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Theoretical Economics and the Second-Order Economic Theory. What is it?

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  • Victor Olkhov

Abstract

The economic and financial variables of economic agents determine macroeconomic variables. Current models consider agents' variables that are determined by the sums of values and volumes of agents' trades during some time interval {\Delta}. We call them first-order economic variables. We describe how the volatilities and correlations of market trade values and volumes determine price volatility. We argue that such a link requests consideration of agents' economic variables of the second order that are composed of sums of squares of agents' transactions during {\Delta}. Almost any variable of the first order should be complemented by its second-order pair. Respectively, the sums of agents' second-order variables introduce macroeconomic variables of the second order. The description of the first- and second-order macroeconomic variables establishes the subject of second-order economic theory. We highlight that the complexity of second-order economic theory essentially restricts any hopes for precise predictions of price probability and, at best, could provide estimates of price volatility. That limits the predictions of price probability to Gauss's approximations only.

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  • Victor Olkhov, 2021. "Theoretical Economics and the Second-Order Economic Theory. What is it?," Papers 2112.04566, arXiv.org, revised Mar 2024.
    • Handle: RePEc:arx:papers:2112.04566
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    Cited by:

    1. Olkhov, Victor, 2023. "Economic Theory as Successive Approximations of Statistical Moments," MPRA Paper 118722, University Library of Munich, Germany.
    2. Victor Olkhov, 2022. "Market-Based Asset Price Probability," Papers 2205.07256, arXiv.org, revised Feb 2024.
    3. Olkhov, Victor, 2022. "Introduction of the Market-Based Price Autocorrelation," MPRA Paper 112003, University Library of Munich, Germany.
    4. Victor Olkhov, 2023. "Economic Complexity Limits Accuracy of Price Probability Predictions by Gaussian Distributions," Papers 2309.02447, arXiv.org, revised Apr 2024.
    5. Olkhov, Victor, 2022. "Price and Payoff Autocorrelations in the Consumption-Based Asset Pricing Model," MPRA Paper 112255, University Library of Munich, Germany.
    6. Olkhov, Victor, 2023. "The Market-Based Probability of Stock Returns," MPRA Paper 116234, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • C0 - Mathematical and Quantitative Methods - - General
    • E0 - Macroeconomics and Monetary Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G0 - Financial Economics - - General

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