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Università degli Studi di Università degli Studi di TriesteTrieste

Facoltà di EconomiaFacoltà di Economia

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THE PROJECTTHE PROJECT

COMPLEX SYSTEMS IN ECONOMICSCOMPLEX SYSTEMS IN ECONOMICS

Italian GovernmentItalian Government

Minister for the University, Scientific and Minister for the University, Scientific and Technological Research (Rome)Technological Research (Rome)

National strategic projectNational strategic project““Dynamics of Complex Systems in the Field of Dynamics of Complex Systems in the Field of

EconomicsEconomics””

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““THE EMPLOYMENT OF SOFTCOMPUTING THE EMPLOYMENT OF SOFTCOMPUTING TECHNIQUES”TECHNIQUES”

SCIENCE PARK (Trieste)SCIENCE PARK (Trieste) and and

UNIVERSITY of TRIESTEUNIVERSITY of TRIESTENational Coordinator – National Coordinator – prof. Maurizio Fanniprof. Maurizio Fanni

C.N.R. (Turin)C.N.R. (Turin) I.S.A.E.(Rome) I.S.A.E.(Rome)

O.S.S.I.N.D. (Cagliari)O.S.S.I.N.D. (Cagliari)

UNIVERSITY DEPARTMENTSUNIVERSITY DEPARTMENTS(Economics and Engineering, Trieste)(Economics and Engineering, Trieste)

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PROJECT OBJECTIVESPROJECT OBJECTIVES

The research involvesThe research involves

The description of the emergence of vulnerability The description of the emergence of vulnerability and riskand risk in various areas of economics in various areas of economics

Economic systems, i.e. political, financial and Economic systems, i.e. political, financial and economic riskeconomic risk(elements of country risk)(elements of country risk)

Enterprise and Financial Markets, i.e. operating Enterprise and Financial Markets, i.e. operating risk, financial risk, and distress riskrisk, financial risk, and distress risk

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continuedcontinued

Researching factors that produce instability and Researching factors that produce instability and chaoschaos

Discovering new organizational principles (of Discovering new organizational principles (of economic systems, enterprises and financial economic systems, enterprises and financial markets) following a complex systems approachmarkets) following a complex systems approach

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INTERESTED ORGANIZATIONS ANDINTERESTED ORGANIZATIONS ANDINSTITUTIONSINSTITUTIONS

GovernmentGovernment

Central banksCentral banks

Savings marketsSavings markets

Institutional investorsInstitutional investors

Insurance companiesInsurance companies

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BRIEF OUTLINE OF THE PROJECTBRIEF OUTLINE OF THE PROJECT

Researching new models in the field of Economics by Researching new models in the field of Economics by the application of the logic of complex systems the application of the logic of complex systems dynamicsdynamics

S C O P ES C O P E

The economic system in generalThe economic system in general

The territory of enterpriseThe territory of enterprise

The structure of financial marketsThe structure of financial markets

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SOME SPECIFIC INTENTIONS OF THE SOME SPECIFIC INTENTIONS OF THE INVESTIGATIONINVESTIGATION

Awareness of the presence Awareness of the presence

of risk of risk

in all parts of the analysisin all parts of the analysis

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IN DETAILIN DETAIL

Typology of vulnerability and risk in any entity or Typology of vulnerability and risk in any entity or system under considerationsystem under consideration

In the economic systemIn the economic system

In the territory of enterpriseIn the territory of enterprise

• country riskcountry risk

• operation riskoperation risk• financial riskfinancial risk• distress riskdistress risk

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continuedcontinued

In the financial marketsIn the financial markets(trade-off risk/return of equity(trade-off risk/return of equitysecurities)securities)

Financial marketsFinancial markets(trade-off risk/ return of bonds)(trade-off risk/ return of bonds)

• intertemporal preferenceintertemporal preferencerate (risk free)rate (risk free)

• financial risk premiumfinancial risk premium

• full risk premiumfull risk premium

• intertemporal preferenceintertemporal preferencerate (risk free)rate (risk free)

• high yield bonds, ratinghigh yield bonds, ratingand default riskand default risk

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OBJECTIVES (2)OBJECTIVES (2)

The recognition of possible links between The recognition of possible links between methods used and results obtained on the methods used and results obtained on the basis of economic theorybasis of economic theory

Fisher TheoryFisher TheoryModigliani and Miller TheoryModigliani and Miller TheoryCAPM and market modelsCAPM and market models

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Methods used in each section of analysis (country risk, Methods used in each section of analysis (country risk,

enterprise risk, financial markets risk) should result in –enterprise risk, financial markets risk) should result in –

success in discovering new organizational principles success in discovering new organizational principles

applicable to each system – applicable to each system –

Equilibrium simulationEquilibrium simulation

Periodic motion of phenomenaPeriodic motion of phenomena

Chaotic behaviour of phenomenaChaotic behaviour of phenomena

identification in each system of internal or external forces identification in each system of internal or external forces

representing tools of attraction in conditions of agreement representing tools of attraction in conditions of agreement

or or disagreementdisagreement

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To extend to Economics some important To extend to Economics some important principles and categories of Physics –principles and categories of Physics –

Concept of dimensionConcept of dimension

Concept of mass (inertial or gravity)Concept of mass (inertial or gravity)

Concept of speed and type of motionConcept of speed and type of motion

(uniform, accelerated)(uniform, accelerated)

The placing in the analysis of some concepts of The placing in the analysis of some concepts of “prospect theory” for interpreting utility functions “prospect theory” for interpreting utility functions (Prof. Kahneman)(Prof. Kahneman)

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DATABASEDATABASE

Type of informationType of informationapplicable to every applicable to every

countrycountry

Political information. TI’sPolitical information. TI’sCorruption Perception IndexCorruption Perception Index

Level of take-over defenceLevel of take-over defencein every countryin every country

International monetaryInternational monetaryenvironmentenvironment

Foreign exchange rateForeign exchange ratedeterminationdetermination

Foreign exchange marketForeign exchange market

Public economic informationPublic economic information(GDP, Y,I,C, Importing, (GDP, Y,I,C, Importing, Exporting)Exporting)

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ENTERPRISE RISKENTERPRISE RISK

Type of information inType of information in

the global systemthe global system

off-line database off-line database consisting of companyconsisting of company

balance-sheetsbalance-sheets

off-line databaseoff-line database

consisting of statisticalconsisting of statistical

information – productioninformation – production

sectorssectors

on-line database – on-line database – Bloomberg, Data-Bloomberg, Data-streams, Reutersstreams, Reuters

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FINANCIAL MARKETSFINANCIAL MARKETS

Type of informationType of information in the in the global systemglobal system

Market segmentationMarket segmentation

Emerging capital marketsEmerging capital markets

International portfolioInternational portfoliodiversificationdiversification

Trend and cycles ofTrend and cycles ofsecuritiessecurities

Market indexesMarket indexes

Stock exchange bookStock exchange book

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FEASIBLE OBJECTIVES (1)FEASIBLE OBJECTIVES (1)

Researching the principles of organization of Researching the principles of organization of

economic systems (country systems, financial economic systems (country systems, financial

markets, systems of production) which markets, systems of production) which

produce stability or, conversely, generate produce stability or, conversely, generate

instability and, in addition, the development of instability and, in addition, the development of

“softcomputing” techniques for the purpose of “softcomputing” techniques for the purpose of

analysis of those principles.analysis of those principles.

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FEASIBLE OBJECTIVES (2)FEASIBLE OBJECTIVES (2)

The creation and implementation of database The creation and implementation of database

systems, essential for empirical study, their systems, essential for empirical study, their

application to complex systems in the areas application to complex systems in the areas

above mentioned, and to model tests.above mentioned, and to model tests.

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FEASIBLE OBJECTIVES (3)FEASIBLE OBJECTIVES (3)

The construction of forecast models of risk The construction of forecast models of risk

(operative, financial, default) by the (operative, financial, default) by the

application of softcomputing techniques application of softcomputing techniques

(including neural networks and genetic (including neural networks and genetic

algorithms) able to define the systems algorithms) able to define the systems

under consideration and to reproduce under consideration and to reproduce

trade-off risk yield in non-linear termstrade-off risk yield in non-linear terms

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FEASIBLE OBJECTIVES (4)FEASIBLE OBJECTIVES (4)

The creation of platform prototypes (software The creation of platform prototypes (software

modular) for the analysis and evaluation of modular) for the analysis and evaluation of

country risk, of country insolvency risk and of country risk, of country insolvency risk and of

financial markets risk (operational, financial financial markets risk (operational, financial

and default)and default)

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FEASIBLE OBJECTIVES (5)FEASIBLE OBJECTIVES (5)

The use of the EGRID data system of The use of the EGRID data system of

operation for access to and sharing of operation for access to and sharing of

information and results, and the creation of information and results, and the creation of

an interface of “facility” platform prototypes an interface of “facility” platform prototypes

(see previous note) and the (see previous note) and the

implementation (representing considerable implementation (representing considerable

innovative importance) of a connection innovative importance) of a connection

between the two between the two systemssystems

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AREAS OF ACTIVITYAREAS OF ACTIVITY

Extensive bibliographical research, the Extensive bibliographical research, the

determination determination of the principal economic-financial of the principal economic-financial

parameters for for exact analysis, and the parameters for for exact analysis, and the

selection of new numerical selection of new numerical methodologymethodology

Grouping of data and the creation and Grouping of data and the creation and

organization of personalized data banks, organization of personalized data banks,

essential for the development essential for the development of empirical studyof empirical study

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continuedcontinued

Comparative use of the Gaussian processes, neuralComparative use of the Gaussian processes, neural

networks and genetic programming for thenetworks and genetic programming for the

understanding of the reaction of the systems underunderstanding of the reaction of the systems under

study in cases of instabilitystudy in cases of instability

Creation of forecast models of riskCreation of forecast models of risk

Creation of a platform (software modular), itsCreation of a platform (software modular), its

interaction with the data bank (see Area of Activity 1)interaction with the data bank (see Area of Activity 1)

and its connection with the EGRID system ofand its connection with the EGRID system of

operationoperation

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Area of activity 1: Area of activity 1: Extensive bibliographical research, the Extensive bibliographical research, the

determination of the principal economic-financial parameters for determination of the principal economic-financial parameters for exact analysis, and the selection of new numerical methodologyexact analysis, and the selection of new numerical methodology

Coordinator – Coordinator – prof. Maurizio Fanniprof. Maurizio Fanni

The activity provides for extensive bibliographical research and The activity provides for extensive bibliographical research and classified bibliographical documentationclassified bibliographical documentation

Critical reading of the studies already undertaken, especially in the Critical reading of the studies already undertaken, especially in the field of economics, and of methodology able to interpret complex field of economics, and of methodology able to interpret complex phenomena, represents a significant stage in the research as a phenomena, represents a significant stage in the research as a whole and forms the phase of identification of both strong and weak whole and forms the phase of identification of both strong and weak points which result from the merging of various points which result from the merging of various

areas which, though widely dispersed, reach sufficientareas which, though widely dispersed, reach sufficient

integrationintegration

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Area of activity 2 :Area of activity 2 : Collection of data and the creation and Collection of data and the creation and

organization of personalized data banks, essential for the organization of personalized data banks, essential for the

development of empirical studydevelopment of empirical study

Coordinator: Coordinator: prof. Maurizio Fanniprof. Maurizio Fanni

Relevant sources are represented by data bank archives Relevant sources are represented by data bank archives

supplying information, in both paper and digital forms, with supplying information, in both paper and digital forms, with

reference to company balance-sheets, both quoted and reference to company balance-sheets, both quoted and

unquoted.unquoted.

Data processing for the purpose of “personalization” which Data processing for the purpose of “personalization” which

should lead to the ordering of usuable information for analysis should lead to the ordering of usuable information for analysis

and be in line with modern financial developments.and be in line with modern financial developments.

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Area of Activity 2 :Area of Activity 2 : Collection of data and the creation and Collection of data and the creation and

organization of personalized data banks, essential for the organization of personalized data banks, essential for the

development of empirical study.development of empirical study.

Coordinator: Coordinator: prof. Maurizio Fanniprof. Maurizio Fanni

Relevant sources are represented by series of archival data Relevant sources are represented by series of archival data

(share and bond prices) of various financial markets, the trend (share and bond prices) of various financial markets, the trend

of domestic and global indexes with extensive temporal of domestic and global indexes with extensive temporal

analysis, risk and vulnerability indicators of the same markets, analysis, risk and vulnerability indicators of the same markets,

Rating indicators, etc), organized and diffused by specialized Rating indicators, etc), organized and diffused by specialized

bodies at different times.bodies at different times.

Data processing with the aim of “personalization” should lead to Data processing with the aim of “personalization” should lead to

the arrangement of usable data for analysis and be in line with the arrangement of usable data for analysis and be in line with

the evolution of Modern Finance.the evolution of Modern Finance.

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Area of activity 3 :Area of activity 3 : Comparative use of Gaussian processes, Comparative use of Gaussian processes,

neural networks and “genetic programming” for the understanding of neural networks and “genetic programming” for the understanding of

the response of the systems under investigation in cases of the response of the systems under investigation in cases of

instability.instability.

The construction of forecast models of risk.The construction of forecast models of risk.

Coordinators: Coordinators: prof. Maurizio Fanni and prof. Carlo Poloniprof. Maurizio Fanni and prof. Carlo Poloni

With the aim of an overall interpretation of the structure of the said With the aim of an overall interpretation of the structure of the said

markets (efficiency, stability, significance of the temporal horizon of markets (efficiency, stability, significance of the temporal horizon of

the investor, conditions of “self-similarity”, persistance and non-the investor, conditions of “self-similarity”, persistance and non-

persistance of securities yield and of market indexes), as well as an persistance of securities yield and of market indexes), as well as an

explanation of reactions in cases of instability and in contexts of explanation of reactions in cases of instability and in contexts of

chaos, the various aspects will be treated in comparison by the use chaos, the various aspects will be treated in comparison by the use

of Gaussian processes, neural networks and “genetic of Gaussian processes, neural networks and “genetic

programming”.programming”.

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Area of activity 3 :Area of activity 3 : Comparative use of Gaussian Comparative use of Gaussian

processes, neural networks and “genetic programming” for processes, neural networks and “genetic programming” for the understanding of the reaction of the systems under the understanding of the reaction of the systems under investigation in events of instabilityinvestigation in events of instability

Coordinators: Coordinators: prof. Maurizio Fanni and prof. Carlo Poloniprof. Maurizio Fanni and prof. Carlo Poloni

The emergence of models based on “measuring memory”The emergence of models based on “measuring memory”

research in the areas under investigation. In general, these research in the areas under investigation. In general, these will be “nonlinear dynamic systems” able to offer explanation will be “nonlinear dynamic systems” able to offer explanation of the behaviour of the system in its entirety and to manage its of the behaviour of the system in its entirety and to manage its vulnerability and uncertaintyvulnerability and uncertainty

The analysis of systematic risk will be linked to the level of The analysis of systematic risk will be linked to the level of borrowing and to economic cycle trends in a global borrowing and to economic cycle trends in a global perspectiveperspective

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Area of activity 3:Area of activity 3: Comparative use of Gaussian processes, neural Comparative use of Gaussian processes, neural

networks and “genetic programming” for the understanding of the reaction of networks and “genetic programming” for the understanding of the reaction of

the sytems under investigation in cases of instabilitythe sytems under investigation in cases of instability

Coordinators: Coordinators: prof. Maurizio Fanni and prof. Carlo Poloniprof. Maurizio Fanni and prof. Carlo Poloni

The procedure will be the application, for the purpose of risk management, The procedure will be the application, for the purpose of risk management,

of the algorithms realized in areas of activity 3a and 3bof the algorithms realized in areas of activity 3a and 3b

The application of models The application of models ad hocad hoc of the state of company distress and of the state of company distress and

similar models relative to securities and hedge funds (measurement of the similar models relative to securities and hedge funds (measurement of the

probability of insolvency with the assistance of VAR type analysis) with probability of insolvency with the assistance of VAR type analysis) with

consideration of the consequences of default on financing bodies (financial consideration of the consequences of default on financing bodies (financial

intermediaries and institutional investors)intermediaries and institutional investors)

The role of company risk cover will be studied and a financial market The role of company risk cover will be studied and a financial market

structure will be realized in the context of asset liabilities managementstructure will be realized in the context of asset liabilities management

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Area of activity 4:Area of activity 4: The realization of an information platform The realization of an information platform

(software modular) its intereaction with the data bank of area of activity (software modular) its intereaction with the data bank of area of activity

2, and its connection with the management system EGRID2, and its connection with the management system EGRID

Coordinator: Coordinator: prof. Carlo Poloniprof. Carlo Poloni

The research group transfers and shares, in the EGRID distribution The research group transfers and shares, in the EGRID distribution

system, the results of their individual research in the interest of all system, the results of their individual research in the interest of all

participants thus allowing the scientific sectors involved to make use of participants thus allowing the scientific sectors involved to make use of

advantages generable to the national facilityadvantages generable to the national facility

To that end, the research group proceeds to the prototyping of software To that end, the research group proceeds to the prototyping of software

with the modelling and the numerical methodology created in previous with the modelling and the numerical methodology created in previous

areas of activity, leading to all the necesssary intereactions for a first areas of activity, leading to all the necesssary intereactions for a first

class software connection with the EGRID systemclass software connection with the EGRID system

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Area of activity 4:Area of activity 4: The realization of an information platform (software The realization of an information platform (software

modular), its intereaction with the data bank of area of activity 2 and its modular), its intereaction with the data bank of area of activity 2 and its

connection with the management system EGRIDconnection with the management system EGRID

Coordinator:Coordinator: prof Carlo Poloni prof Carlo Poloni

In general. At the conclusion of activity the research group proceeds to In general. At the conclusion of activity the research group proceeds to

strengthen the interface of the software created with the EGRID data strengthen the interface of the software created with the EGRID data

management system, developed by the ICTP project, in order to make management system, developed by the ICTP project, in order to make

efficient use of the data baseefficient use of the data base

Concluding activity will be generally organized to resolve and Concluding activity will be generally organized to resolve and

implement the connection between the two systemsimplement the connection between the two systems

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