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Finance, risk and economic space

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  • Olkhov, Victor

Abstract

This paper presents new approach to financial modeling and forecasting that is based on economic space notion. Economic space is defined as generalization of risk ratings and allows boost methods and description of financial processes. Risk ratings of economic agents are treated as coordinates of economic agents on economic space. Economic and financial variables of separate economic agents determine macroeconomic and financial variables as functions of time and coordinates on economic space. That permits describe financial relations similar to mathematical physics equations. Financial models can be described on discreet and continuous economic spaces with dimension determined by number of major risks measured simultaneously. To show advantages of economic space usage to financial modeling we present extension of Black-Scholes-Merton equation on n-dimensional economic space; develop macroeconomic models on economic space in a way similar to hydrodynamics and derive financial wave equations.

Suggested Citation

  • Olkhov, Victor, 2016. "Finance, risk and economic space," MPRA Paper 87172, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:87172
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Merton, Robert C, 1998. "Applications of Option-Pricing Theory: Twenty-Five Years Later," American Economic Review, American Economic Association, vol. 88(3), pages 323-349, June.
    3. Masahisa Fujita, 2010. "The Evolution Of Spatial Economics: From Thünen To The New Economic Geography," The Japanese Economic Review, Japanese Economic Association, vol. 61(1), pages 1-32, March.
    4. François Perroux, 1950. "Economic Space: Theory and Applications," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 64(1), pages 89-104.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Citations

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    Cited by:

    1. Olkhov, Victor, 2018. "Expectations, Price Fluctuations and Lorenz Attractor," MPRA Paper 89105, University Library of Munich, Germany.
    2. Olkhov, Victor, 2019. "New Essentials of Economic Theory," MPRA Paper 95065, University Library of Munich, Germany.
    3. Olkhov, Victor, 2020. "Price, Volatility and the Second-Order Economic Theory," MPRA Paper 102767, University Library of Munich, Germany.
    4. Victor Olkhov, 2018. "Econophysics Beyond General Equilibrium: the Business Cycle Model," Papers 1804.04721, arXiv.org.
    5. Olkhov, Victor, 2020. "Classical Option Pricing and Some Steps Further," MPRA Paper 105431, University Library of Munich, Germany, revised 28 Dec 2020.
    6. Olkhov, Victor, 2018. "Economic Transactions Govern Business Cycles," MPRA Paper 87207, University Library of Munich, Germany.
    7. Olkhov, Victor, 2022. "Why Economic Theories and Policies Fail? Unnoticed Variables and Overlooked Economics," MPRA Paper 114187, University Library of Munich, Germany.
    8. Victor Olkhov, 2017. "Econophysics of Macro-Finance: Local Multi-fluid Models and Surface-like Waves of Financial Variables," Papers 1706.01748, arXiv.org.
    9. Victor Olkhov, 2018. "How Macro Transactions Describe the Evolution and Fluctuation of Financial Variables," IJFS, MDPI, vol. 6(2), pages 1-19, March.
    10. Olkhov, Victor, 2019. "New Essentials of Economic Theory I. Assumptions, Economic Space and Variables," MPRA Paper 93085, University Library of Munich, Germany.
    11. Olkhov, Victor, 2019. "New essentials of economic theory II. Economic transactions, expectations and asset pricing," MPRA Paper 93428, University Library of Munich, Germany.
    12. Olkhov, Victor, 2017. "Quantitative Description of Financial Transactions and Risks," MPRA Paper 87316, University Library of Munich, Germany.
    13. Olkhov, Victor, 2019. "New Essentials of Economic Theory III. Economic Applications," MPRA Paper 94053, University Library of Munich, Germany.
    14. Olkhov, Victor, 2019. "Econophysics of Asset Price, Return and Multiple Expectations," MPRA Paper 91587, University Library of Munich, Germany.
    15. Olkhov, Victor, 2016. "On Hidden Problems of Option Pricing," MPRA Paper 87173, University Library of Munich, Germany.
    16. Olkhov, Victor, 2022. "Introduction of the Market-Based Price Autocorrelation," MPRA Paper 112003, University Library of Munich, Germany.
    17. Olkhov, Victor, 2022. "Economic Policy - the Forth Dimension of the Economic Theory," MPRA Paper 112685, University Library of Munich, Germany.
    18. Olkhov, Victor, 2018. "The Business Cycle Model Beyond General Equilibrium," MPRA Paper 87204, University Library of Munich, Germany.
    19. Olkhov, Victor, 2017. "Quantitative wave model of macro-finance," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 143-150.
    20. Victor Olkhov, 2017. "Econophysics Macroeconomic Model," Papers 1701.06625, arXiv.org.
    21. Olkhov, Victor, 2018. "Economic and Financial Transactions Govern Business Cycles," MPRA Paper 93269, University Library of Munich, Germany.
    22. Olkhov, Victor, 2019. "Methods of Economic Theory: Variables, Transactions and Expectations as Functions of Risks," MPRA Paper 95628, University Library of Munich, Germany.
    23. Victor Olkhov, 2017. "Econophysics of Business Cycles: Aggregate Economic Fluctuations, Mean Risks and Mean Square Risks," Papers 1709.00282, arXiv.org.
    24. Victor Olkhov, 2019. "Financial Variables, Market Transactions, and Expectations as Functions of Risk," IJFS, MDPI, vol. 7(4), pages 1-27, November.
    25. Victor Olkhov, 2017. "Non-Local Macroeconomic Transactions and Credits-Loans Surface-Like Waves," Papers 1706.07758, arXiv.org.

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    More about this item

    Keywords

    risk ratings; economic space; option pricing; financial wave equations;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G1 - Financial Economics - - General Financial Markets

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