are compatible with the recent empirical evidence. &copy; 1992 J.C. Baltzer AG, Scientific Publishing Company.
Chiarella, C. 1992, 'Developments in Nonlinear Economic Dynamics: Past, Present and Future'.
Chiarella, C. 1991, 'The Birth of Limit Cycles in Cournot Oligopoly Models with Time Delays'.
We consider the fate of output in the Cournot oligopoly model when the equilibrium is locally unstable. We discuss types of nonlinearities which may be present to bound the motion and introduce time lags in production and information which may serve as bifurcation parameters. In the case of identical firms we apply the Hopf bifurcation theorem to determine conditions under which limit cycle motion is born.
Chiarella, C. 1991, 'Monetary and Fiscal Policy Under Nonlinear Exchange Rate Dynamics'.
A nonlinear exchange rate model based on the famous Dornbusch (1976) overshhoting model is modified to allow for explicit consideration of the sources of supply and demand in the foreign exchange market along the lines suggested by Kouri (1983). Imperfect substitutability between domestic and foreign assets and finite speed of adjustment are intorduced into the foreign exchnage market. Portfolio considerations dictate that the function describing the fraction of wealth domestic residents desire to hold in foreign assets be nonlinear. The exchange rate dynamics are governed by a set of nonlinear differential equations which exhibit limit cycle behaviour under perfect foresight. A number of fiscal and monetary policies are examined within the framework of the nonlinear model and compared with results with results obtained in the traditional linear mode of analysis.
Chiarella, C., Pham, T., Sim, A.B. & Tan, M. 1991, 'The Interaction of the Financing and Investment Decisions: Preliminary Results in the Australian Context'.
In this paper we report preliminary empirical results on the issue of the interaction of the investment and financing decisions in the Australian context. The investigation was implemented on a sample ranging from 144 to 221 firms for the period from 1980/85. Strong support for the hypothesis that investments and dividends are competing uses of funds, implying presence of interaction, is found for two (1983/84, 1984/85) of the five years under study. Work is in train to extend the sample period from five to ten years in order to obtain a reasonable persepctive of the distribution of support/non-support for the link between the investment and financing decisions.
Chiarella, C. & Khomin, A., 'Adaptive Rational Expectations in Models of Monetary Dynamics'.
Chiarella, C. & Flaschel, P., 'Applying Disequilibrium Growth Theory: Debt Effects and Debt Deflation'.
In this paper, we consider two polar dynamical models in which firms use debt (loans) to finance their investment expenditure: a three-dimensional supply-driven model and a sophisticated 20-D Keynesian growth model. In the first, firms' debt accumulations interact with the income distribution and resulting capital-stock and employment-growth patterns. In the second, a high-dimensional model, we have sluggishly adjusting prices and quantities, Keynesian demand rationing, and fluctuating capacity utilization for both labor and capital -- with all budget equations specified and a balanced-growth reference path. These polar growth perspectives are brought together in an intermediate 4-D dynamics, where the debt accumulation of the simple model is combined with the possibility of the deflationary processes of the general model. This intermediate case allows the formulation and investigation, both analytically and numerically, of situations of debt deflation in a demand-constrained setup that augments the insights obtained from the simple model and illustrates an important destabilizing feedback chain in the general 20-D dynamics.
CHEANG, G.E.R.A.L.D.H.L., CHIARELLA, C.A.R.L. & ZIOGAS, A.N.D.R.E.W., 'THE VALUATION OF AMERICAN EXCHANGE OPTIONS UNDER'.
Margrabe provides a pricing formula for an exchange option where the distributions of both stock prices are log-normal with correlated components. Merton has provided a formula for the price of a European call option on a single stock where the stock price process contains a compound Poisson jump component, in addition to a continuous log-normally distributed component. We use Merton's analysis to extend Margrabe's results to the case of exchange options where both stock price processes also contain compound Poisson jump components. We show that there is a change in the distribution of the jump components in the equivalent martingale measure when jumps are present in the num&acute;eraire process. In the case of the American version of such options, the price is shown to be the solution of a free boundary problem. We solve this problem using a modification of McKean's incomplete Fourier transform method due to Jamshidian. The resulting integral equation for the early exercise boundary is solved numerically. We compare the numerical integration solution with a method of lines approach
Asada, T., Chiarella, C., Flaschel, P. & Franke, R., 'Interacting Two-Country Business Fluctuations'.
In this paper we investigate the closed-economy Keynes-Wicksell-Goodwin model of Chiarella and Flaschel (2000) for the case of two interacting open economies. We introduce these coupled two-country KWG dynamics on the extensive form level by means of a subdivision into nine modules describing the behavioral equations, the laws of motion and the identities or budget equations of the model. We then derive their intensive form representation and the 10 laws of motion of the model on the basis of certain simplifying assumptions. Thereafter we present the uniquely determined steady state solution of the dynamics and discuss in a mathematically informal way its stability properties, concerning asymptotic stability and loss of stability by way of super- or subcritical Hopf-bifurcations. In a final section we explore numerically a variety of situations of interacting real and financial cycles, where the steady state is locally repelling, but where the overall dynamics are bounded in an economically meaningful domain by means of a kinked money wage Phillips curve, exhibiting downward rigidity of the money-wage, coupled with upward flexibility of the usual type.
Charpe, M., Chiarella, C., Flaschel, P. & Proaño, C., 'Business Confidence and Macroeconomic Dynamics in a Nonlinear Two-Country Framework with Aggregate Opinion Dynamics'.
The main objective of the present paper is to investigate explicitly the role of the state of confidence for the macroeconomic dynamics of two interacting economies using the opinion dy- namics approach by Weidlich and Haag (1983) and Lux (1995). Particularly, the overall state of confidence in the world (two-country) economy plays not only for the dynamics of the nominal ex- change rate but also for the dynamics of the real economy through the determination of aggregate investment. This novel feature allows us to consider far richer international macroeconomic inter- actions than most standard models. Further, it features wage-price dynamics that interact with output and employment fluctuations &#8211; leading to a Goodwin (1967)-type of distributive cycle &#8211;, as well as debt dynamics due to a credit-financed investment behavior. The resulting framework is both advanced as well as flexible enough to generate various types of persistent fluctuations, and also complex dynamics.