Economic Darwinism

Minsky Model: Initial Thoughts

Posted in Financial Models, Krugman, Minsky by Economic Darwinism on June 15, 2009

For a while now, Paul Krugman has been tinkering with a model to simulate a Minsky moment. See, for example,

This sounds like a fun project, so I think I’ll do some brainstorming and see what happens. Comments welcome.

Finite Equity Market

One aspect I’d like to incorporate that is motivated by my experience at large asset management firms is to model the equity market as finite. Most models assume the market is infinite so that you can purchase and sell as much of any security as you like. In practice, we have size constraints. For example, when you own 10% of the outstanding market cap of any security, you cannot sell it without moving the market. Modeling a finite market will introduce liquidity. This will be important for modeling a Minsky moment.

Positions can be expressed as a fraction of the outstanding market cap.

Continuous Leverage

I think we should model agents with continuous leverage, i.e. the amount of leverage is inversely proportional to market volatility.

L \propto \frac{1}{\sigma}

This is motivated by both theory and recent experience. Clients expect stable or increasing returns. However, returns are commensurate with risk. Prior to the crisis, we were experiencing a period of decreasing market volatility with corresponding decreasing returns. To maintain high (and unsustainable) returns, investors began to increase leverage. This is also consistent with bank’s capital requirement being determined by value-at-risk (VaR).

Debt Market

To be continued…


One Response

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  1. Muqeem said, on December 29, 2009 at 8:32 am

    Creationist and Darwinists

    Can any body tell me? Who has made the perfect, mathematical and complex laws of Physics, laws of Chemistry and laws of biology , complex reproductive system in human and animal and plants ?. Scientists are only discovering these laws and in through obeying these law making some imperfect or semi perfect things. Yet the scientists have discovered a tiny part of the Creator’s innovative world. 99% yet to be explored. Keeping in view only a stupid or illogical persons can deny the perfect, and the wise Creator.

    The Darwin has proposed a theory not fact . His tautology could not be proved by any undoubtedly/real true scientific evidence/fact. After studying 10,000 fossils, Harun Yahya (click here to explore) a Turkish biologist has challenged all Darwinists of the world to produce a single intermediate fossil, he will pay US$100 billion . He has proved that every species appeared in perfect shape and disappeared and new specie appeared in perfect shape. No incomplete bird can survive and incomplete eye can see. A half build eye and half build wing cannot see and cannot fly.

    Survival of the fittest? Why love existence? Why a mother dies for her child?, Why A perfect family system of Honey bee functions?. Why Peacock beautiful colors appeared?. Darwinists have failed miserably to explain the facts of creation. So fact of existence of creator of a perfect, very beautiful and complex creation is just like Sun on the sky but blind cannot see.

    Click to watch video : Death of Darwinism and Win of Creationists

    Click to watch video : Fossil Record Prove Creationism

    Click to watch Video : Collapse to Ethism

    Click to Watch video : Disasters Darwinism Brought to Humanity

    Indeed Creation and ordering of the universe is seen as an act of prime mercy for which all creatures sing God’s glories and bear witness to God’s unity and lordship. According to the Islamic teachings, God exists without a place. According to the Qur’an, “No vision can grasp Him, but His grasp is over all vision. God is above all comprehension, yet is acquainted with all things” (Qur’an 6:103)

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