economics

The Information Superhighway Becomes International

Jerry Sheehan — Wed, 03 Sep 2008 09:27:09 -0700

Description

Prior to the last decade most data networks were routed through the United States. It was not uncommon for traffic from one European country to find itself being hauled to the US prior to being delivered to an EU neighbor.
However, we are clearly witnessing a major transition in this position as the exceptional pace of the development of international high speed network creation quickens.

This growth has been fueled by a number of factors. First, nations have begun to look at high speed networking as a necessary infrastructure for economic growth. A number of futurists have argued that today's networks are as importance economically as the sea routes and roads of yesterday.[1] Second, a number of countries in a post-911 world began to become concerned that American intelligence agencies might be "easedropping" on their data communications for either political or economic gain.[2] This de facto collaboration between American telecommunications companies and federal agencies is now an accepted fact.[3]

The globalization of the world's information infrastructure was a natural consequence of the increased adoption of the Internet throughout the world. One of the interesting challenges for the American marketplace is the development of methods to capitalize on the increasing percentage of international traffic coming to US web sites. The Wall Street Journal has reported that most major US sites not draw more then half their audience from international visitors but only generate 5% of their revenue from this traffic.[4]

This data infrastructure globalization will also likely lead to an increase in "dark" budgets used by intelligence agencies for electronic surveillance. J. McConnel, Director of National Intelligence for the United States, has revealed in the course of investigation of the Bush Administration's wireless wiretapping program that the US domestically wiretaps thousand of international calls.[5] As these communications move overseas the US will need to expend more effort and technological prowess to keep up.

Computer & Information Science

Source

1] "Can Optic Cables Predict Economic Shifts?", Om Malik, BusinessWeek, August 18, 2008
[2] "Internet Traffic Begins to Bypass the U.S.", John Markoff, New York Times, August 29, 2008, http://www.nytimes.com/2008/08/30/business/30pipes.html
[3] "Verizon and Government Seek Dismissal of Data-Mining Programs on Secrecy and Free Speech Grounds", Ryan Singel, Wired, August 30, 2007, http://blog.wired.com/27bstroke6/2007/08/verizon-and-gov.html#previouspost
[4]"U.S. Web Sites Draw Traffic From Abroad But Few Ads", Emily Steel and Amol Sharma, Wall Street Journal, July 10, 2008, http://online.wsj.com/article/SB121563492172840249.html?mod=googlenews_wsj
[5]"Spy Chief Sheds Light on Wiretaps", Greg Miller, Los Angeles Times, August 23, 2007, http://articles.latimes.com/2007/aug/23/nation/na-intel23

The growth of econophysics programs

Alex Soojung-Kim Pang — Tue, 08 Apr 2008 13:04:16 -0700

Description

There are numerous programs in financial engineering, blending physics, finance, and computer science. More recently, several universities, particularly outside the United States, have started programs in "econophysics." The Institute of Theoretical Physics at the University of Wrocław started an econophysics program in 2002 (http://dx.doi.org/10.1016/j.physa.2004.06.146). St. Petersburg State University has a small center on econophysics. The physics departments of the University of Buenos Aires, in Argentina, and the University of Silesia, in Poland, have concentrations in econophysics (http://www.nld.df.uba.ar/ and http://uranos.cto.us.edu.pl/~ekonofiz/englsiat.htm). In the United States, University of Houston's physics department started a Ph.D. program in econophysics in 2006 (http://www.phys.uh.edu/econophysics.htm).

It's too early to tell whether the term econophysics will emerge as a competitor to financial engineering; it certainly suggests a greater range of ambition, and a purer merger of physics and economics.

Physics & Space Science

Source

http://dx.doi.org/10.1016/j.physa.2004.06.146
http://www.nld.df.uba.ar/
http://uranos.cto.us.edu.pl/~ekonofiz/englsiat.htm
http://www.phys.uh.edu/econophysics.htm

Hedge funds: new cool places for basic science?

Alex Soojung-Kim Pang — Mon, 07 Apr 2008 23:04:23 -0700

Description

A friend who is a research director at a hedge fund recently told me that good research departments of financial institutions are like universities were thirty years ago: they reward innovative thinking and risk, and are more interested in big, disruptive ideas than in incremental advances in established technique.

This dovetails with a recent Alpha article on efforts by hedge funds to develop ever-more complex tools to understand (and profit from) markets. Some of this work draws on econophysics, but researchers are looking to a variety of other fields as well:

They are pressing into new realms of computational finance, applying concepts from molecular physics, mathematical linguistics, artificial intelligence and other scientific disciplines. Thales, for example, is using computer simulations to replicate human behavior to try to predict the myriad decisions that drive trading activity. Other firms are pinning their hopes on machine learning — statistical methods that allow computers to identify relationships in financial data and make predictions from them. But regardless of the approach, managers agree that quant funds have been far too focused on equities and need to find ways to apply their strategies to a broader range of asset classes....

Sanford Grossman, president and CEO of Greenwich-based quantitative hedge fund firm QFS Investment Management, notes that the quant connection with academia has led to the widespread sharing of ideas. "Instead of inventing things themselves from scratch, many firms are reading academic papers, talking with academics and coming up with strategies that for some reason work in a long historical simulation," says Grossman, who continued to teach finance at the University of Pennsylvania’s Wharton School for more than a decade after founding QFS in 1988. "And then they do it. They don’t really know why it works."

Indeed, some funds engage in more basic research on markets:

Although Thales focuses most of its effort on improving current trading systems and strategies, [founder and CEO Marek] Fludzinski says the firm devotes as much as 20 percent of its resources to finding a unifying theory of markets. Like physics, he says, finance lends itself to mathematical models based on observations. Through experiments that replicate what they see in the natural world, physicists have described its underlying principles.

Thales is taking a similar approach with finance, using computers to model so-called agent simulations of thousands of traders. In one experiment Thales created a simulation with 10,000 traders, each owning the same portfolio of 15 stocks. After hearing news about one of these stocks, half of the simulated traders might buy it and the other half might sell. Fludzinski says such computer models help explain why a stock typically trades higher than average for a few days after a positive earnings announcement and then trades lower before returning to normal. By modeling such herding behavior, he hopes to better understand how securities prices move in relation to one another.

This kind of research hasn't received a lot of attention in conventional academic programs. There are a handful of physics programs that now have specializations in econophysics, and the Santa Fe Institute was an early center of work applying agent-based modeling and complexity theory to markets, but economics departments have been pretty resistant to econophysics. It will be interesting to see if financial institutions-- or the finance world more generally-- manages to develop the 21st century successors of corporate R&D labs like those started by GE and AT&T in the 20th.

Source

http://www.alphamagazine.com/Article.aspx?ArticleID=1897101

Stock price jumps: news and volume play a minor role

Matt Daniels — Thu, 13 Mar 2008 14:32:11 -0700

NOTE: This content was aggregated from RSS feed. Original source is http://arxiv.org/abs/0803.1769

In order to understand the origin of stock price jumps, we cross-correlate
high-frequency time series of stock returns with different news feeds. We find
that neither idiosyncratic news nor market wide news can explain the frequency
and amplitude of price jumps. We find that the volatility patterns around jumps
and around news are quite different: jumps are followed by increased
volatility, whereas news tend on average to be followed by lower volatility
levels. The shape of the volatility relaxation is also markedly different in
the two cases. Finally, we provide direct evidence that large transaction
volumes are_not_ responsible for large price jumps. We conjecture that most
price jumps are induced by order flow fluctuations close to the point of
vanishing liquidity.

Why youth hostel showers are like the stock market

Alex Soojung-Kim Pang — Sun, 10 Feb 2008 21:00:00 -0800

NOTE: This content was aggregated from RSS feed. Original source is http://www.eurekalert.org/pub_releases/2008-02/uob-wyh021108.php

From EurekAlert:

Diversity keeps you warm. At least that is true while you're having a shower in youth hostels. If you like, this sums up the research project just published by scientists from the Universities of Fribourg and Bonn. Their result is not as trivial as it sounds. Ultimately it shows that heterogeneity provides stability, whether this is in a shower, in power grids or even on the stock market.

Having a shower in a youth hostel can be risky when there is not enough hot water for everybody. If only one visitor turns up the hot tap during the early morning shower, everyone else is threatened by an icy gush of water. This unwanted form of hydrotherapy is particularly likely to happen when all the shower taps have the same possible settings, in other words if cold and hot water can be adjusted to exactly the same amount in all showers. But if the water taps in each shower have their individual quirks, the risk of extreme fluctuations is less.

At least that is what the Bonn economist Christina Matzke and her colleague Damien Challet, a physicist at the University of Fribourg, say. They modelled the temperature profile of showers in a youth hostel on the computer. 'All in all, heterogeneous taps offer advantages – they prevent the average shower temperature of all guests from suddenly dropping or rising,' Christina Matzke explains. 'From the perspective of the individual they also have disadvantages, as it’s more difficult for each person to set the right temperature.'

The problem sounds comical, but in principle it can be applied to all situations where people compete for a scarce resource, whether this is hot water, electricity or equities. One thing is always true, the more individualistic the behaviour of those involved in the market is, the more stable the whole system becomes. Put simply, the only reason why our electricity grid does not break down is that not all the inhabitants of Germany switch on the tumble drier at the same time. And if all shareholders made strictly rational decisions on their investments, there would probably be a lot more turbulence on the stock market.

Economics as if Nature Mattered

Alex Soojung-Kim Pang — Tue, 23 Oct 2007 11:10:30 -0700

Description

Crisis and pragmatism could encourage more economists to account for ecological costs and to rethink the role of natural systems in understanding markets and growth.

Neoclassical welfare economics has placed little value on the services provided by ecosystems. Ecological economics, on the other hand, understands the economy as a subsystem within the larger global ecosystem. New evidence of the pressure being placed on the Earth's resources, and political action aimed at mitigating the impact of human activity on the environment, is likely to force the "dismal science" to broaden its worldview to encompass ecological concerns. As more economists rethink the role of natural systems in understanding markets and growth, a fundamental shift may take place in mainstream economic thought, which largely sees the economy as a self-contained system.

Implications:
* Increasing use of the triple bottom line as the new metric for corporate success
* Increasing demand for scientist-economists

Early Indicators:
* Convocation of the Kyoto Summit on Global Climate Change and adoption of the resulting protocols by many nations
* Acknowledgment of the importance of environmental concerns to economic thought in the G8 2005 agenda
* California’s air pollution control, coordinates air policy in metropolitan districts since 1947
* The US NSF's funding of 5 centers to examine climate change policy decision-making processes 'in the face of irreducible uncertainty'
* Increasing drive toward zero-footprint corporations (for example, Interface Rugs)
* The Economist's devotion of its April 23, 2005, cover story to environmental economics

What to Watch:
* NSF directs funding toward development of an environmental economics.
* New journals on environmental economics are founded in the next decade.

Parallels/Precedents:
* Adoption of any heterodox idea into economics over the last 50 years

Enablers/drivers:
* Improvements in environmental and ecological accounting techniques
* Continuing development of technologies to remotely sense environmental data
* Increasing evidence of the economic impact of global warming
* Advent of business partnerships with environmental activists
* Continuing development of climate modeling tools and economic modeling tools
* Engagement of the field of conservation biology with economic policy and urban planning to maximize productivity of ecological services

Signals

Mobile Phones and Economic Growth in the Developing World

Alex Soojung-Kim Pang — Tue, 23 Oct 2007 11:10:30 -0700

Description

Mobile phones have the potential to spur economic growth, especially entrepreneurial business, in the Developing World.

Since 1979 the mobile phone has played a significant role in economic development in the West. However, the poorest countries of the global south are only now beginning to experience significant diffusion of mobile phone services. The potential for mobile phones to transform the economies of developing nations is exemplified by the Grameen Phone Company of Bangladesh, which has used micro-credit financing to rapidly and widely deploy a network of shared mobile phones rented by individual village entrepreneurs.

Over the next two decades, mobile telephone networks will reshape the African continent as countries that never had extensive telephone networks leap-frog into the wireless age. One recent study claims that a 10 percent increase in mobile phone density boosts GDP growth by 0.6 percent. Africa currently has just 8 mobile lines per 100 persons, but this has increased from just 3 per 100 in 2001. Over the next two decades, mobile phone networks may blossom in countries that never had extensive fixed-line networks. Thus will these countries "leap-frog" into the wireless age."

This will be enabled by:

Early indicators include:

"According to a New York Times article, from 1999 to 2004 mobile subscriptions in Africa jumped from 7.5 million to 76.8 million. [http://www.nytimes.com/2005/08/25/international/africa/25africa.html?%20ei=5088&en=cad54d043ab15f30&ex=1282622400&partner=rssny]
Vodafone releases a report arguing for the benefits of mobile telephony in Africa, linking it to GDP growth and foreign investment. [http://www.vodafone.com/africa]"

What to watch:

The selling of cell phone minutes through SMS as a form of micro-lending.

Signals

R&D Outsourcing and the Economics of Innovation

Alex Soojung-Kim Pang — Tue, 23 Oct 2007 11:10:30 -0700

Description

A shift in R&D processes from "ivory tower" models to global networks of contractors and alliances could have a significant impact on the economics of innovation.

During most of the 20th century, the usual site for innovation in science and technology was the academic laboratory or the corporate research park. MIT's Lincoln Labs, Bell Laboratories, and Xerox PARC are notable examples of such laboratories. In the 1980s and 1990s, there was a marked shift to regional innovation clusters, Silicon Valley in California and Cambridge, England, emerged as two of the global leaders. While large research organisations continued to exist in this new milieu of innovation, they were seen as less competitive. Firms like Cisco Systems, which shunned internal R and instead acquired innovative start-ups, were better able to maintain a competitive edge.

Over the next 20 years, the geography of R may shift again, from regional clusters in the developed world to global networks with large outsourced operations in the developing world. India and China, in particular, will provide large pools of highly skilled workers at 25% to 50% of the cost of their counterparts in the West and Japan. The Indian government estimates that outsourced R in India currently generates about $1 billion annually; this is projected to rise to $11 billion by 2008, mostly in software. China's manufacturing capacity gives it a natural advantage in computer hardware R Both nations also have the long-term potential for large-scale work in pharmaceuticals and biotechnology.

The trend towards sourcing R off-shore may change the economic significance of sourcing services off-shore generally. Up to now, the practice has tended to free up capital and labour in developing countries and provided resources for the creation of new, higher value-added enterprises. However, some of the R jobs that may be outsourced are among the most highly prised.

Serious obstacles still remain, in particular, quality control and the protection of intellectual property. Furthermore, for the near future R outsourcing will be limited to 'modular innovation', namely incremental improvements in existing lines of research. Radical, breakthrough innovation will continue to be the domain of regional clusters in developed countries."

This will be enabled by:

Continued expansion of high-capacity global undersea fiber optic networks
Acceptance of English as the global business language
Continued development of domestic venture capital sources for export-oriented services firms
Increasingly widespread use of Voice over Internet Protocol (VoIP)
Development of global intellectual property standards and enforcement

Early indicators include:

China is now the 2nd largest global cluster of researchers in the world 2004 (2nd only to the US)
Increase in the number of offshoring deals announced by Fortune 500 firms
Growth of services export clusters in India
Departure of Professor Andrew Yao from Princeton in 2004 for a position with the Center for Advanced Study at Tsinghua University

What to watch:

"By 2017, 3.3 million U.S. service industry jobs, including 1 million IT service jobs and $136 billion in wages, have moved offshore.
Outsourced R in India grows to $11 billion by 2008.
The first instance of a WIPO dispute over stolen intellectual property at a Chinese R outsourcing firm occurs.
The Turing Award is given for the first time to a researcher in a Chinese or Indian research lab.
Fortune 500 firms initiate major downsizing at their US/European R labs."

Signals

Offshoring of White-Collar Work Drives Globalization

Alex Soojung-Kim Pang — Tue, 23 Oct 2007 11:10:30 -0700

Description

The next wave of global trade may be driven by a trend towards sourcing off-shore services and information-processing tasks that can be delivered electronically.

The first modern wave of globalisation, which drove economic growth during the 1990s, was largely based on deindustrialization in developed countries, and the re-location of manufacturing to Asia. China is today what Manchester was in the 18th century – the world's workshop. Advanced telecommunications systems allow close coupling of supply and demand into a single global system of production. While this phenomenon will continue to contribute to future growth, there are limits to its impact in the next 50 years – much of the potential has already been exploited.

However, the massive telecommunications capacity deployed in the 1990s is enabling a second wave of globalisation, but in service and information industries rather than manufacturing. To date, the two sectors most heavily affected have been software development and telephone-based customer service operations such as airline reservations. Over the next 20 years, firms in Western countries will begin to off-shore information analysis tasks to take advantage of wages that are 1/5 to 1/4 of their Western counterparts.

This trend may produce negative political backlash in the developed economies, which may experience significant labour market shocks, similar to those that affected its blue-collar workforce during deindustrialisation. For example, there are approximately 500,000 call-centre jobs in Britain alone that may be at risk in the next 20 years. However, off-shoring is a very successful strategy for global firms to increase their competitive edge through cost savings and many of these lost jobs will be replaced with new more highly-skilled positions. (Economist, 2004)

Implications:

Early Indicators:

What to Watch:

Parallels/Precedents:

Enablers/drivers:
* Global bandwidth glut, continued spread of English as dominant global business language, regulatory reform in India
* According to a major survey of economists' predicitions for the 21st century, approximately 90 percent predicted that globalization would proceed at least as fast as it did during the 1990s. Furthermore, half expect globalization to proceed at a faster rate than in the 1990s. (Pryor, 2000)

Signals

More Accurate Modeling of Complex Economic Systems

Alex Soojung-Kim Pang — Tue, 23 Oct 2007 11:10:30 -0700

Description

Advances in simulation tools and behavioural analysis may facilitate innovation in economic research methods.

Within 10 to 20 years, agent-based modelling may facilitate a significant improvement in the scope and utility of economic models. Accurate simulations could potentially give economists new confidence in their conclusions. The difference this could make to economics can be compared with the impact of structural engineering on building. In the past, people designed buildings by intuition, experience, and guesswork. Today novel structures can be built with confidence because we have theories of structures and materials and we can model buildings with computers before they are built. Agent-based modelling could have a similar impact on economics.

Two factors are driving change in economics: accessibility of computational power and the adoption of behaviourist approaches. The (increasing) accessibility of computational power permits the accurate and rapid modelling of complex economies. The availability of computational power may, for a new generation of researchers, facilitate a shift in economics from deductive formalism to an applied mathematical approach based on simulations. In addition, the fundamental simplifying assumptions underlying current economic theory (greed, rationality, and equilibrium) are tending now to be replaced by new insights from behavioural studies of economic actors (firms, consumers, etc.) Drawing upon psychological experiments, behavioural approaches to economics may provide a far more accurate model of economic behaviour, revealing how variations in behaviour contribute to complexity in economic systems.

The impact of behavioural approaches to economic theory and computer power combined, may provoke a widespread shift in economic research methods from rational-actor models towards large simulations of complex economies inhabited by behaviourally-sophisticated agents. Cheap grid computing power will allow massive experiments that will begin to explain many of the seemingly random everyday trends in complex economic systems like the financial markets and international trade.

Implications:
* Ability to explore a far wider range of public policy alternatives than previously
* Creation of large new areas of inquiry for economists
* Potential fo expansion of economic theories and analytical techniques in other social sciences

Early Indicators:
* Awarding of recent Nobel prizes that lay the foundation for doctoral student interest behavioural economics
* Increase in the number of doctoral dissertations having to do with agent-based modeling techniques, and increase in the funding of research taking these approaches
* Work by a consortium of universities in a project known as NEW-TIES -- New and Emergent World models Through Individual, Evolutionary, and Social Learning -- on developing a large-scale and highly complex computer-based society as a means to understand social learning and behaviour

What to Watch:
* Faculty research in economics reflects increasing interest in agent-based models and behavioural analysis.
* Graduate economics curricula change to encompass agent-based models and behavioural analysis.
* Results from behavioural/ABM analysis are increasingly used in policy debates.

Parallels/Precedents:
* Complexity revolution in the "hard" sciences -- physics, biology, and computing

Enablers/Drivers:
* Increasing availability of cheap desktop computational power
* Continued development of high-level programming languages for building models
* Continuing or expanding support for interdisciplinary work between economists and computer scientists, mathematicians, and psychologists
* Neurotechnology for gathering data about emotional state of experimental subjects

Signals

Data Mining for Effective Decision Making

Alex Soojung-Kim Pang — Tue, 23 Oct 2007 11:10:30 -0700

Description

Mathematical tools for discovering patterns in large databases, along with stochastic modeling, could contribute to better decision making in a range of fields.

Technologies are increasingly available for collecting and storing massive amounts of data, whether about the movement of the equity markets, drug treatment outcomes, or changing air quality. Mathematical techniques will increasingly enable mining of this data to provide a basis for making effective decisions.

In the financial world, for example, large quantities of high-frequency data need to be processed effectively and efficiently so that opportunities can be quickly identified and acted upon 24 hours a day, 7 days a week. Rapid implementation of new mathematical models and algorithms, along with an expanding computing infrastructure, has the potential to meet this need. Statistical pattern recognition could be used to identify arbitrage opportunities and improve speculative trading. Integration of techniques from mathematical finance and insurance could lead to new products: catastrophe bonds, futures, and options; equity-linked life insurance; credit risk derivatives; and mortgage-backed securities. More financial decision making could be automated and made more effective by superior models, analytical tools, and processing systems.

Advances in data mining are also likely to be made in the areas such as national security and crime detection. Advances will possibly come from the development of human-machine-synergistic methods, designed to maximize the different abilities of people and machines. This will require collaborative work between mathematicians and computer scientists and psychologists, in many ways parallel to the existing collaborations between mathematicians and computers scientists and biologists and chemists on projects such as genome mapping and pharmacological research."

This will be enabled by:

"Effective testing of mathematical models in real-world environments
Growth of grid computing
Development of massive distributed storage devices
Continued development of stochastic algorithms, data-mining and knowledge discovery algorithms, and modeling languages"

Early indicators include:

Current application of transaction analysis for fraud detection and product recommendation systems over large data sets

What to watch:

"Data-mining techniques are applied to massive collections of environmental sensor data to find causal relationships between industrial pollutants and global warming.
Data mining is applied increasingly to the massive amount of data associated with health care, concerning patients, procedures, and drug treatment outcomes.
Mathematicians and physicists are hired at an increasing rate by investment banks and traders."

Signals

Improved Health Care for Underdeveloped Regions

Alex Soojung-Kim Pang — Tue, 23 Oct 2007 11:10:30 -0700

Description

Advances in technology and medicine, as well as the expiration of patents on medicine, promise to significantly improve health care in previously underserved regions.

The convergence of widespread health care research (and the ensuing knowledge) with the expiration of patents on medicines and medical devices, could make quality health care much more widely available in underdeveloped regions.

The developed world has been providing structured funding for 50+ years to address the unique health care challenges faced in poor regions (such as sanitation and nutrition). While these have contributed to significant progress in life expectancy within these regions, economic disincentives have prevented investment in research to address developing world diseases. Now many medical discoveries from the mid-20th century onward are coming into the public domain as patents expire and developing nations with drug industries (South Korea, Israel, India, and China) are waiting in the wings to manufacture generic versions of biologics (that is, follow-on biologics).

Furthermore, as information technology is likely to play a growing role in health care in developing nations, these nations are likely to benefit from the enormous number of health care applications now becoming freely available as 'open source'.

While these developments alone are unlikely to be sufficient, these, coupled with growing economies, improving educational systems and political priorities, could bring significant benefits to healthcare and life-expectancy in some of the poorest parts of the world."

This will be enabled by:

Upcoming expiration of the patents of some early biotech discoveries
Development of creative approaches to intellectual property that help to create domestic industries for generic drugs (such as India's policy of allowing process patents for drugs that are product patented elsewhere)

Early indicators include:

"Dr. Peter Lansbury's testing of more than 1,000 drugs on which the patent has expired for their treatment effects on Parkinson's Disease (Harvard Medical School)
India's increasing production of pharmaceuticals, making it the fourth largest producer worldwide, according to the World Health Organization"

What to watch:

"Foundation grants, together with the support of the UN and Western donor nations, enable development of inexpensive medicines for widespread illnesses.
Developing nations collaborate to create a complete drug development industry, from basic research through preclinical and clinical development to generic and new drug production.