Emeritus Professor Carl Chiarella

Chiarella, C., Flaschel, P. & Semmler, W. 2012, Reconstructing Keynesian Macroeconomics Volume 1: Partial Perspectives, 1st, Routledge, USA.
View/Download from: UTSePress
View description>>

This book represents the first of three volumes offering a complete reinterpretation and restructuring of Keynesian macroeconomics and a detailed investigation of the disequilibrium adjustment processes characterizing the financial, the goods and the labour markets and their interaction. It questions in a radical way the evolution of Keynesian macroeconomics after World War II and focuses on the limitations of the traditional Keynesian approach until it fell apart in the early 1970s, as well as the inadequacy of the new consensus in macroeconomics that emerged from the Monetarist critique of Keynesianism. Professors Chiarella, Flaschel and Semmler investigate basic methodological issues, the pitfalls of the Rational Expectations School, important feedback channels in the tradition of Tobin+s work, and theories of the wage-price spiral and the evidences for them. The book uses primarily partial approaches, the integration of which will be the subject of subsequent volumes. With its focus on Keynesian propagation mechanisms, the research in this book provides a unique alternative to the black-box shock-absorber approaches that dominate modern macroeconomics. Reconstructing Keynesian Macroeconomics should be of interest to students and researchers who want to look at alternatives to the mainstream macrodynamics that emerged from the Monetarist critique of Keynesianism.

Charpe, M., Chiarella, C., Flaschel, P. & Semmler, W. 2011, Financial Assets, Debt and Liquidity Crises: A Keynesian Approach, 1st, Cambridge University Press, US.
View/Download from: UTSePress
View description>>

The macroeconomic development of most major industrial economies is characterised by boom-bust cycles. Normally such boom-bust cycles are driven by specific sectors of the economy. In the financial meltdown of the years 2007-2009 it was the credit sector and the real-estate sector that were the main driving forces. This book takes on the challenge of interpreting and modelling this meltdown. In doing so it revives the traditional Keynesian approach to the financial-real economy interaction and the business cycle, extending it in several important ways. In particular, it adopts the Keynesian view of a hierarchy of markets and introduces a detailed financial sector into the traditional Keynesian framework. The approach of the book goes beyond the currently dominant paradigm based on the representative agent, market clearing and rational economic agents. Instead it proposes an economy populated with heterogeneous, rationally bounded agents attempting to cope with disequilibria in various markets.

Asada, T., Chiarella, C., Flaschel, P. & Franke, R. 2010, Monetary Macrodynamics, 1st, Routledge, USA.
View/Download from: UTSePress
View description>>

This book investigates the interaction of effective goods demand with the wage-price spiral, and the impact of monetary policy on financial and the real markets from a Keynesian perspective. Endogenous business fluctuations are studied in the context of long-run distributive cycles in an advanced, rigorously formulated and quantitative setup. The material is developed by way of self-contained chapters on three levels of generality, an advanced textbook level, a research-oriented applied level and on a third level that shows how the interaction of real with financial markets has to be modelled from a truly integrative Keynesian perspective.

Bischi, G., Chiarella, C., Kopel, M.O. & Szidarovsky, F. 2010, Nonlinear Oligopolies: Stability and Bifurcations, 1st, Springer, Heidelberg, Germany.
View/Download from: UTSePress | Publisher's site
View description>>

The book focuses on the dynamics of nonlinear oligopoly models. It discusses the classical Cournot model with a large variety of demand and cost functions that illustrate the many different types of possible best response functions and it shows the existence of unique and multiple equilibria. Particular emphasis is placed on the influence of nonnegativity and capacity constraints. Dynamics are introduced under various assumptions for the adjustment process. An introduction to the analysis of global dynamics is given through some specific examples. The book also considers concave and general oligopolies and gives conditions for the local asymptotic stability of their equilibria, and it investigates global dynamics in some special cases. Other oligopolies examined include market share attraction games, labor-managed oligopolies, partially cooperating firms and models with intertemporal demand attraction. Local/global stability analyses are carried out for these models and the impact of constraints is discussed. The book contains a number of technical appendices that summarize techniques of global dynamics not easily accessible elsewhere.

Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2009, Financial Markets and the Macroeconomy: A Keynesian Perspective, 1, Routledge, USA.
View/Download from: UTSePress
View description>>

The financial instability and its spillover to the real sector have become a great challenge to macro-economic theory. The book takes a Keynesian theoretical perspective, representing an attempt to revive what Keynes stressed in his General Theory, namely the role of the financial market in macroeconomic outcomes. Although this book is inspired and motivated by the Asian currency and financial crises in the years 1997-8 and the experiences of the currently evolving U.S. financial disruptions, it also focuses on reviving a modeling tradition that provides a theoretical framework that throws light on recent financial market episodes and disturbances and their macroeconomic effects. It brings to the forefront, as Keynes has suggested, the role of financial market stability for growth and macroeconomics. It criticizes theories that see economic disruptions and shocks rooted solely in the real side of the economy. It stresses the financial real interaction as the major source for macroeconomic instability and disruptions. This important new book from a group of Keynesian, but nonetheless technically oriented economists would be of most interest to specialists and graduate students in macroeconomics and financial economics, especially those with an interest in US and European financial markets, emerging market analysis, and dynamic economic modeling

Chiarella, C., Flaschel, P. & Franke, R. 2005, Foundations for a Disequilibrium Theory of the Business Cycle - Qualitative Analysis and Quantitative Assessment, 1, Cambridge University Press, Cambridge, UK.
View/Download from: UTSePress

Asada, T., Chiarella, C., Flaschel, P. & Franke, R. 2003, Open Economy Macrodynamics: An Integrated Disequilibrium Approach, 1, Springer-Verlag, Berlin.
View/Download from: UTSePress

Chiarella, C., Flaschel, P., Groh, G. & Semmler, W. 2000, Disequilibrium, growth and labor market dynamics, Springer-Verlag, Berlin, Germany.

Chiarella, C. & Flaschel, P. 2000, The dynamics of keynesian monetary growth: macrofoundations, Cambridge University Press, Cambridge, UK.

Bohm, V., Chiarella, C., He, X. & Huls, T. 2013, 'A homoclinic route to volatility: Dynamics of asset prices under autoregressive forecasting' in Gian Italo Bischi, Carl Chiarella and Iryna Sushko (eds), Global analysis of dynamic models in economics and finance: Essays in honour of Laura Gardini, Springer, Germany, pp. 289-316.

Chiarella, C. & Di Guilmi, C. 2013, 'A reconsideration of the formal Minskyan analysis: Microfoundations, endogenous money and the public sector' in Gian Italo Bischi, Carl Chiarella and Iryna Sushko (eds), Global analysis of dynamic models in economics and finance: Essays in honour of Laura Gardini, Springer, Germany, pp. 63-81.

Chiarella, C., Chi-Fai Lo, E. & Huang, M. 2013, 'Credit portfolio correlations with dynamic leverage ratios' in Daniel R÷sch and Harald Scheule (eds), Credit Securitisations and Derivatives: Challenges for the Global Markets, Wiley, Australia, pp. 71-94.

Chiarella, C., Flaschel, P. & Semmler, W. 2013, 'Keynes, the dynamic stochastic general equilibrium model, and the business cycle' in Ryuzo Kuroki (ed), Keynes and Modern Economics, Routledge, New York, USA, pp. 85-116.

Cheang, G.H. & Chiarella, C. 2012, 'A modern view on Merton's jump-diffusion model' in Samuel N Cohen, Dilip Madan, Tak Kuen Siu and Hailiang Yang (eds), Advances in Statistics, Probability and Actuarial Science: Stochastic Processes, Finance and Control, World Scientific, USA, pp. 217-234.

Chiarella, C., Dieci, R. & He, X. 2010, 'A framework for CAPM with heterogeneous beliefs' in Bischi, GI; Chiarella, C; Gardini, L (eds), Nonlinear Dynamics in Economics, Finance and the Social Sciences: Essays in Honour of John Barkley Rosser Jr, Springer, US, pp. 353-369.
View/Download from: UTSePress
View description>>

The Sharpe~Lintnel~Mossin (Sharpe 1964; Lintner 1965; Mossin 1966) Capital Assel Pricing Model (CAPM) plays a central role in modern finance theory. It is founded on the paradigm of humogeneous beliefs and a rational representarive agent. However, from a theoretical perspective this paradigm has been criticized on a number of grounds, in particular concerning liS: extreme assumptions about homoge~ neous beliefs, information about the economic envlronment, and the computational ability on the part of the ratIonal representative economic agent

Chiarella, C., Ziogas, A. & Ziveyi, J. 2010, 'Representation of American option prices under Heston stochastic volatility dynamics using integral transforms' in Chiarella, C; Novikov, A (eds), Contemporary Quantitative Finance: Essays in Honour of Eckhard Platen, Springer, Germany, pp. 281-315.
View/Download from: UTSePress | Publisher's site
View description>>

We consider the evaluation of American options on dividend paying stocks in the case where the underlying asset price evolves according to Heston+s stochastic volatility model in (Heston, Rev. Financ. Stud. 6:327+343, 1993). We solve the Kolmogorov partial differential equation associated with the driving stochastic processes using a combination of Fourier and Laplace transforms and so obtain the joint transition probability density function for the underlying processes. We then use this expression in applying Duhamel+s principle to obtain the expression for an American call option price, which depends upon an unknown early exercise surface. By evaluating the pricing equation along the free surface boundary, we obtain the corresponding integral equation for the early exercise surface.

Chiarella, C., Dieci, R. & He, X. 2009, 'Heterogeneity, market mechanisms and asset price dynamics' in Hens, T; Schenk-Hoppe, KR (eds), Handbook of Financial Markets: Dynamics and Evolution, Elsevier, USA, pp. 277-344.
View/Download from: UTSePress

Chiarella, C. & He, X. 2008, 'An adaptive model of asset price and wealth dynamics in a market with heterogeneous trading strategies' in Seese, D; Weinhardt, C; Schlottmann, F (eds), Handbook on Information Technology in Finance, Springer, Germany, pp. 465-499.
View/Download from: UTSePress | Publisher's site
View description>>

The traditional asset-pricing models + such as the capital asset pricing model (CAPM) of [42] and [34], the arbitrage pricing theory (APT) of [40], or the intertemporal capital asset pricing model (ICAPM) of [38] + have as one of their important assumptions, investor homogeneity. In particular the paradigm of the representative agent assumes that all agents are homogeneous with regard to their preferences, their expectations and their investment strategies.1 However, as already argued by Keynes in the 1930s, agents do not have sufficient knowledge of the structure of the economy to form correct mathematical expectations that would be held by all agents

Chiarella, C., Meyer, G. & Ziogas, A. 2008, 'Pricing American Options Under Stochastic Volatility and Jump-Diffusion Dynamics' in Muller, K; Steffens, U (eds), Die Zukunft der Finanzdienstleistungs-industrie in Deutschland, Frankfurt School Verlag, Frankfurt, Germany, pp. 213-236.
View/Download from: UTSePress

Chiarella, C., El-Hassan, N. & Kucera, A. 2008, 'The evaluation of discrete barrier options in a path integral framework' in Kontoghiorghes, E; Rustem, B; Winker, P (eds), Computational Methods in Financial Engineering: Essays in Honour of Manfred Gilli, Springer, Germany, pp. 117-144.
View/Download from: UTSePress | Publisher's site
View description>>

The pricing of discretely monitored barrier options is a difficult problem. In general, there is no known closed form solution for pricing such options. A path integral approach to the evaluation of barrier options is developed. This leads to a backward recursion functional equation linking the pricing functions at successive barrier points. This functional equation is solved by expanding the pricing functions in Fourier-Hermite series. The backward recursion functional equation then becomes the backward recurrence relation for the coefficients in the Fourier-Hermite expansion of the pricing functions. A very efficient and accurate method for generating the pricing function at any barrier point is thus obtained. A number of numerical experiments with the method are performed in order to gain some understanding of the nature of convergence. Results for various volatility values and different numbers of basis functions in the Fourier-Hermite expansion are presented. Comparisons are given between pricing of discrete barrier option in the path integral framework and by use of finite difference methods.

Asada, T., Chiarella, C., Flaschel, P. & Franke, R. 2007, 'Interacting Two-Country Business Fluctuations: Euroland and the USA' in Mazzi, G; Savio, G (eds), Growth and Cycle in the Eurozone, Palgrave Macmillan, New York, USA, pp. 109-118.
View/Download from: UTSePress
View description>>

This book presents recent theoretical and empirical advances on business cycles analysis with particular attention to Euro-zone characteristics. It also identifies applications of sophisticated tools by private and public institutions involved in the analysis of economic fluctuations and seeks to increase interaction between the academics, researchers and institutions in the area of business cycle analysis. This volume encompasses methodological advances in several important areas for business cycle analysis, such as multivariate statistical methods, synchronization and convergence, composite indicators, turning points dating and detection, output gap measurement, as well as innovative applications of the existing theories and methods to the economy of the Euro-zone.

Asada, T., Chen, P., Chiarella, C. & Flaschel, P. 2006, 'AD-AS and the Phillips curve: a baseline disequilibrium model' in Chiarella, C; Franke, R; Flaschel, P; Semmler, W (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 173-227.
View/Download from: UTSePress

Chen, P., Chiarella, C., Flaschel, P. & Semmler, W. 2006, 'Keynesian macrodynamics and the Phillip curve: an estimated model for the US economy' in Chiarella, C; Franke, R; Flaschel, P; Semmler, W (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 229-284.
View/Download from: UTSePress

Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2006, 'A high-dimensional model of real-financial market interaction: the cascade of stable matrices approach' in Chiarella, C; Franke, R; Flaschel, P; Semmler, W (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 359-384.
View/Download from: UTSePress

Chiarella, C., Flaschel, P., He, X. & Hung, H. 2006, 'A stochastic model of real-financial interaction with boundedly rational heterogeneous agents' in Chiarella, C; Franke, R; Flaschel, P; Semmler, W (eds), Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Elsevier, Amsterdam, Netherlands, pp. 333-358.
View/Download from: UTSePress

Chiarella, C., He, X. & Wang, D. 2006, 'Statistical properties of a heterogeneous asset pricing model with time-varying second moment' in Namatame, A; Kaizouji, T; Aruka, Y (eds), The Complex Networks of Economic Interactions: essays in agent-based economics & econophysics, Springer, Berlin, Germany, pp. 109-123.
View/Download from: UTSePress

Chiarella, C. & He, X. 2005, 'An asset pricing model with adaptive heterogeneous agents and wealth effects' in Lux, T; Reitz S; Samanidou E (eds), Nonlinear Dynamics and Heterogeneous Interacting Agents, Springer, Berlin, Germany, pp. 269-285.
View/Download from: UTSePress | Publisher's site
View description>>

The characterisation of agents' preferences by decreasing absolute risk aversion (DARA) and constant relative risk aversion (CRRA) are well documented in the literature and also supported in both empirical and experimental studies. This paper considers a financial market with heterogeneous agents having power utility functions, which are the only utility functions displaying both DARA and CRRA. By introducing a population weighted average wealth measure, we develop an adaptive model to characterise asset price dynamics as well as the evolution of population proportions and wealth dynamics. Some numerical simulations are included to illustrate the evolution of the wealth dynamics, market behaviour and market efficiency within the framework of heterogeneous agents.

Chiarella, C., Dieci, R. & Gardini, L. 2005, 'Asset price dynamics and diversification with heterogeneous agents' in Lux, T; Reitz S; Samanidou E (eds), Nonlinear Dynamics and Heterogeneous Interacting Agents, Springer, Berlin, Germany, pp. 251-267.
View/Download from: UTSePress | Publisher's site
View description>>

A discrete-time dynamic model of a financial market is developed, where two types of agents, fundamentalists and chartists, allocate their wealth between two risky assets and a safe asset, according to one-period mean-variance maximization. The two groups of agents form different expectations about asset returns and their variance/covariance structure, and this results in different demand functions. At the end of each trading period, agents' demands are aggregated by a market maker, who sets the next period prices as functions of the excess demand. The model results in a high-dimensional nonlinear discrete-time dynamical system, which describes the time evolution of prices and agents' beliefs about expected returns, variances and correlation. It is shown that the unique steady state may become unstable through a Hopf-bifurcation and that an attracting limit cycle, or more complex attractors, exist for particular ranges of the key parameters. In particular, the two risky assets may exhibit +coupled+ long-run price fluctuations and time-varying correlation of returns.

Chiarella, C., Dieci, R. & Gardini, L. 2004, 'A dynamical analysis of speculation across two markets.' in Gallegati, M; Kirman, A P; Marsili, M (eds), The Complex Dynamics of Economic Interaction: essays in economics and econophysics, Springer, Heidelberg, pp. 197-212.
View/Download from: UTSePress

Chiarella, C. & He, X. 2004, 'Dynamics of beliefs and learning under AL processes - the homogeneous case.' in Barnett, W; Deissenberg, C; Feichtinger, G (eds), Economic complexity: Non-linear dynamics, multi-agents economics, and learning, Elsevier, Amsterdam, The Netherlands, pp. 363-390.
View/Download from: UTSePress

Chiarella, C., Flaschel, P. & Semmler, W. 2004, 'Real-financial interaction: a reconsideration of the Blanchard model with a state-of-market dependent reaction coefficient.' in Barnett, W; Deissenberg, C; Feichtinger, G (eds), Economic complexity: Non-linear dynamics, multi-agents economies, and learning., Elsevier, Amsterdam, The Netherlands, pp. 31-65.
View/Download from: UTSePress

Bhar, R., Chiarella, C. & Runggaldier, W.J. 2002, 'Estimation in models of the instantaneous short term interest rate by use of a dynamic Bayesian algorithm' in Sandmann K; Schonbucher PJ (eds), Advances in Finance and Stochastics: essays in honour of Dieter Sondermann, Springer-Verlag, Berlin, Germany, pp. 177-195.

Chiarella, C. & Khomin, A. 2002, 'Learning in a generalised Dornbusch model of exchange rate dynamics' in Woodland AD (ed), Economic Theory and International Trade: essays in honour of Murray C Kemp, Edward Elgar Publishing Ltd, Cheltenham, pp. 249-267.

Chiarella, C., Pasquali, S. & Runggaldier, W.J. 2002, 'On Filtering in Markovian Term Structure Models' in Yong J (ed), Recent Developments in Mathematical Finance, World Scientific, Singapore, pp. 139-150.
View/Download from: UTSePress

Chiarella, C. & Szidarovszky, F. 2002, 'The birth of limit cycles in nonlinear oligopolies with continuously distributed information lag' in Dror M; L'Ecuyer P; Szidarovszky F (eds), Modeling Uncertainty - An examination of stochastic theory, methods, and applications, Kluwer Academic Publishers, Boston, pp. 249-268.

Chiarella, C., Szidarovszky, F. & Zhu, P. 2002, 'The interaction of uncertainty and information lags in the Cournot oligopoly model' in Puu T; Sushko I (eds), Oligopoly Dynamics: models and tools, Springer-Verlag, Berlin, Germany, pp. 233-263.

Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2001, 'Output, Financial Markets & Growth. An Extension of the Balnchard Stock-Market Approach' in Friedman R; Knuppel L; Lutkepohl H (eds), Econometric Studies: A Festschrift in Honour of Joachim Frohn, LIT Verlag, Munster, Germany, pp. 159-183.

Chiarella, C., Flaschel, P. & Semmler, W. 2001, 'The Macrodynamics of debt deflation' in Bellofiore R; Ferri P (eds), Financial Fragility and Investment in the Capitalist Economy, Edward Elgar Publishing, Cheltenham, UK, pp. 133-184.

Bhar, R. & Chiarella, C. 2000, 'Analysis of time varying exchange rate risk premia' in C L Dunis (ed), Advances in Quantitative Asset Management, Kluwer Academic Publishers, Norwell, Canada, pp. 255-273.

Chiarella, C., Flaschel, P., Groh, G. & Semmler, W. 2000, 'AS-AD disequilibrium dynamics and economic growth' in E J; Hartl Dockner, R F; Luptacik, M; Sorger, G (eds), Optimization, Dynamics, and Economic Analysis, Physica-Verlag, Heidelberg, Germany, pp. 101-117.

Chiarella, C. & Khomin, A. 2000, 'The dynamic interaction of rational fundamentalists and trend chasing chartists in a monetary economy' in D; Gallegati Deili Gatti, M; Kirman, A P (eds), Interaction and Market Structure: essays on heterogeneity in economics, Springer-Verlag, Berlin, Germany, pp. 151-165.

Chiarella, C. & He, X. 2000, 'The dynamics of the cobweb when producers are risk averse learners' in E J; Hartl Dockner, R F; Luptacik, M; Sorger, G (eds), Optimization, Dynamics, and Economic Analysis, Physica-Verlag, Heidelberg, Germany, pp. 86-100.

Chiarella, C. & Flaschel, P. 2000, 'The emergence of complex dynamics in a naturally nonlinear integrated keynesian model of monetary growth' in W; Chiarella Barnett, C; Keen, S; Marks, R; Schnabl, H (eds), Commerce, Complexity, and Evolution: topics in economics, finance, marketing and management: proceedings of the twelfth international symposium in economic theory and economentrics, Cambridge University Press, Cambridge, UK, pp. 111-145.

Cheang, G.H., Chiarella, C. & Ziogas, A. 2013, 'C', Quantitative Finance, vol. 13, no. 2, pp. 241-253.
View/Download from: Publisher's site
View description>>

This paper considers the problem of pricing American options when the dynamics of the underlying are driven by both stochastic volatility following a square-root process as used by Heston [Rev. Financial Stud., 1993, 6, 327´+¢343], and by a Poisson jump process as introduced by Merton [J. Financial Econ., 1976, 3, 125´+¢144]. Probability arguments are invoked to find a representation of the solution in terms of expectations over the joint distribution of the underlying process. A combination of Fourier transform in the log stock price and Laplace transform in the volatility is then applied to find the transition probability density function of the underlying process. It turns out that the price is given by an integral dependent upon the early exercise surface, for which a corresponding integral equation is obtained. The solution generalizes in an intuitive way the structure of the solution to the corresponding European option pricing problem obtained by Scott [Math. Finance, 1997, 7(4), 413´+¢426], but here in the case of a call option and constant interest rates

Matsumoto, A., Chiarella, C. & Szidarovszky, F. 2013, 'Dynamic monopoly with bounded continuously distributed delay', Chaos, Solitions & Fractals, vol. 47, pp. 66-72.
View/Download from: Publisher's site

Chiarella, C., He, X. & Pellizzari, P. 2012, 'A dynamic analysis of the microstructure of moving average rules in a double auction market', Macroeconomic Dynamics, vol. 16, no. 4, pp. 556-575.
View/Download from: Publisher's site
View description>>

Inspired by the theoretically oriented dynamic analysis of moving average rules in the model of Chiarella, He, and Hommes (CHH) [Journal of Economic Dynamics and Control 30 (2006), 1729-1753], this paper conducts a dynamic analysis of a more realistic microstructure model of continuous double auctions in which the probability of heterogeneous agents trading is determined by the rules of either fundamentalists mean-reverting to the fundamental or chartists choosing moving average rules based on their relative performance. With such a realistic market microstructure, the model is able not only to obtain the results of the CHH model but also to characterize most of the stylized facts including volatility clustering, insignificant autocorrelations (ACs) of returns, and significant slowly decaying ACs of the absolute returns. The results seem to suggest that a comprehensive explanation of several statistical properties of returns is possible in a framework where both behavioral traits and realistic microstructure have a role

Chiarella, C., He, X., Huang, W. & Zheng, H. 2012, 'Estimating behavioural heterogeneity under regime switching', Journal of Economic Behavior & Organization, vol. 83, no. 3, pp. 446-460.
View/Download from: Publisher's site
View description>>

Financial markets are typically characterized by high (low) price level and low (high) volatility during boom (bust) periods, suggesting that price and volatility tend to move together with different market conditions/states. By proposing a simple heterogeneous agent model of fundamentalists and chartists with Markov chain regime-dependent expectations and applying the S&P 500 data from January 2000 to June 2010, we show that the estimation of the model matches well with the boom and bust periods in the US stock market. In addition, we find evidence of time-varying behavioural heterogeneity within-group and that the model exhibits good forecasting accuracy.

Chiarella, C., Flaschel, P., Koper, C., Proano, C. & Semmler, W. 2012, 'Macroeconomic stabilization policies in intrinsically unstable macroeconomies', Studies in NonLinear Dynamics and Econometrics, vol. 16, no. 2, p. art2.
View/Download from: UTSePress | Publisher's site
View description>>

Many monetary and fiscal policy measures have aimed at mitigating the effects of the financial market meltdown that started in the U. S. subprime sector in 2008 and has subsequently spread world wide as a great recession. Slowly some recovery appears to be on the horizon, yet it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of a framework that builds on the ideas of Keynes and Tobin. This framework stresses the fragilities and destabilizing feedback mechanisms that are potential features of all major markets-those for goods, labor, and financial assets. We use a Tobin macroeconomic portfolio approach and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we study what potential labor market, fiscal and monetary policies can have in stabilizing unstable macroeconomies. In order to study this problem we introduce, besides money, long term bonds and equity into the asset market. We in particular propose a countercyclical monetary policy that sells assets in the boom and purchases them in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of the suggested policies. The policies suggested here could help the Fed in its search for an appropriate exit strategy after its massive intervention in the financial market.

Chiarella, C., Flaschel, P., Hartmann, F. & Proa+¦o, C. 2012, 'Stock market booms, endogenous credit creation and the implications of broad and narrow banking for macroeconomic stability', Journal of Economic Behavior and Organization, vol. 83, no. 3, pp. 410-423.
View/Download from: Publisher's site
View description>>

In this paper we study the implications of the present broad banking system for macroeconomic stability. We show that when commercial banks are allowed to trade in financial assets (here equities) as a substitute for traditional lending, the macroeconomic system is likely to be an unstable one. We then consider a narrow banking system defined by a Fisherian 100 percent reserve ratio for checkable deposits and the ban for commercial banks from trading in stocks and other financial assets. Within the stylized theoretical framework set up here, we show that in the second system macroeconomic stability is guaranteed by some weak assumptions on the behavior of economic agents. Moreover, while a sufficient loan supply can be guaranteed in such a framework, the rationale for bank runs can be eliminated, in contrast to what is likely to happen under traditional broad banking. Though narrow banking is an extreme banking system unlikely to be adopted in the short-run, its features highlight the stability and efficiency properties that the separation between commercial and investment banking bring about.

Chiarella, C., Kang, B. & Meyer, G. 2012, 'The evaluation of barrier option prices under stochastic volatility', Computers & Mathematics With Applications, vol. 64, no. 6, pp. 2034-2048.
View/Download from: Publisher's site
View description>>

This paper considers the problem of numerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston (1993)[7]. We develop a method of lines approach to evaluate the price as well as the delta and gamma of the option. The method is able to efficiently handle both continuously monitored and discretely monitored barrier options and can also handle barrier options with early exercise features. In the latter case, we can calculate the early exercise boundary of an American barrier option in both the continuously and discretely monitored cases.

Chiarella, C. & Di Guilmi, C. 2012, 'The fiscal cost of financial instalbility', Studies in NonLinear Dynamics and Econometrics, vol. 16, no. 4, pp. 1-27.
View/Download from: Publisher's site
View description>>

This paper presents an agent based model that investigates the possible outcomes of different fiscal and regulatory policies in a financially fragile economy. We analyse the consequences of the attempt by the government to counteract a downturn when it ignores the debt dynamics as modelled by Fisher and Minsky. In particular, we formulate an educated guess about the burden that the government and the taxpayer must bear when a bubble bursts, and its relationship with the extent of government intervention and the taxation system. We also evaluate the outcomes of possible alternatives or complementary regulatory policies. We model four different scenarios treating separately a tax on profits and a tax on private wealth and, for both of them, we specify two cases depending on whether the financial system is able to autonomously generate liquidity. Therefore, we can assess the effect of endogenous money and endogenous credit on the different stabilization policies.

Giansante, S., Chiarella, C., Sordi, S. & Vercelli, A. 2012, 'Structural contagion and vulnerability to unexpected liquidity shortfalls', Journal of Economic Behavior & Organization, vol. 83, no. 3, pp. 558-569.
View/Download from: Publisher's site
View description>>

This paper assumes that financial fluctuations are the result of the dynamic interaction between liquidity and solvency conditions of individual economic units. The framework is an extention of designed as an heterogeneous agent model which proceeds through discrete time steps within a finite time horizon. The interaction at the micro-level between economic units monitors the spread of contagion and systemic risk, producing interesting complex dynamics. The model is analysed by means of numerical simulations and systemic risk modelling, where local interaction of units is captured and analysed by the bilateral provision of liquidity among units. The behaviour and evolution of economic units are studied for different parameter regimes in order to investigate the relation between units' expectations, liquidity regimes and contagion. Liquidity policy implications are briefly discussed

Asada, T., Chiarella, C., Flaschel, P., Mouakil, T., Proano, C. & Semmler, W. 2011, 'Stock-flow Interactions, Disequilibrium Macroeconomics and the Role of Economic Policy', Journal of Economic Surveys, vol. 25, no. 3, pp. 569-599.
View/Download from: UTSePress | Publisher's site
View description>>

This paper presents the `KMGT+ (Keynes+Metzler+Goodwin+Tobin) portfolio model and studies its stability properties. The approach to macrodynamic modelling taken here extends the KMG model of Chiarella and Flaschel (2000), focusing in particular on the incorporation of financial markets and policy issues. The original KMG model considered three asset markets (equities, bonds and money) but depicted them in a rudimentary way so that they had little influence on the real side of the model. The only financial market influencing the real side of the economy was the money market (via an LM curve theory of interest). Here Tobin+s portfolio choice theory models the demand for each asset in such a way that the total amount of assets that households want to hold equals their net wealth, which is a stock constraint attached to portfolio choice. There is also a flow constraint, that the net amount of assets accumulated (liabilities issued) by one sector must equal its net savings (expenditures). The Tobinian macroeconomic portfolio approach characterizes the potential for financial market instability, focusing on the interconnectedness of all three markets. The paper goes on to study the potential for labour market and fiscal policies to stabilize unstable macroeconomies.

Cheang, G.H. & Chiarella, C. 2011, 'Exchange Options Under Jump-Diffusion Dynamics', Applied Mathematical Finance, vol. 18, no. 3, pp. 245-276.
View/Download from: UTSePress | Publisher's site
View description>>

This article extends the exchange option model of Margrabe, where the distributions of both stock prices are log-normal with correlated Wiener components, to allow the underlying assets to be driven by jump-diffusion processes of the type originally introduced by Merton. We introduce the Radon+Nikody¦m derivative process that induces the change of measure from the market measure to an equivalent martingale measure. The choice of parameters in the Radon+Nikody¦m derivative allows us to price the option under different financial-economic scenarios. We also consider American style exchange options and provide a probabilistic interpretation of the early exercise premium.

Chiarella, C., He, X. & Zheng, M. 2011, 'An analysis of the effect of noise in a heterogeneous agent financial market model', Journal of Economic Dynamics and Control, vol. 35, no. 1, pp. 148-162.
View/Download from: UTSePress | Publisher's site
View description>>

Heterogeneousagentmodels(HAMs)infinanceandeconomicsareoftencharacterised by highdimensionalnonlinearstochasticdifferentialordifferencesystems.Becauseof thecomplexityoftheinteractionbetweenthenonlinearitiesandnoise,acommonly used,oftencalledindirect,approachtothestudyofHAMscombinestheoreticalanalysis of theunderlyingdeterministicskeletonwithnumericalanalysisofthestochastic model.However,itiswellknownthatthisindirectapproachmaynotproperly characterisethenatureofthestochasticmodel.Thispaperaimstotacklethisissueby developingadirectandanalyticalapproachtotheanalysisofastochasticmodelof speculativepricedynamicsinvolvingtwotypesofagents,fundamentalistsand chartists,andthemarketpriceequilibriaofwhichcanbecharacterisedbythe stationarymeasuresofastochasticdynamicalsystem.Usingthestochasticmethodof averagingandstochasticbifurcationtheory,weshowthatthestochasticmodeldisplays behaviourconsistentwiththatoftheunderlyingdeterministicmodelwhenthetimelag in theformationofpricetrendsusedbythechartistsisfarawayfromzero.However, whenthislagapproacheszero,suchconsistencybreaksdown.

Chiarella, C., Dieci, R. & He, X. 2011, 'Do heterogeneous beliefs diversify market risk?', The European Journal of Finance, vol. 17, no. 3, pp. 241-258.
View/Download from: UTSePress | Publisher's site
View description>>

It is believed that diversity is good for our society, but is it good for financial markets? In particular, does the diversity with respect to beliefs among investors reduce the market risk of risky assets? The current paper aims to answer this question.Within the standard mean+variance framework, we introduce heterogeneous beliefs not only in risk preferences and expected payoffs but also in variances/covariances. By aggregating heterogeneous beliefs into a market consensus belief, we obtain capital asset pricing model-like equilibrium price and return relationships under heterogeneous beliefs.We show that the market aggregate behaviour is in principle a weighted average of heterogeneous individual behaviours. The impact of heterogeneity on the market equilibrium price and risk premium is examined in general. In particular, we give a positive answer to the question in the title by considering some special structure in heterogeneous beliefs. In addition, we provide an explanation of Miller+s long-standing hypothesis on the relation between a stock+s risk and the divergence of opinions.

Chiarella, C., Fanelli, V. & Musti, S. 2011, 'Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model', European Journal Of Operational Research, vol. 208, no. 2, pp. 95-108.
View/Download from: UTSePress | Publisher's site
View description>>

In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and credit default swap option price in a probability setting equipped with a subfiltration structure. The Euler+Maruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical scheme for pricing. Finally, the antithetic variable technique is used to reduce the variance of credit default swap option prices.

Chiarella, C., Dieci, R. & He, X. 2011, 'The dynamic behaviour of asset prices in disequilibrium: a survey', International Journal of Behavioural Accounting and Finance, vol. 2, no. 2, pp. 101-139.
View/Download from: UTSePress
View description>>

This article surveys boundedly rational heterogeneous agent (BRHA) models of financial markets. We give particular emphasis to the role of the market clearing mechanism used, the utility function of the investors, the interaction of price and wealth dynamics, and calibration of this class of models. Due to agents+ behavioural features and market noise, the BRHA class of models are both non-linear and stochastic. We show that BRHA models produce both a locally stable fundamental equilibrium corresponding to that of the standard paradigm, as well as instability with a consequent rich range of possible complex behaviours that are analysed by both simulation and deterministic bifurcation analysis. A calibrated model is able to reproduce quite well the stylised facts of financial markets. The BRHA framework seems able to better accommodate market features such as fat tails, volatility clustering, large excursions from the fundamental and bubbles than the standard financial market paradigm.

Chiarella, C. & Di Guilmi, C. 2011, 'The financial instability hypothesis: A stochastic microfoundation framework', Journal of Economic Dynamics and Control, vol. 35, no. 8, pp. 1151-1171.
View/Download from: UTSePress | Publisher's site
View description>>

This paperexaminesthedynamicsoffinancialdistressandinparticularthemechanism of transmissionofshocksfromthefinancialsectortotherealeconomy.Theanalysisis performedbyrepresentingthelinkagesbetweenmicroeconomicfinancialvariablesand the aggregateperformanceoftheeconomybymeansofamicrofoundedmodelwith firms thathaveheterogeneouscapitalstructures.Themodelissolvedbothnumerically and analytically,bymeansofastochasticapproximationthatisabletoreplicatequite well thenumericalsolution.Thesemethodologies,byovercomingtherestrictions imposedbythetraditionalmicrofoundedapproach,enableustoprovidesomeinsights into thestabilizationpolicieswhichmaybeeffectiveinafinanciallyfragilesystem.

Rothig, A. & Chiarella, C. 2011, 'Small Traders in Currency Futures Markets', Journal of Futures Markets, vol. 31, no. 9, pp. 898-913.
View/Download from: UTSePress | Publisher's site
View description>>

This study examines the interrelation between small traders+ open interest and large hedging and speculation in the Canadian dollar, Swiss franc, British pound, and Japanese yen futures markets. The results, based on Granger-causality tests and vector autoregressive models, suggest that small traders+ open interest is closely related to large speculators+ open interest. Small traders and speculators tend to herd, which means that small traders are long [short] when speculators are long [short] as well. Moreover, small traders and speculators are positive feedback traders whereas hedgers are contrarians. Regarding information flows, speculators lead small traders in three of the four currency futures markets. The results therefore suggest that small traders are small speculators who follow the large speculators, indicating that they are less well informed than the large speculators.

Asada, T., Chiarella, C., Flaschel, P., Mouakil, T., Proa+¦o, C. & Semmler, W. 2010, 'Stabilizing an unstable economy: On the choice of proper policy measures', Economics, vol. 3, no. 21, pp. 1-43.
View/Download from: UTSePress
View description>>

In the last months, the world's economies were confronted with the largest economic recession since the Great Depression. The occurrence of a worldwide financial market meltdown as a consequence originally stemming from of the crisis in the US subprime housing sector was only prevented by extraordinary monetary and fiscal policy measures implemented at the international level. Although the world economy seems now to be slowing recovering, it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of Keynesian macro models. Fragilities and destabilizing feedback mechanisms are known to be potential features of all markets+the product markets, the labor market, and the financial markets. In this paper we focus in particular on the financial market. We use a Tobin-like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial market to characterize the potential instability of the financial markets. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we also study how labor market, fiscal and monetary policies can stabilize unstable macroeconomies. Besides other stabilizing policies we in particular propose a countercyclical monetary policy that sells assets in the boom and purchases assets in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of those suggested policies.

Chiarella, C., Hung, H. & Flaschel, P. 2010, 'Keynesian Macrodynamics: Convergence, roads to instability and the emergence of complex business fluctuations', AUCO Czech Economic Review, vol. 4, no. 3, pp. 236-262.
View/Download from: UTSePress
View description>>

We reformulate the traditional AS-AD growth model, with a Taylor policy rule replacing the conventional LM-curve. The essential features of the model are gradually adjusting wages and prices, perfect foresight on current inflation rates and an adaptive revision of the inflationary climate in which the economy is operating. We compare this approach with the New Keynesian approach with staggered price and wage setting and find that whilst both approaches have common components, they have radically different dynamic implications due to the treatment of the forward-looking part of our wage-price spiral. We show that an estimated version of our model implies local asymptotic stability, due to stable interaction of goods market dynamics with the interest rate policy rule of the central bank, and due to a normal working of a real-wage feedback chain. These results are however endangered when there is a global floor to money wage inflation rates, leading in fact to economic breakdown. In this latter case, the return of some money wage flexibility in deep depressions is of help in restoring the viability of the model, thereby avoiding explosive dynamics and the collapse of the economy.

Chiarella, C. & Flaschel, P. 2010, 'Some numerical explorations of the Keynes-Metzler-Goodwin monetary growth model', Indian Economic Review, vol. 45, no. 1, pp. 1-28.
View/Download from: UTSePress
View description>>

We study numerically Keynes-Metzler-Goodwin growth, modelling households, firms and government as interacting across real and financial markets. The model allows for sluggish wage / price adjustment, disequilibrium on the market for goods, equilibrium in asset markets and a dynamic government budget restraint. It is first studied in the presence of its intrinsic nonlinearities. Then we add an extrinsic nonlinearity capturing the institutional feature of downward wage rigidity. The dynamic properties of the resulting nonlinear model are studied via bifurcation diagrams, stability basins, by adding stochastic noise to aggregate demand, and by distributional characteristics of key economic quantities.

Bhar, R. & Chiarella, C. 2009, 'Inference on forward exchange rate risk premium: Reviewing signal extraction methods', International Journal of Monetary Economics and Finance, vol. 2, no. 2, pp. 115-125.
View/Download from: UTSePress | Publisher's site
View description>>

The existence of risk premium is thought to be the reason why forward exchange rate is not an unbiased predictor of future spot exchange rate. In this paper we review two methodologies for inferring this unobserved risk premium based upon signal extraction mechanism. One approach relies on the theory of derivatives pricing that relates historical and risk neutral measures via market price of risk. The other approach specifies the risk premium in the historical measure directly. We compare these two methods in predicting future spot exchange rates and contrast these with that of random walk forecast

Chiarella, C. & Szidarovsky, F. 2009, 'A multiobjective model of oligopolies under uncertainty', CUBO Matematica Educational, vol. 11, no. 2, pp. 107-115.
View/Download from: UTSePress
View description>>

It is assumed that in an n-firm single-product oligopoly without product differentiation the firms face an uncertain price function, which is considered random by the firms. At each time period each firm simultaneously maximizes its expected profit and minimizes the variance of the profit since it wants to receive as high as possible profit with the least possible uncertainty. It is assumed that the best response of each firm is obtained by the weighting method. We show the existence of a unique equilibrium, and investigate the local stability of the equilibrium.

Chiarella, C. & Ziogas, A. 2009, 'American Call Options Under Jump-Diffusion Processes - A Fourier Transform Approach', Applied Mathematical Finance, vol. 16, no. 1, pp. 37-79.
View/Download from: UTSePress | Publisher's site
View description>>

We consider the American option pricing problem in the case where the underlying asset follows a jump-diffusion process. We apply the method of Jamshidian to transform the problem of solving a homogeneous integro-partial differential equation (IPDE) on a region restricted by the early exercise (free) boundary to that of solving an inhomogeneous IPDE on an unrestricted region. We apply the Fourier transform technique to this inhomogeneous IPDE in the case of a call option on a dividend paying underlying to obtain the solution in the form of a pair of linked integral equations for the free boundary and the option price. We also derive new results concerning the limit for the free boundary at expiry. Finally, we present a numerical algorithm for the solution of the linked integral equation system for the American call price, its delta and the early exercise boundary. We use the numerical results to quantify the impact of jumps on American call prices and the early exercise boundary.

Chiarella, C. & Szidarovsky, F. 2009, 'Dynamic oligopolies and intertemporal demand interaction', CUBO Matematica Educational, vol. 11, no. 2, pp. 85-105.
View/Download from: UTSePress
View description>>

Dynamic oligopolies are examined with continuous time scales and under the assumption that the demand at each time period is affected by earlier demands and consumptions. After the mathematical model is introduced the local asymptotical stability of the equilibrium is examined, and then we will discuss how information delays alter the stability conditions. We will also investigate the occurrence of a Hopf bifurcation gving the possibility of the birth of limit cycles. Numerical examples will be shown toillustrate the theoretical results.

Chiarella, C. & Szidarovsky, F. 2009, 'Existence and uniqueness in Cournot models with cost externalities', Mathematica Pannonica, vol. 20, no. 1, pp. 17-25.
View/Download from: UTSePress
View description>>

In this paper we examine single product Cournot oligopolies, with- out product differentiation, under the assumption that the cost of each firm depends on its own output and also on the output of the rest of the industry. The competition of the firms on the secondary market for manpower, capital, energy, and so forth as well as the spillover effect of the R&D investments of the firms can be taken into account with this more general cost structure. The existence of a unique Nash+Cournot equilibrium is proved under realistic conditions. Our result is a straightforward generalization of the well-known existence and uniqueness theorem of concave oligopolies.

Chiarella, C., Kang, B., Meyer, G. & Ziogas, A. 2009, 'The evaluation of American option prices under stochastic volatility and jump diffusion dynamics using the method of lines', International Journal of Theoretical and Applied Finance, vol. 12, no. 3, pp. 393-425.
View/Download from: UTSePress | Publisher's site
View description>>

This paper considers the problem of numerically evaluating American option prices when the dynamics of the underlying are driven by both stochastic volatility following the square root process of Heston [18], and by a Poisson jump process of the type originally introduced by Merton [25]. We develop a method of lines algorithm to evaluate the price as well as the delta and gamma of the option, thereby extending the method developed by Meyer [26] for the case of jump-diffusion dynamics. The accuracy of the method is tested against two numerical methods that directly solve the integro-partial differential pricing equation. The first is an extension to the jump-diffusion situation of the componentwise splitting method of Ikonen and Toivanen [21]. The second method is a Crank-Nicolson scheme that is solved using projected successive over relaxation and which is taken as the benchmark for the price. The relative efficiency of these methods for computing the American call option price, delta, gamma and free boundary is analysed. If one seeks an algorithm that gives not only the price but also the delta and gamma to the same level of accuracy for a given computational effort then the method of lines seems to perform best amongst the methods considered.

Chiarella, C., Iori, G. & Perello, J. 2009, 'The impact of heterogeneous trading rules on the limit order book and order flows', Journal of Economic Dynamics and Control, vol. 33, no. 3, pp. 525-537.
View/Download from: UTSePress | Publisher's site
View description>>

In this paper we develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to exogenously fixed rules. Agents are assumed to have three components of the expectation of future asset returns, namely fundamentalist, chartist and noise trader. Furthermore agents differ in the characteristics describing these components, such as time horizon, risk aversion and the weights given to the various components. The model developed here extends a great deal of earlier literature in that the order submissions of agents are determined by utility maximisation, rather than the mechanical unit order size that is commonly assumed. In this way the order flow is better related to the ongoing evolution of the market. For the given market structure we analyze the impact of the three components of the trading strategies on the statistical properties of prices and order flows and observe that it is the chartist strategy that is mainly responsible of the fat tails and clustering in the artificial price data generated by the model. The paper provides further evidence that large price changes are likely to be generated by the presence of large gaps in the book.

Chiarella, C., Hung, H. & To, T. 2009, 'The volatility structure of the fixed income market under the HJM framework: A nonlinear filtering approach', Computational Statistics and Data Analysis, vol. 53, no. 6, pp. 2075-2088.
View/Download from: UTSePress | Publisher's site
View description>>

The dynamics for interest rate processes within the well-known multi-factor Heath, Jarrow and Morton (HJM) specification are considered. Despite the flexibility of and the notable advances in theoretical research about the HJM model, the number of empirical studies of it is still very sparse. This paucity is principally due to the difficulties in estimating models in this class, which are not only high-dimensional, but also nonlinear and involve latent state variables. The estimation of a fairly broad class of HJM models as a nonlinear filtering problem is undertaken by adopting the local linearization filter, which is known to have some desirable statistical and numerical features, so enabling the estimation of the model via the maximum likelihood method. The estimator is then applied to the US, the UK and the Australian markets. Different two- and three-factor models are found to be the best for each market, with the factors being the level, the slope and the +twist+ effect. The contribution of each factor towards overall variability of the interest rates and the financial reward each factor claims are found to differ considerably from one market to another.

Zhu, M., Chiarella, C., He, X. & Wang, D. 2009, 'Does the market maker stabilize the market?', Physica A: Statistical Mechanics and its Applications, vol. 388, no. 15-16, pp. 3164-3180.
View/Download from: UTSePress | Publisher's site
View description>>

The market maker plays an important role in price formation, but his/her behavior and stabilizing impact on the market are relatively unclear, in particular in speculative markets. This paper develops a financial market model that examines the impact on market stability of the market maker, who acts as both a liquidity provider and an active investor in a market consisting of two types of boundedly rational speculative investorsÔ++the fundamentalists and trend followers. We show that the market maker does not necessarily stabilize the market when he/she actively manages the inventory to maximize profits, and that rather the market makerÔ++s impact depends on the behavior of the speculators. Numerical simulations show that the model is able to generate outcomes for asset returns and market inventories that are consistent with empirical findings.

Chiarella, C., Dieci, R., Gardini, L. & Sbragia, L. 2008, 'A model of financial market dynamics with heterogeneous beliefs and state-dependent confidence', Computational Economics, vol. 32, no. 1-2, pp. 55-72.
View/Download from: UTSePress | Publisher's site
View description>>

In a simple model of financial market dynamics, we allow the price of a risky security to be set by a market maker depending on the excess demand of heterogeneous interacting traders, fundamentalists and chartists, who place their orders based upon different expectations schemes about future prices: while chartists rely on standard trend-based rules, fundamentalists are assumed to know the economic environment and to form their beliefs accordingly. As price moves away from the long-run fundamental, fundamentalists become less confident in their forecasts, and put increasing weight on a reversion towards the fundamental price. The resulting two-dimensional discrete time dynamical system can exhibit a rich range of dynamic scenarios, often characterized by coexistence of attractors. A simple noisy version of the model reveals a variety of possible patterns for return time series.

Chiarella, C. & Szidarovszky, F. 2008, 'Dynamic oligopolies with production adjustment costs', Scientia Iranica, vol. 15, no. 1, pp. 120-124.
View/Download from: UTSePress
View description>>

Single-product oligopolies, without product differentiation, are examined under the assumption that any increase in production levels has additional cost to the rms. Therefore, the best response of each firm depends on the current output of the rest of the industry and on the previous output of the firm. Two dynamic models are introduced. In the first case, the firms form adaptive expectations on the output of the rest of the industry and select the best response output levels and, in the second case, it is assumed that they adjust their output levels adaptively. Conditions are derived in both cases for the asymptotic stability of the equilibrium.

Chiarella, C., He, X., Wang, D. & Zheng, M. 2008, 'The Stochastic Bifurcation Behaviour of Speculative Financial Markets', Physica A: Statistical Mechanics and its Applications, vol. 387, no. 15, pp. 3837-3846.
View/Download from: UTSePress | Publisher's site
View description>>

This paper establishes a continuous-time stochastic asset pricing model in a speculative financial market with fundamentalists and chartists by introducing a noisy fundamental price. By application of stochastic bifurcation theory, the limiting market equilibrium distribution is examined numerically. It is shown that speculative behaviour of chartists can cause the market price to display different forms of equilibrium distributions. In particular, when chartists are less active, there is a unique equilibrium distribution which is stable. However, when the chartists become more active, a new equilibrium distribution will be generated and become stable. The corresponding stationary density will change from a single peak to a crater-like density. The change of stationary distribution is characterized by a bimodal logarithm price distribution and fat tails. The paper demonstrates that stochastic bifurcation theory is a useful tool in providing insight into various types of financial market behaviour in a stochastic environment.

Chiarella, C., Nikitopoulos Sklibosios, C. & Schlogl, E. 2007, 'A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton Models with Jumps', Applied Mathematical Finance, vol. 14, no. 5, pp. 365-399.
View/Download from: UTSePress | Publisher's site
View description>>

This paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process. The pricing framework adapted was developed by Chiarella and Nikitopoulos to provide an extension of the Heath, Jarrow and Morton model to jump-diffusions and achieves Markovian structures under certain volatility specifications. Fourier Transform solutions for the price of a bond option under deterministic volatility specifications are derived and a control variate numerical method is developed under a more general state dependent volatility structure, a case in which closed form solutions are generally not possible. In doing so, a novel perspective is provided on control variate methods by going outside a given complex model to a simpler more tractable setting to provide the control variates.

Chiarella, C., Nikitopoulos Sklibosios, C. & Schlogl, E. 2007, 'A Markovian Defaultable Term Structure Model with State Dependent Volatilities', International Journal of Theoretical and Applied Finance, vol. 10, no. 1, pp. 155-202.
View/Download from: UTSePress | Publisher's site
View description>>

The defaultable forward rate is modelled as a jump diffusion process within the Schonbucher [26,27] general Heath, Jarrow and Morton [20] framework where jumps in the defaultable term structure fd(t, T) cause jumps and defaults to the defaultable bond prices Pd(t, T). Within this framework, we investigate an appropriate forward rate volatility structure that results in Markovian defaultable spot rate dynamics. In particular, we consider state dependent Wiener volatility functions and time dependent Poisson volatility functions. The corresponding term structures of interest rates are expressed as finite dimensional affine realizations in terms of benchmark defaultable forward rates In addition, we extend this model to incorporate stochastic spreads by allowing jump intensities to follow a square-root diffusion process. In that case the dynamics become non-Markovian and to restore path independence we propose either an approximate Markovian scheme or, alternatively, constant Poisson volatility functions. We also conduct some numerical simulations to gauge the effect of the stochastic intensity and the distributional implications of various volatility specifications.

Chiarella, C., Dieci, R. & He, X. 2007, 'Heterogeneous Expectations and Speculative Behavior in a Dynamic Multi-Asset Framework', Journal of Economic Behavior and Organization, vol. 62, no. 3, pp. 408-427.
View/Download from: UTSePress | Publisher's site
View description>>

This paper develops a dynamic model of a financial market where heterogeneous agents invest among multiple risky assets and a risk-free asset, under a market maker scenario. Particular attention is paid to the case of two risky assets and two agent types, fundamentalists and trend chasers, whose beliefs on both first and second moments of the conditional distribution of returns are based on past observations. Conditions for the stability of the fundamental equilibrium are established and the effect of the correlation between the risky assets is examined. It turns out that investors anticipated correlation and dynamic portfolio diversification do not always have a stabilizing role, but rather may act as a source of complexity in the financial market.

Chiarella, C., Hsiao, C. & Semmler, W. 2007, 'Intertemporal Asset Allocation when the Underlying Factors are Unobservable', Computational Economics, vol. 29, no. 3-4, pp. 383-418.
View/Download from: UTSePress | Publisher's site
View description>>

The aim of this paper is to develop an optimal long-term bond investment strategy which can be applied to real market situations. This paper employs Merton s intertemporal framework to accommodate the features of a stochastic interest rate and the time-varying dynamics of bond returns.The long-term investors encounter a partial information problem where they can only observe the market bond prices but not the driving factors of the variability of the interest rate and the bond return dynamics.With the assumption of Gaussian factor dynamics, we are able to develop an analytical solution for the optimal long-term investment strategies under the case of full information. To apply the best theoretical investment strategy to the real market we need to be aware of the existence of measurement errors representing the gap between theoretical and empirical models. We estimate the model based on data for the German securities market and then the estimation results are employed to develop long-term bond investment strategies. Because of the presence of measurement errors, we provide a simulation study to examine the performance of the best theoretical investment strategy. We find that the measurement errors have a great impact on the optimality of the investment strategies and that under certain circumstance the best theoretical investmentstrategies may not perform so well in a real market situation. In the simulation study, we also investigate the role of information about the variability of the stochastic interest rate and the bond return dynamics. Our results show that this information can indeed be used to advantage in making sensible long-term investment decisions.

Engel, A., Szidarovszky, F. & Chiarella, C. 2007, 'A Game Theoretical Coalition Model of International Fishing with Time Delay', Journal of Concrete and Applicable Mathematics, vol. 5, no. 2, pp. 115-131.
View/Download from: UTSePress | Publisher's site
View description>>

The oligopoly model of international fishing of Szidarovszky and Okuguchi [7] where the harvesting countries form a coalition is re- visited with the additional assumption that there is a time lag in obtaining and implementing information on the fish stock. The introduction of continuously distributed time lags results in a special Volterra-type integro-differential equation. Since it is equivalent to a system of nonlinear ordinary differential equations, linearization and standard techniques are used to examine the local asymptotic behavior of the equilibrium. Stability conditions are derived and in the case of instability special cyclic behavior is analyzed.

Rothig, A. & Chiarella, C. 2007, 'Investigating Nonlinear Speculation in Cattle, Corn and Hog Futures Markets Using Logisitic Smooth Transition Regression Models', Journal Of Futures Markets, vol. 27, no. 8, pp. 719-737.
View/Download from: UTSePress | Publisher's site
View description>>

This study explores nonlinearities in the response of speculators trading activity to price changes in live cattle, corn, and lean hog futures markets Analyzing weekly data from March 4, 1997 through December 27, 2005, the authors reject linearity in all of these markets. Using smooth transition regression models, the authors found a similar structure of nonlinearities with regard to the number of different regimes, the choice of the transition variable, and the value at which the transition occurs.

Agliari, A., Chiarella, C. & Gardini, L. 2006, 'A re-evaluation of adaptive expectations in light of global nonlinear dynamic analysis', Journal of Economic Behavior and Organization, vol. 60, no. 4, pp. 526-552.
View/Download from: UTSePress | Publisher's site
View description>>

We undertake an analysis of the dynamic behaviour of a discrete time nonlinear monetary dynamics model with adaptive expectation that is a basic mechanism in a broad class of descriptive macro-dynamic models. We consider in particular a variety of ways i

Asada, T., Chen, P., Chiarella, C. & Flaschel, P. 2006, 'Keynesian dynamics and the wage-price spiral: a baseline disequilibrium model', Journal of Macroeconomics, vol. 28, no. 1, pp. 90-130.
View/Download from: UTSePress | Publisher's site
View description>>

We reformulate the traditional AS-AD growth model of the Neoclassical synthesis, stage 1, as a disequilibrium approach to aggregate supply analysis. with sticky wages. sticky prices. myopic perfect foresight oil current inflation rates. and adaptively fo

Bhar, R., Chiarella, C., Hung, H. & Runggaldier, W.J. 2006, 'The volatility of the instantaneous spot interest rate implied by arbitrage pricing - a dynamic Bayesian approach', Automatica, vol. 42, no. 8, pp. 1381-1393.
View/Download from: UTSePress | Publisher's site
View description>>

his paper considers the estimation of the volatility of the instantaneous short interest rate from a new perspective. Rather than using discretely compounded market rates as a proxy for the instantaneous short rate of interest, we derive a relationship between observed LIBOR rates and certain unobserved instantaneous forward rates. We determine the stochastic dynamics for these rates under the risk-neutral measure and propose a filtering estimation algorithm for a time-discretised version of the resulting interest rate dynamics based on dynamic Bayesian updating in order to estimate the volatility function. Our time discretisation can be justified by the fact that data are observed discretely in time. The method is applied to US Treasury rates of various maturities to compute a (posterior) distribution for the parameters of the volatility specification.

Chen, P., Chiarella, C., Flaschel, P. & Semmler, W. 2006, 'The feedback channels in macroeconomics: analytical foundations for structural econometric model building', Central European Journal of Operations Research, vol. 14, no. 3, pp. 261-288.
View/Download from: UTSePress | Publisher's site
View description>>

We investigate important macroeconomic and macroeconometric feedback channels in models that concern the dynamic interaction of the labor market, product market and the monetary and financial sector. The core of our study is an applied disequilibrium model of monetary growth of a small open economy. After surveying the feedback channels we consider a compact description of the intensive form of the model. We consider various types of subsystems, the integration of which is subsequently compared from the perspective of bifurcation diagrams that separate cases of asymptotic stability from stable cyclical behavior as well as pure explosiveness. In this way we lay out a research strategy, which will show, in contrast to what is generally believed, that applied integrated macrodynamic systems can have a variety of interesting attractors and transient dynamics, which are obtained in particular when locally explosive situations are turned into bounded dynamics by the addition of specifically tailored extrinsic nonlinearities.

Chiarella, C., He, X. & Wang, D. 2006, 'A behavioral asset pricing model with a time-varying second moment', Chaos, Solitons and Fractals, vol. 29, no. 3, pp. 535-555.
View/Download from: UTSePress | Publisher's site
View description>>

We develop a simple behavioral asset pricing model with fundamentalists and chartists in order to study price behavior in financial markets when chartists estimate both conditional mean and variance by using a weighted averaging process. Through a stabil

Chiarella, C., He, X. & Hommes, C. 2006, 'A dynamic analysis of moving average rules', Journal of Economic Dynamics and Control, vol. 30, no. 9-10, pp. 1729-1753.
View/Download from: UTSePress | Publisher's site
View description>>

The use of various moving average (MA) rules remains popular with financial market practitioners. These rules have recently become the focus of a number empirical studies, but there have been very few studies of financial market models where some agents

Chiarella, C., He, X., Hung, H. & Zhu, P. 2006, 'An analysis of the cobweb model with boundedly rational heterogeneous producers', Journal of Economic Behavior & Organization, vol. 61, no. 4, pp. 750-768.
View/Download from: UTSePress | Publisher's site
View description>>

This paper considers the traditional cobweb model with heterogenous risk averse producers whose supply functions involve their estimates of the conditional mean and variance of the future price. The producers seek to learn these quantities by applying geometric decay processes (GDP) to past prices. The heterogeneity manifests itself in the lag lengths and memory parameters applied to past prices as well as in risk aversion coefficients. We find that each dimension of heterogeneity changes/enriches the cobweb dynamics with respect to the case of homogeneous producers.

Chiarella, C., Dieci, R. & Gardini, L. 2006, 'Asset price and wealth dynamics in a financial market with heterogeneous agents', Journal of Economic Dynamics and Control, vol. 30, no. 9-10, pp. 1755-1786.
View/Download from: UTSePress | Publisher's site
View description>>

This paper considers a discrete-time model of a financial market with one risky asset and one risk-free asset, where the asset price and wealth dynamics are determined by the interaction of two groups of agents, fundamentalists and chartists. In each per

Chiarella, C., Flaschel, P. & Hung, H. 2006, 'Interacting Business Cycle Fluctuations: A Two-Country Model', Singapore Economic Review, vol. 51, no. 3, pp. 365-394.
View/Download from: UTSePress
View description>>

In this paper, we develop a model of business cycle fluctuations between two interacting open economies within the disequilibrium or non-market clearing paradigm. We analyze the main feedback mechanisms (Keynes, Mundell, Rose and Dornbusch) driving the dynamics and the conflict between their stabilizing and destabilizing tendencies and how these depend on certain key speeds of adjustment in the real and foreign exchange sectors. We explore numerically a variety of situations of interacting price cycles in the two countries, where the steady state is locally repelling, but where the overall dynamics are bounded in an economically meaningful domain by assuming downward money wage rigidity.

Chiarella, C., He, X. & Hommes, C. 2006, 'Moving average rules as a source of market instability', Physica A: Statistical Mechanics and its Applications, vol. 370, no. 1, pp. 12-17.
View/Download from: UTSePress | Publisher's site
View description>>

Despite the pervasiveness of the efficient markets paradigm in the academic finance literature, the use of various moving average (MA) trading rules remains popular with financial market practitioners. This paper proposes a stochastic dynamic financial m

Chiarella, C. & Hsiao, C. 2006, 'The impact of short-sale constraints on asset allocation strategies via the backward Markov chain approximation method', Computational Economics, vol. 28, no. 2, pp. 113-137.
View/Download from: UTSePress | Publisher's site
View description>>

This paper considers an asset allocation strategy over a finite period under investment uncertainty and short-sale constraints as a continuous-time stochastic control problem. Investment uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short-sale constraints, the optimal asset allocation strategy can be obtained analytically. We consider several kinds of short-sale constraints and employ the backward Markov chain approximation method to explore the impact of short-sale constraints on asset allocation decisions. Our results show that the short-sale constraints do indeed have a significant impact on these decisions.

Chiarella, C. & To, T.D. 2006, 'The multifactor nature of the volatility of futures markets', Computational Economics, vol. 27, no. 2-3, pp. 163-183.
View/Download from: UTSePress | Publisher's site
View description>>

This paper estimates a model of interest rate dynamics containing multi-factor Wiener and single-factor Poisson jump volatility components. Data from the highly liquid but short term futures markets are used. The difficult numerical problem of estimating such multi-factor models is resolved by using a genetic algorithm to carry out the optimization procedure. It is established that the multi-factor Wiener volatility components are adequate to model the interest rate dynamics without the need to incorporate Poisson jump components, the existence of which would create difficulties in the practical use of interest rate models.

Bohm, V. & Chiarella, C. 2005, 'Mean variance preferences expectations formation and the dynamics of random asset prices', Mathematical Finance, vol. 15, no. 1, pp. 61-97.
View/Download from: UTSePress | Publisher's site
View description>>

This paper analyzes the dynamics of an explicit random process of prices and price expectations of finitely many assets in an economy with overlapping generations of heterogeneous consumers. They maximize expected utility with respect to subjective trans

Chiarella, C., Clewlow, L. & Musti, S. 2005, 'A Volatility Decomposition Control Variate Technique For Monte Carlo Simulations Of Heath Jarrow Morton Models', European Journal Of Operational Research, vol. 161, no. 2, pp. 325-336.
View/Download from: UTSePress | Publisher's site
View description>>

The aim of this work is to develop a simulation approach to the yield curve evolution in the Heath, Jarrow and Morton [Econometrica 60 (1) (1992) 77] framework. The stochastic quantities considered as affecting the forward rate volatility function are th

Chiarella, C. & Szidarovszky, F. 2005, 'Cournot oligopolies with product differentiation under uncertainty', Computers & Mathematics With Applications, vol. 50, no. 38810, pp. 413-424.
View/Download from: UTSePress | Publisher's site
View description>>

This paper considers Cournot oligopolies with product differentiation when the firms have inexact knowledge of the price functions and there are random time lags in obtaining and implementing information on the firms' own outputs and prices as well as on

Chiarella, C. & Ziogas, A. 2005, 'Evaluation of American strangles', Journal Of Economic Dynamics & Control, vol. 29, no. 1-2, pp. 31-62.
View/Download from: UTSePress | Publisher's site
View description>>

This paper presents a generalisation of McKean's free boundary value problem for American options by considering an American strangle position, where exercising one side of the payoff early knocks-out the remaining side. The Fourier transform technique i

Chiarella, C. & Szidarovszky, F. 2005, 'On the stability of price-adjusting oligopolies with incomplete information', International Journal Of Systems Science, vol. 36, no. 8, pp. 501-507.
View/Download from: UTSePress | Publisher's site
View description>>

A general linear price-adjusting scheme is examined in non-linear Bertrand oligopolies that contains the models of Negishi and Jin as special cases among others. The existence of a unique equilibrium of the dynamic process is first proved, and then under

Chiarella, C., Dieci, R. & Gardini, L. 2005, 'The dynamic interaction of speculation and diversification', Applied Mathematical Finance, vol. 12, no. 1, pp. 17-52.
View/Download from: UTSePress | Publisher's site

Agliari, A., Chiarella, C. & Gardini, L. 2004, 'A stability analysis of the perfect foresight map in nonlinear models of monetary dynamics.', Chaos, Solitions & Fractals, vol. 21, no. 2, pp. 371-386.
View/Download from: UTSePress | Publisher's site

Bhar, R., Chiarella, C. & Runggaldier, W.J. 2004, 'Inferring the forward looking equity risk premium from derivative prices', Studies In Nonlinear Dynamics and Econometrics, vol. 8, no. 1, pp. 1-24.
View/Download from: UTSePress

Bischi, G., Chiarella, C. & Kopel, M.O. 2004, 'The long run outcomes and global dynamics of a duopoly game with misspecified demand functions.', International Game Theory Review, vol. 6, no. 3, pp. 343-379.
View/Download from: UTSePress

Chiarella, C. & Szidarovszky, F. 2004, 'Dynamic oligopolies without full information and with continuously distributed time lags', Journal Of Economic Behaviour & Organization, vol. 54, no. 4, pp. 495-511.
View/Download from: UTSePress | Publisher's site
View description>>

Dynamic oligopolies are examined without full information on the price function, with each firm using a perceived price function that usually differs from the actual inverse demand function of the market. It is assumed that firms experience time lags in obtaining and implementing information on the price and also on output. Under realistic assumptions we show that without time lags the steady state is always locally asymptotically stable whereas in the presence of time lags situations of local instability may occur. The possibility of limit cycles is examined, and some special cases are considered.

Chiarella, C. & Gao, S. 2004, 'The value of the S&P 500 - a macro view of the stock market adjustment process.', Global Finance Journal, vol. 15, no. 2, pp. 171-196.
View/Download from: UTSePress | Publisher's site

Szidarovszky, F., Engel, A. & Chiarella, C. 2004, 'A game theoretical model of international fishing with time delay.', International Game Theory Review, vol. 6, no. 3, pp. 391-415.
View/Download from: UTSePress | Publisher's site

Szidarovszky, F. & Chiarella, C. 2004, 'The asymptotic behaviour of dynamic producer-consumer systems', Mathematical and Computer Modelling, vol. 39, no. 11-12, pp. 1297-1312.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & Nikitopoulos Sklibosios, C. 2003, 'A Class of Jump-Diffusion Bond Pricing Models within the HJM Framework', Asia - Pacific Financial Markets, vol. 10, no. 2-3, pp. 87-127.
View/Download from: UTSePress | Publisher's site
View description>>

This paper considers a class of term structure models that is a parameterisation of the Shirakawa (1991) extension of the Heath et al. (1992) model to the case of jump-diffusions. We consider specific forward rate volatility structures that incorporate state dependent Wiener volatility functions and time dependent Poisson volatility functions. Within this framework, we discuss the Markovianisation issue, and obtain the corresponding affine term structure of interest rates. As a result we are able to obtain a broad tractable class of jump-diffusion term structure models. We relate our approach to the existing class of jump-diffusion term structure models whose starting point is a jump-diffusion process for the spot rate. In particular we obtain natural jump-diffusion versions of the Hull and White (1990, 1994) one-factor and two-factor models and the Ritchken and Sankarasubramanian (1995) model within the HJM framework. We also give some numerical simulations to gauge the effect of the jump-component on yield curves and the implications of various volatility specifications for the spot rate distribution.

Chiarella, C., Craddock, M.J. & El-Hassan, N. 2003, 'An implementation of Bouchouev's method for a short time calibration of option pricing models', Computational Economics, vol. 22, no. 2-3, pp. 113-138.
View/Download from: UTSePress | Publisher's site

Chiarella, C., Gallegati, M., Leombruni, R. & Palestrini, A. 2003, 'Asset price dynamics among heterogeneous interacting agents', Computational Economics, vol. 22, no. 2-3, pp. 213-223.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & Szidarovszky, F. 2003, 'Bounded continuously distributed delays in dynamic oligopolies', Chaos Solitons & Fractals, vol. 18, no. 5, pp. 977-993.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & Szidarovszky, F. 2003, 'Dynamic oligopolies with pollution treatment cost sharing', Keio Economics Studies, vol. XL, no. 1, pp. 27-44.
View/Download from: UTSePress

Chiarella, C. & He, X. 2003, 'Dynamics of beliefs and learning under aL processes - the heterogeneous case', Journal of Economics Dynamics and Control, vol. 27, no. 3, pp. 503-531.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & Kwon, O. 2003, 'Finite dimensional affine realisation of HJM models in terms of forward rates and yields', Review of Derivatives Research, vol. 6, no. 2, pp. 129-155.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & He, X. 2003, 'Heterogeneous beliefs, risk, and learning in a simple asset-pricing model with a market maker', Macroeconomic Dynamics, vol. 7, no. 4, pp. 503-536.
View/Download from: UTSePress

Chiarella, C., Flaschel, P., Gong, G. & Semmler, W. 2003, 'Nonlinear Phillips curves, complex dynamics and monetary policy in a Keynesian macro model', Chaos Solitons & Fractals, vol. 18, no. 3, pp. 613-634.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & To, T. 2003, 'The jump component of the volatility structure of interest rate futures markets: an international comparison', Journal Of Futures Markets, vol. 23, no. 12, pp. 1125-1158.
View/Download from: UTSePress | Publisher's site

Engel, A., Szidarovszky, F. & Chiarella, C. 2003, 'A game theoretical partially cooperative model of international fishing with time delay', Chaos Solitons & Fractals, vol. 18, no. 3, pp. 549-560.
View/Download from: UTSePress | Publisher's site

Li, W., Rychlik, M., Szidarovszky, F. & Chiarella, C. 2003, 'On the attractivity of a class of homogeneous dynamic economic systems', Nonlinear Analysis: Theory, Methods & Applications, vol. 52, no. 6, pp. 1617-1636.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & Iori, G. 2002, 'A simulation analysis of the microstructure of double auction markets', Quantative Finance, vol. 2, no. 5, pp. 346-353.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & He, X. 2002, 'Heterogeneous beliefs, risk and learning in a simple asset pricing model', Computational Economics, vol. 19, no. 1, pp. 95-132.
View/Download from: UTSePress | Publisher's site

Chiarella, C., Dieci, R. & Gardini, L. 2002, 'Speculative behaviour and complex asset price dynamics: a global analysis', Journal of Economic Behaviour amd Organisation, vol. 49, no. 2, pp. 173-197.
View/Download from: UTSePress | Publisher's site

Chiarella, C., Semmler, W., Mittnik, S. & Zhu, P. 2002, 'Stock market, interest rate and output: a model and estimation for US time series data', Studies in Nonlinear Dynamics and Econometrics, vol. 6, no. 1 / Article 2, pp. 1-37.
View/Download from: UTSePress

Chiarella, C. & Szidarovszky, F. 2002, 'The asymptotic behaviour of dynamic rent-seeking games', Computers and Mathematics with Applications, vol. 43, no. 1/2, pp. 169-178.
View/Download from: UTSePress | Publisher's site

Bhar, R., Chiarella, C. & Pham, T.M. 2001, 'Modelling the currency forward risk premium: A new perspective', Asia Pacific Financial Markets, vol. 8, no. 4, pp. 341-360.
View/Download from: UTSePress | Publisher's site
View description>>

In this paper we seek to develop a new approach to the time series analysis of foreign exchange risk premia. We do so by assuming a geometric Brownian process for the spot exchange rate and expressing the no-arbitrage spot-forward price relationship under the historical probability measure. We are thereby able to obtain a stochastic differential equation system linking the spot exchange rate, the forward exchange rate and the risk premium (modelled directly as a mean-reverting diffusion process) which we estimate using Kalman filtering techniques. We are able to use observations at a range of frequencies since the framework we set up does not involve overlapping observations. The model is then applied to the French Franc/USD, DEM/USD, GBP/USD, and Japanese Yen/USD exchange rates from 1 January 1990 to 31 December 1998. For all currencies we find evidence that the forward risk premium is stationary and exhibits substantial positive time variation

Chiarella, C. & He, X. 2001, 'Asset Price & Wealth Dynamics Under Heterogeneous Expectations', Quantitative Finance, vol. 1, no. 5, pp. 509-526.
View/Download from: UTSePress | Publisher's site

Chiarella, C., Dieci, R. & Gardini, L. 2001, 'Asset Price Dynamics in a Financial Market with Fundamentalists & Chartists', Discrete Dynamics in Nature & Society, vol. 6, no. 2, pp. 69-99.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & Kwon, O. 2001, 'Classes of Interest Rate Models Under the HJM Framework', Asia-Pacific Financial Markets, vol. 8, no. 1, pp. 1-22.
View/Download from: UTSePress | Publisher's site

Chiarella, C. & Kwon, O. 2001, 'Forward Rate Dependent Markovian Transformation of the Heath-Jarrow-Morton Term Structure Model', Finance & Stochastics, vol. 5, no. 2, pp. 237-257.
View/Download from: UTSePress | Publisher's site
View description>>

In this paper, a class of forward rate dependent Markovian transformations of the Heath-Jarrow-Morton [16] term structure model are obtained by considering volatility processes that are solutions of linear ordinary differential equations. These transformations generalise the Markovian systems obtained by Carverhill [8], Ritchken and Sankarasubramanian [20], Bhar and Chiarella [1], and Inui and Kijima [18], and also generalise the bond price formulae obtained therein.

Chiarella, C., Pasquali, S. & Runggaldier, W.J. 2001, 'On filtering in Markovian term structure models: an approximation approach', Advances in Applied Probability, vol. 33, no. 4, pp. 794-809.
View/Download from: UTSePress | Publisher's site
View description>>

We consider a parametrization of the Heath-Jarrow-Morton (HJM) family of term structure of interest rate models that allows a finite-dimensional Markovian representation of the stochastic dynamics. This parametrization results from letting the volatility function depend on time to maturity and on two factors: the instantaneous spot rate and one fixed-maturity forward rate. Our main purpose is an estimation methodology for which we have to model the observations under the historical probability measure. This leads us to consider as an additional third factor the market price of interest rate risk, that connects the historical and the HJM martingale measures. Assuming that the information comes from noisy observations of the fixed-maturity forward rate, the purpose is to estimate recursively, on the basis of this information, the three Markovian factors as well as the parameters in the model, in particular those in the volatility function. This leads to a nonlinear filtering problem, for the solution of which we describe an approximation methodology, based on time discretization and quantization. We prove the convergence of the approximate filters for each of the observed trajectories.

Chiarella, C., Flaschel, P., Franke, R. & Semmler, W. 2001, 'Output Interest & the Stock Market: An Alternative to the Jump Variable Technique', The Bulletin of the Czech Econometric Society, vol. 7, no. 13, pp. 1-29.
View/Download from: UTSePress

Chiarella, C., Flaschel, P. & Semmler, W. 2001, 'Price Flexibility & Debt Dynamics in a High Order AS-AD Model', Central European Journal of Operational Research, vol. 9, no. 1-29, pp. 119-145.
View/Download from: UTSePress

Chiarella, C. & Szidarovszky, F. 2001, 'The Nonlinear Cournot Model Under Uncertainty with Continously Distributed Time Lags', Central European Journal of Operational Research, vol. 9, pp. 183-196.
View/Download from: UTSePress

Szidarovszky, F. & Chiarella, C. 2001, 'Dynamic Oligopilies, Stability & Bifurcation', CUBO Matematica Educational, vol. 3, no. 2, pp. 269-284.
View/Download from: UTSePress

Bhar, R. & Chiarella, C. 2000, 'Expectations in monetary policy in Australia implied by the probability distributions of interest rate derivatives', The European Journal of Finance, vol. 6, no. 2, pp. 113-125.

Bhar, R., Chiarella, C., El-Hassan, N. & Zheng, X. 2000, 'Reduction of forward rate dependent HJM models to Markovian form: pricing European bond options', Journal of Computational Finance, vol. 3, no. 3, pp. 47-72.

Chiarella, C. & Kwon, O. 2000, 'A complete Markovian stochastic volatility model in the HJM framework', Asia-Pacific Financial Markets, vol. 7, no. 4, pp. 293-304.

Chiarella, C. & Flaschel, P. 2000, 'High order disequilibrium growth dynamics: theoretical aspects and numerical features', Journal of Economic Dynamics & Control, vol. 24, no. 5-7, pp. 935-963.
View/Download from: Publisher's site
View description>>

We investigate an open monetary growth model with sluggish prices and quantities. The model combines the dynamics of Rose's employment cycle and Metzler's inventory cycle with internal nominal dynamics of Tobin and external nominal dynamics of Dornbusch type, implying eight laws of motion, four for the real sector and four for the nominal part. These intrinsically nonlinear 8D-dynamics are asymptotically stable for low adjustment speeds of prices and expectations, give rise to Hopf-bifurcations as adjustment parameters are increased and explosive behavior thereafter. Extrinsic nonlinearities are therefore added, one in capital flows and one in wage behavior. These nonlinearities modify the dynamics radically, limiting them to domains with economically plausible outcomes, also for extreme parameter choices, where the dynamics may become chaotic.

Chiarella, C. & Khomin, P. 1999, 'Adaptively evolving expectations in models of monetary dynamics: The fundamentalists forward looking', Annals Of Operations Research, vol. 89, pp. 21-34.
View/Download from: UTSePress | Publisher's site
View description>>

In the basic Cagan model of monetary dynamics, we allow inflationary expectations to be formed as a weighted average of fundamentalist and chartists expectations. We allow the weights to evolve adaptively according to the mechanism of Brock and Hommes [3] and study the resulting dynamic behaviour.

Chiarella, C., El-Hassan, N. & Kucera, A. 1999, 'Evaluation Of American option prices in a path integral framework using Fourier-Hermite series expansions', Journal Of Economic Dynamics & Control, vol. 23, no. 9-10, pp. 1387-1424.
View/Download from: UTSePress | Publisher's site
View description>>

In this paper we review the path integral technique which has wide applications in statistical physics and relate it to the backward recursion technique which is widely used for the evaluation of derivative securities. We formulate the pricing of equity

Chiarella, C. & Flaschel, P. 1999, 'Keynesian monetary growth dynamics in open economies', Annals Of Operations Research, vol. 89, pp. 35-59.
View/Download from: UTSePress | Publisher's site
View description>>

We investigate an open economy monetary growth model with sluggish price and quantity adjustments. It integrates the real dynamics of Rose's employment cycle, an inflationary dynamics of Cagan type, Metzlerian inventory dynamics and Dornbusch's exchange rate dynamics, implying eight laws of motion, two for each subdynamics. These intrinsically nonlinear 8D dynamics are asymptotically stable for low adjustment speeds of prices and expectations, give rise to Hopf bifurications as these adjustment parameters are increased and lead to cyclically explosive behavior thereafter. Two extrinsic nonlinearities are therefore added, one in capital flows and the other a kinked Phillips curve. These two nonlinearities modify the dynamics radically, limiting them to economically meaningful domains even for extreme parameter choices.

Chiarella, C. & Flaschel, P. 1998, 'Dynamics of natural rates of growth and employment', Macroeconomic Dynamics, vol. 2, no. 3, pp. 345-368.
View description>>

We investigate the dynamics of an integrated Keynesian disequilibriummodel of monetary growth that allows for a variety of labor-marketand employment-adjustment processes. The structure of the model isnaturally nonlinear, i.e., no extrinsic nonlinear economicbehavioral relationships are imposed at first. The dynamics of themodel are nine-dimensional and are investigated analytically byconsidering appropriate subdynamics. The model generates limit cycles(via Hopf bifurcations) and more complex dynamic behavior (when anatural kink in the money-wage Phillips curve is taken intoaccount). It exhibits hysteresis effects with respect to long-rununemployment as well as growth and implies the occurrence of steady-state depressions in particular.

Chiarella, C. & Khomin, A. 1996, 'An analysis of the complex dynamic behaviour of nonlinear oligopoly models with time delays', Chaos Solitons & Fractals, vol. 7, no. 12, pp. 2049-2065.
View/Download from: UTSePress | Publisher's site
View description>>

We consider the fate of output in the Cournot oligopoly model when the equilibrium is locally unstable. We discuss types of nonlinearities which may be present to bound the motion and introduce time lags in production and information which serve as bifurcation parameters. We apply the Hopf bifurcation theorem to determine conditions under which limit cycle motion is born, and use computer simulations to investigate the nature of the attractors generated by such models.

Chiarella, C. & Flaschel, P. 1996, 'An integrative approach to 2D-macromodels of growth, price and inventory dynamics', Chaos Solitons & Fractals, vol. 7, no. 12, pp. 2105-2133.
View/Download from: UTSePress | Publisher's site
View description>>

This paper investigates two variants of a Keynesian model of monetary growth with sluggish price and quantity adjustments. The first model integrates the real growth dynamics of Rose's employment cycle, an inflationary dynamics of the Cagan type and Metzler's inventory dynamics. This model is based on intrinsic nonlinearities solely and it implies for the private sector six laws of motion, two for each of the subdynamics stated above. It is shown that the integrated model does not at all preserve the insights obtained from the three prototype subdynamics. Since this model can give rise to global instabilities even for moderate adjustment speeds of prices and quantities, a variant of this model is then introduced which exhibits one fundamental `nonintrinsic+ nonlinearity in its wage adjustment mechanism. This nonlinearity makes the considered 6D-dynamics at the same time extremely `viable+ and complex, in particular for a high adjustment speed of nominal wages.

Chiarella, C. & Flaschel, P. 1996, 'Real and monetary cycles in models of Keynes-Wicksell type', Journal Of Economic Behavior & Organization, vol. 30, no. 3, pp. 327-351.
View/Download from: UTSePress | Publisher's site
View description>>

We formulate a descriptive dynamic macroeconomic model of the Keynes-Wicksell type which incorporates goods, labour and financial markets. The model has well specified budget constraints with respect to the economic agents (households, firms and government) within it. We introduce some standard nonlinearities into the goods and labour markets. The dynamics of the general model consist of five differential equations; we analyse two- and three-dimensional subcases to show the existence of real and monetary cycles whose interaction will determine the full dynamics. We use numerical simulation to study the dynamics of the full model and the impact of various government fiscal and monetary policies.

Chiarella, C., Kemp, M. & Vanlong, N. 1989, 'Innovation and the transfer of technology - A leader-follower model', Economic Modelling, vol. 6, no. 4, pp. 452-456.
View/Download from: UTSePress | Publisher's site
View description>>

There have been few attempts to model the interaction of R and D, the leakage of industrial technology and product pricing. In the present paper we develop a simple leader+follower model of process innovation with leakage. The leader engages in R and D and sets the product price. The discoveries of the leader become available to the followers with delay. The task of the leader is to choose a time sequence of product prices and a time sequence of expenditures on R and D, knowing the supply function of the followers during each interval of time and knowing how that function changes through time in response to its own earlier expenditures on R and D. We describe the trajectories in qualitative terms and derive several comparative static results.

Chiarella, C. 1988, 'The cobweb model - Its instability and the onset of chaos', Economic Modelling, vol. 5, no. 4, pp. 377-384.
View/Download from: Publisher's site
View description>>

We introduce a fairly general non-linear supply function into the traditional cobweb model under adaptive expectations. We find that the dynamics of the model are driven by a single hump map of the type that occurs in the chaos literature. By applying some recent results of Feigenbaum we are able to show that in its locally unstable region the cobweb model exhibits a regime of period doubling followed by a chaotic regime.

Chiarella, C. & Shannon, A.G. 1986, 'An example of diabetes compartment modeling', Mathematical Modelling, vol. 7, no. 9-12, pp. 1239-1244.
View/Download from: UTSePress | Publisher's site
View description>>

A general biomedical two-compartment model is described and analyzed. An application in diabetes research is then illustrated by reference to a study which is comparing subcutaneous and intravenous insulin kinetcs.

Chiarella, C. 1986, 'Perfect foresight models and the dynamic instability problem from a higher viewpoint', Economic Modelling, vol. 3, no. 4, pp. 283-292.
View/Download from: UTSePress | Publisher's site
View description>>

Dynamic macroeconomic models incorporating perfect foresight expectations can display a dynamic instability of the saddle point type. So that unless the initial values happen to place the system on the stable arm of the saddle point, the economic variables will diverge ever more from the equilibrium. We consider the dynamic instability problem in a simple model of monetary dynamics which is non-linear and assumes adaptive expectations which are characterized by an expectations time lag. This model is shown to have a stable limit cycle. By considering perfect foresight as the limit as the expectations time lag tends to zero we are able to view the perfect foresight model from a dimension higher than that from which is it is normally viewed. We are thus able to see that the stable limit cycle continues to exist for the perfect foresight model as well. In this framework there is no longer a dynamic instability problem since whatever the intial values time paths are tending to the stable limit cycle.

Chiarella, C., Kemp, M., Vanlong, N. & Okuguchi, K. 1984, 'On the economics of international fisheries', International Economic Review, vol. 25, no. 1, pp. 85-92.
View description>>

It has long been believed that when several countries share access to a fishery, the total catch is suboptimal; that, in particular, for each fish population the catch is too high and the steady-state population and catch too low. Recent careful analyses by Khalitbari [1977] and Levhari and Mirman [1980] show that the traditional view is valid under a variety of institutional arrangements and solution concepts. Thus Levhari and Mirman focussed their attention on the case of direct commonality, in which each country enjoys immediate access to the entire fish population and adopted a feedback or perfect closed-loop solution- concept; whereas Khalitbari examined the polar case of indi7ect commonality, in which each country has immediate access only to that part of the fish population in its coastal waters but in which fish move across international boundaries from regions of high population density to regions of low density, and adopted an open- loop solution-concept.

Chiarella, C., Dieci, R., He, X. & Li, K. 2012, 'An evolutionary CAPM under heterogeneous beliefs', The 25th Australasian Finance and Banking Conference 2012, Sydney, Australia, December 2012 in Proceedings of the 25th Australasian Finance and Banking Conference 2012, ed Fariborz Moshirian et al, University of NSW, Sydney, Australia, pp. 1-38.

Chiarella, C., Clewlow, L. & Kang, B. 2012, 'The evaluation of gas swing contracts with regime switching', Numerical Methods for Finance Conference 2011, Limerick, Ireland, June 2011 in Topics in Numerical Methods for Finance: Proceedings in Mathematics and Statistics, ed Mark Cummins, Finbar Murphy and John J. H. Miller, Springer, Germany, pp. 155-176.
View/Download from: Publisher's site

Asada, T., Chen, P., Chiarella, C. & Flaschel, P. 2004, 'Keynesian dynamics and the wage-price spiral: a baseline disequilibrium approach', Australian Conference of Economists 2004 - 33rd Conference of Economists, Sydney, Australia, September 2004 in Proceeding of the Australian Conference of Economists 2004, ed -, The Economics Society of Australia, Sydney, Australia, pp. 1-43.
View/Download from: UTSePress