Modeling the Interconnections between the Financial System and the Real Economy using the Principles of Statistical Mechanics
Romanian version
Project type: CNCSIS PNIIRUPD 583/2010, 20102012
Project team:
Abstract
The research project aims to conduct a deeper investigation of the interconnections between the financial system and the real economy, by developing, for the first time in the literature, a model that captures the insights of the theory of reflexivity about the influence of stock prices on fundamentals.
The motivation of the research project resides in the belief that the standard approach, based on the representative agent paradigm, is misguided, and that a fundamentally different approach, based on statistical physics, is necessary to analyze the interconnections between the financial system and the real economy.
The real economy and the financial markets are modeled as complex systems of interacting heterogeneous agents using tools drawn from statistical physics, mathematics, biology, economics and other social sciences. More specifically, we employ the stochastic dynamic aggregation techniques. Also the notion of equilibrium needs to be reconsidered.
The final objective of the research project consists in modeling the interconnections between the stock price and the fundamentals using the following the transmission mechanism: the stock prices affect the mood (i.e. confidence) of the economic agents, the mood of economic agents affect the aggregate level of consumption and investment, and, therefore, the aggregate level of output and the level of profit per share, which is the fundamental variable that influences the stock price. The model that will be developed in this research project will have a major impact on theoretical level and will have direct policy implications, providing decisionmakers with refined instruments for analyzing the interconnections between fundamentals, the confidence of economic agents and the stock market.
Completed objectives
2010
 Building a modeling framework based on principles of statistical mechanics to analyze the interactions between different categories of heterogeneous economic agents
2011
 Building a framework for analyzing the interconnections between the financial system and real economy using stockflow consistent models
 Modeling the dynamics of confidence
2012
 Modeling asset price dynamics in the context of the framework
 Modeling the interconnections between the asset price and fundamentals
Selected publications
 Necula C. and AN Radu, (2012), Quantifying the recapitalization fund premium using option pricing techniques, Economics Letters, 114, 3, 249251
 Necula C. (2012), A Framework for Analyzing the Reflexive Relationship Between Stock Prices and Fundamentals, Procedia  Social and Behavioral Sciences, 62, 377–381
 Necula, C. and AN. Radu, (2012), Long Memory in Eastern European Financial Markets, Economic Research (Ekonomska istrazivanja), 25, 2, 361  378
 Necula C., (2010), Modeling the Dependency Structure of Stock Index Returns using a Copula Function Approach, Romanian Journal of Economic Forecasting, 13, 3, 96106
 Necula C. and AN Radu, (2012), The Dependency Structure of Stock Market Returns in Central and Eastern European Countries, in Socol C. (ed), Emerging macroeconomics. Case studies  Central and Eastern Europe, Nova Science, New York
 Necula C. and AN Radu, (2011), The Distribution of EUR/RON Returns In A General Equilibrium Model With Jumps
 Radu AN, C. Necula and A Trifan, (2011), The Dynamics of Bank Assets Volatility in Central and Eastern European Countries


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