To bail-out or to bail-in? Answers from an agent-based model

Since the beginning of the 2008 financial crisis almost half a trillion euros have been spent to financially assist EU member states in taxpayer-funded bail-outs. These crisis resolutions are often accompanied by austerity programs causing political and social friction on both domestic and international levels. The question of how to resolve failing financial institutions, and how this depends on economic preconditions, is therefore a pressing and controversial issue of vast political importance. In this work we employ an agent-based model to study the economic and financial ramifications of three highly relevant crisis resolution mechanisms. To establish the validity of the model we show that it reproduces a series of key stylized facts of the financial and real economy. The distressed institution can either be closed via a purchase & assumption transaction, it can be bailed-out using taxpayer money, or it may be bailed-in in a debt-to-equity conversion. We find that for an economy characterized by low unemployment and high productivity the optimal crisis resolution with respect to financial stability and economic productivity is to close the distressed institution. For economies in recession with high unemployment the bail-in tool provides the most efficient crisis resolution mechanism. Under no circumstances do taxpayer-funded bail-out schemes outperform bail-ins with private sector involvement

A Multi Agent Model for the Limit Order Book Dynamics

In the present work we introduce a novel multi-agent model with the aim to reproduce the dynamics of a double auction market at microscopic time scale through a faithful simulation of the matching mechanics in the limit order book. The agents follow a noise decision making process where their actions are related to a stochastic variable, "the market sentiment", which we define as a mixture of public and private information. The model, despite making just few basic assumptions over the trading strategies of the agents, is able to reproduce several empirical features of the high-frequency dynamics of the market microstructure not only related to the price movements but also to the deposition of the orders in the book.Comment: 20 pages, 11 figures, in press European Physical Journal B (EPJB

Studies of the limit order book around large price changes

We study the dynamics of the limit order book of liquid stocks after experiencing large intra-day price changes. In the data we find large variations in several microscopical measures, e.g., the volatility the bid-ask spread, the bid-ask imbalance, the number of queuing limit orders, the activity (number and volume) of limit orders placed and canceled, etc. The relaxation of the quantities is generally very slow that can be described by a power law of exponent $\approx0.4$. We introduce a numerical model in order to understand the empirical results better. We find that with a zero intelligence deposition model of the order flow the empirical results can be reproduced qualitatively. This suggests that the slow relaxations might not be results of agents' strategic behaviour. Studying the difference between the exponents found empirically and numerically helps us to better identify the role of strategic behaviour in the phenomena.Comment: 19 pages, 7 figure

Eroding market stability by proliferation of financial instruments

We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently provides more means for risk diversification, making the market more efficient and complete. In the simple market of interacting traders discussed here, the proliferation of financial instruments erodes systemic stability and it drives the market to a critical state characterized by large susceptibility, strong fluctuations and enhanced correlations among risks. This suggests that the hypothesis of APT may not be compatible with a stable market dynamics. In this perspective, market stability acquires the properties of a common good, which suggests that appropriate measures should be introduced in derivative markets, to preserve stability.Comment: 26 pages, 8 figure

The ChlD subunit links the motor and porphyrin binding subunits of magnesium chelatase

Magnesium chelatase initiates chlorophyll biosynthesis, catalysing the MgATP2- dependent insertion of a Mg2+ ion into protoporphyin IX. The catalytic core of this large enzyme complex consists of three subunits: Bch/ChlI, Bch/ChlD and Bch/ChlH (in bacteriochlorophyll and chlorophyll producing species respectively). The D and I subunits are members of the AAA+ (ATPases associated with various cellular activities) superfamily of enzymes, and they form a complex that binds to H, the site of metal ion insertion. In order to investigate the physical coupling between ChlID and ChlH in vivo and in vitro , ChlD was FLAG-tagged in the cyanobacterium Synechocystis sp. PCC 6803 and co-immunoprecipitation experiments showed interactions with both ChlI and ChlH. Co-production of recombinant ChlD and ChlH in Escherichia coli yielded a ChlDH. Quantitative analysis using microscale thermophoresis (MST) showed magnesium-dependent binding ( K d 331 ± 58 nM) between ChlD and H. The physical basis for a ChlD-H interaction was investigated using chemical crosslinking coupled with mass spectrometry (XL-MS), together with modifications that either truncate ChlD or modify single residues. We found that the C-terminal integrin I domain of ChlD governs association with ChlH, the Mg2+ dependence of which also mediates the cooperative response of the Synechocystis chelatase to magnesium. Our work, showing the interaction site between the AAA+ motor and the chelatase domain of magnesium chelatase, will be essential for understanding how free energy from the hydrolysis of ATP on the AAA+ ChlI subunit is transmitted via the bridging subunit ChlD to the active site on ChlH

Criticality and finite size effects in a simple realistic model of stock market

We discuss a simple model based on the Minority Game which reproduces the main stylized facts of anomalous fluctuations in finance. We present the analytic solution of the model in the thermodynamic limit and show that stylized facts arise only close to a line of critical points with non-trivial properties. By a simple argument, we show that, in Minority Games, the emergence of critical fluctuations close to the phase transition is governed by the interplay between the signal to noise ratio and the system size. These results provide a clear and consistent picture of financial markets as critical systems.Comment: 4 pages, 4 figure

A global map to aid the identification and screening of critical habitat for marine industries

Marine industries face a number of risks that necessitate careful analysis prior to making decisions on the siting of operations and facilities. An important emerging regulatory framework on environmental sustainability for business operations is the International Finance Corporation’s Performance Standard 6 (IFC PS6). Within PS6, identification of biodiversity significance is articulated through the concept of “Critical Habitat”, a definition developed by the IFC and detailed through criteria aligned with those that support internationally accepted biodiversity designations. No publicly available tools have been developed in either the marine or terrestrial realm to assess the likelihood of sites or operations being located within PS6-defined Critical Habitat. This paper presents a starting point towards filling this gap in the form of a preliminary global map that classifies more than 13 million km2 of marine and coastal areas of importance for biodiversity (protected areas, Key Biodiversity Areas [KBA], sea turtle nesting sites, cold- and warm-water corals, seamounts, seagrass beds, mangroves, saltmarshes, hydrothermal vents and cold seeps) based on their overlap with Critical Habitat criteria, as defined by IFC. In total, 5798×103 km2 (1.6%) of the analysis area (global ocean plus coastal land strip) were classed as Likely Critical Habitat, and 7526×103 km2 (2.1%) as Potential Critical Habitat; the remainder (96.3%) were Unclassified. The latter was primarily due to the paucity of biodiversity data in marine areas beyond national jurisdiction and/or in deep waters, and the comparatively fewer protected areas and KBAs in these regions. Globally, protected areas constituted 65.9% of the combined Likely and Potential Critical Habitat extent, and KBAs 29.3%, not accounting for the overlap between these two features. Relative Critical Habitat extent in Exclusive Economic Zones varied dramatically between countries. This work is likely to be of particular use for industries operating in the marine and coastal realms as an early screening aid prior to in situ Critical Habitat assessment; to financial institutions making investment decisions; and to those wishing to implement good practice policies relevant to biodiversity management. Supplementary material (available online) includes other global datasets considered, documentation and justification of biodiversity feature classification, detail of IFC PS6 criteria/scenarios, and coverage calculations

Economic Fluctuations and Diffusion

Stock price changes occur through transactions, just as diffusion in physical systems occurs through molecular collisions. We systematically explore this analogy and quantify the relation between trading activity - measured by the number of transactions $N_{\Delta t}$ - and the price change $G_{\Delta t}$, for a given stock, over a time interval $[t, t+\Delta t]$. To this end, we analyze a database documenting every transaction for 1000 US stocks over the two-year period 1994-1995. We find that price movements are equivalent to a complex variant of diffusion, where the diffusion coefficient fluctuates drastically in time. We relate the analog of the diffusion coefficient to two microscopic quantities: (i) the number of transactions $N_{\Delta t}$ in $\Delta t$, which is the analog of the number of collisions and (ii) the local variance $w^2_{\Delta t}$ of the price changes for all transactions in $\Delta t$, which is the analog of the local mean square displacement between collisions. We study the distributions of both $N_{\Delta t}$ and $w_{\Delta t}$, and find that they display power-law tails. Further, we find that $N_{\Delta t}$ displays long-range power-law correlations in time, whereas $w_{\Delta t}$ does not. Our results are consistent with the interpretation that the pronounced tails of the distribution of $G_{\Delta t} are due to$w_{\Delta t}$, and that the long-range correlations previously found for$| G_{\Delta t} |$are due to$N_{\Delta t}$.Comment: RevTex 2 column format. 6 pages, 36 references, 15 eps figure

The active site of magnesium chelatase

The insertion of magnesium into protoporphyrin initiates the biosynthesis of chlorophyll, the pigment that underpins photosynthesis. This reaction, catalysed by the magnesium chelatase complex, couples ATP hydrolysis by a ChlID motor complex to chelation within the ChlH subunit. We probed the structure and catalytic function of ChlH using a combination of X-ray crystallography, computational modelling, mutagenesis and enzymology. Two linked domains of ChlH in an initially open conformation of ChlH bind protoporphyrin IX, and the rearrangement of several loops envelops this substrate, forming an active site cavity. This induced fit brings an essential glutamate (E660), proposed to be the key catalytic residue for magnesium insertion, into proximity with the porphyrin. A buried solvent channel adjacent to E660 connects the exterior bulk solvent to the active site, forming a possible conduit for the delivery of magnesium or abstraction of protons