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Econophysics of Macro-Finance: Local Multi-fluid Models and Surface-like Waves of Financial Variables

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  • Victor Olkhov

Abstract

This paper models macro financial variables alike to financial fluids with local interactions and describes surface-like waves of Investment and Profits. We regard macro-finance as ensemble of economic agents and use their risk ratings as coordinates on economic space. Aggregations of agent's financial variables with risk coordinates x on economic space define macro financial variables as function of x. We describe evolution and interactions between macro financial variables alike to financial fluids by hydrodynamic-like equations. Minimum and maximum risk grades define most secure and most risky agents respectively. That determines borders of macro-finance domain that is filled by economic agents. Perturbations of agent's risk coordinates near risk borders of macro domain cause disturbances of macro financial variables like Investment and Profits. Such disturbances can generate waves that propagate along risk borders. These waves may exponentially amplify perturbations inside of macro domain and impact financial sustainability. We study simple model Investment and Profits and describe linear approximation of steady state distributions of Investment and Profits on macro-finance domain that fulfill dreams of Investors: "more risks-more Profits". We describe Investment and Profits waves on risk border of economic space alike to surface waves in fluids. We present simple examples that specify waves as possible origin of time fluctuations of macro financial variables. Description of possible steady state distributions of macro financial variables and financial risk waves on economic space could help for better policy-making and managing sustainable macro-finance.

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  • Victor Olkhov, 2017. "Econophysics of Macro-Finance: Local Multi-fluid Models and Surface-like Waves of Financial Variables," Papers 1706.01748, arXiv.org.
    • Handle: RePEc:arx:papers:1706.01748
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    References listed on IDEAS

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    1. Masahisa Fujita, 2010. "The Evolution Of Spatial Economics: From Thünen To The New Economic Geography," The Japanese Economic Review, Japanese Economic Association, vol. 61(1), pages 1-32, March.
    2. Starr,Ross M., 2011. "General Equilibrium Theory," Cambridge Books, Cambridge University Press, number 9780521826457, September.
    3. Brunnermeier, Markus & Sannikov, Yuliy, 2016. "Macro, Money and Finance: A Continuous Time Approach," CEPR Discussion Papers 11329, C.E.P.R. Discussion Papers.
    4. Brunnermeier, M.K. & Sannikov, Y., 2016. "Macro, Money, and Finance," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1497-1545, Elsevier.
    5. Olkhov, Victor, 2016. "On Economic Space notion," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 372-381.
    6. François Perroux, 1950. "Economic Space: Theory and Applications," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 64(1), pages 89-104.
    7. Victor Olkhov, 2017. "Econophysics Macroeconomic Model," Papers 1701.06625, arXiv.org.
    8. Victor Olkhov, 2017. "Econophysics of Macroeconomics: "Action-at-a-Distance" and Waves," Papers 1702.02763, arXiv.org.
    9. Starr,Ross M., 2011. "General Equilibrium Theory," Cambridge Books, Cambridge University Press, number 9780521533867, September.
    10. Olkhov, Victor, 2017. "Quantitative wave model of macro-finance," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 143-150.
    11. Olkhov, Victor, 2016. "Finance, risk and economic space," MPRA Paper 87172, University Library of Munich, Germany.
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    Cited by:

    1. Victor Olkhov, 2017. "Econophysics of Business Cycles: Aggregate Economic Fluctuations, Mean Risks and Mean Square Risks," Papers 1709.00282, arXiv.org.

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