Ponzi schemes: computer simulation

Mário Cunha, Hélder Valente and Paulo B. Vasconcelos ()
Additional contact information
Mário Cunha: Economy master program student at FEP
Hélder Valente: CEF.UP, Center for Economics and Finance at UP
Paulo B. Vasconcelos: CMUP, Mathematics Center at UP

OBEGEF Working Papers from OBEGEF - Observatório de Economia e Gestão de Fraude, OBEGEF Working Papers on Fraud and Corruption

Abstract: Ponzi and Madoff names, as well as the Portuguese D. Branca, are so-called investment schemes that have become well-known. These scams are widespread and continue to exist, with more or less modifications, depicting serious damage to many people and society in general. Being a phenomenon of easy explanation after the implosion, its perception is not easy in a timely manner. There are some interesting studies on this subject, although in reduced numbers. In this paper we present a computational approach to the mathematical model developed by Artzrouni (2009), to study Ponzi schemes. The model describes the dynamics of an investment fund that promises higher incomes than those it can effectively offer. In the genesis there are a promised return rate, the actual nominal rate, unrealistic market capture rate of new investment and the rate of removal of accumulated deposits. Simulations resulting from shocks on the parameters of the model will be presented, in order to illustrate the impact on the success or the collapse of the investment fund. For the model calibration, data available for one of the most famous fraudulent financial schemes was used: Charles Ponzi, 1920. A philanthropic version of the model is also presented for discussion, bearing in mind social security models. The aptitude of simulation in the detection of unsustainable patterns may be of interest to financial regulators and investors when confronted with situations where funds show unrealistic performances vis-à-vis the economic and financial constraints.

Keywords: Ponzi schemes; investment; rate of return; ordinary differential equations; numerical methods for odes; simulation (search for similar items in EconPapers)
Pages: 20 pages
Date: 2013-02
New Economics Papers: this item is included in nep-cmp
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Citations: View citations in EconPapers (1)

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