Econophysics of Macro-Finance: Local Multi-fluid Models and Surface-like Waves of Financial Variables

TL;DR

This paper models macro-financial variables as fluid-like entities on an economic space, analyzing surface-like waves of investment and profits that can influence financial stability and inform policy-making.

Contribution

It introduces a hydrodynamic-like framework for macro-finance, modeling risk-based interactions and wave phenomena on economic space, which is a novel approach in this field.

Findings

Surface-like waves of financial variables can propagate along risk borders.

Perturbations near risk borders can amplify and impact macro-financial stability.

Steady state distributions of investment and profits can be modeled with simple linear approximations.

Abstract

This paper models macro financial variables alike to financial fluids with local interactions and describes surface-like waves of Investment and Profits. We regard macro-finance as ensemble of economic agents and use their risk ratings as coordinates on economic space. Aggregations of agent's financial variables with risk coordinates x on economic space define macro financial variables as function of x. We describe evolution and interactions between macro financial variables alike to financial fluids by hydrodynamic-like equations. Minimum and maximum risk grades define most secure and most risky agents respectively. That determines borders of macro-finance domain that is filled by economic agents. Perturbations of agent's risk coordinates near risk borders of macro domain cause disturbances of macro financial variables like Investment and Profits. Such disturbances can generate waves that propagate along risk borders. These waves may exponentially amplify perturbations inside of macro domain and impact financial sustainability. We study simple model Investment and Profits and describe linear approximation of steady state distributions of Investment and Profits on macro-finance domain that fulfill dreams of Investors: "more risks-more Profits". We describe Investment and Profits waves on risk border of economic space alike to surface waves in fluids. We present simple examples that specify waves as possible origin of time fluctuations of macro financial variables. Description of possible steady state distributions of macro financial variables and financial risk waves on economic space could help for better policy-making and managing sustainable macro-finance.