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Technical
Papers
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This is
where the more technical special interest articles are kept.
Please feel free to download and view at your leisure.
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Over the odds: Information-based rescaling in subjective probability and prospect theory
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The psychological basis of subjective probability is often identified with the odds at which agents will gamble. The same framework can be used in cumulative prospect theory to derive ‘weighting functions’ for outcomes that differ from the natural distribution in assigning additional weight to exceptionally good or bad outcomes. Rescaling is itself a form of measure change analogous to that used in derivatives pricing. The measure change is based on locational entropy, which cumulates the tail behaviour of the log odds function. Implications for risk management are considered. |
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Information, measure shifts and distribution metrics
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Reflexive shifting of a given distribution, using its own distribution function, can reveal information. The shifts are changes in measure such that the separation of the resulting left and right unit shifted distributions reveals the binary entropy of position, called locational or partition entropy. This can be used for spread and asymmetry functions. Alternatively, summary metrics for distributional asymmetry and spread can be based on the relative strengths of left and right hand shifts. Such metrics are applicable even for long tail densities where distributional moments may not exist. |
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Contingency and collapse in credit default swap networks
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Credit insurance via credit default swaps should theoretically improve market efficiency and lower the cost of capital by allowing credit risks to be shared by a wider market. In practice, apparent risk sharing led to a faster collapse: the subprime crisis and consequential credit crisis. By modelling the counterparty system as a two dimensional network, the matrix representation can be used to identify points of weakness for counterparty survival and hence the survival of principals who have bought credit protection. Useful analogies exist with input output economics and econometrics. Counterparty portfolios that are collinear or concentrated are an implicit exposure to apparently unrelated parties, predisposing the system to contagious collapse. Policy implications for credit rating agencies and regulators are explored. |
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An econometric theory of performance bureaucracy
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Performance bureaucracies are organizational structures that arise in response to internally or externally derived metrics for mission or goal attainment, often associated with public sector accountability. Measurement and certification are key drivers of the internal political process. This becomes counterproductive when goal setting is exposed to hidden or latent variables reflecting incomplete information or coalface disaffection, so that managerial controls are metrically insufficient. An econometric framework is developed that draws on the semiotics in common use by performance oriented management regimes. Nash cooperative budget solutions among managers lead to overinvestment in measurement and control, the problem of the commons, and adverse performance outcomes. |
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