Dresden 2017 – scientific programme

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SOE: Fachverband Physik sozio-ökonomischer Systeme

SOE 5: YSA Award Session: Young Scientist Award for Socio- and Econophysics 2017

SOE 5.1: Invited Talk

Monday, March 20, 2017, 15:00–15:45, HSZ 01

Complexity in Economics and Finance — •Cees Diks — University of Amsterdam, CeNDEF

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