Stochastic Logistic Model of the Global Financial Leverage

Smirnov Alexander D. ()
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Smirnov Alexander D.: Department of Applied Macroeconomics, National Research University Higher School of Economics, Moscow, Russia

The B.E. Journal of Theoretical Economics, 2018, vol. 18, issue 1, 20

Abstract: Debt, as one of basic human relations, has profound effects on economic growth. Debt accumulation in the global economy was modeled by the stochastic logistic equation reflecting causality between leverage and its rate of change. The model, identifying interactions and feedbacks in aggregate behaviour of creditors and borrowers, addressed various issues of macrofinancial stability. Qualitatively diverse patterns, including the Wicksellian (normal) market, the Minsky financial bubbles and the Fisherian debt-deflation, were discerned by appropriate combinations of rates of return, spreads and leverage. The Kolmogorov-Fokker-Plank equation was used to find out the stationary gamma distribution of leverage that was instrumental for the evaluation of appropriate failure and survival functions. Two patterns corresponding to different forms of a stationary gamma distribution were recognized in the long run leverage dynamics and were simulated as scenarios of a possible system evolution. In particular, empirically parameterized asymptotical distribution indicated excessive leverage and unsustainable global debt accumulation. It underlined the necessity of comprehensive reforms aiming to decrease uncertainty, debt and leverage. Assuming these reforms were successfully implemented, global leverage distributions would have converged in the long run to a peaked gamma distribution with the mode identical to the anchor leverage. The latter corresponded to a balanced long run debt demand and supply, hence to fairly evaluated financial assets fully collateralized by real resources. A particular case of macrofinancial Tobin’s q-coefficients following the Ornstein-Ulenbeck process was studied to evaluate a reasonable range of squeezing the bloated world finance. The model was verified on data published by the IMF in Global Financial Stability Reports for the period 2003–2013.

Keywords: leverage; logistic equation; debt collateral; gamma distribution; hazard function (search for similar items in EconPapers)
JEL-codes: C2 E4 E5 G1 N2 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/bejte-2016-0009

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