9814

The Hazards of Propping Up: Bubbles and Chaos

This Demonstration shows the potentially hazardous long-term effects of propping up. An entity with the given capital seeks to maintain a constant proportion exposure to a financial instrument that trades with a fixed maturity. As time goes by, the entity experiences profits from the difference between the realized value of the instrument and the implied price at which it purchased it. The instrument is relatively illiquid, so each purchase or sale by the entity has an impact on the implied price. The plot of the evolution of the capital, the average maturity of the held instruments, the implied price, or the realized value is shown for the given number of years, assuming time steps of 1/days per year. The evolution is often a smooth bubble but when the capital reaches a critical value, discontinuities can result.

THINGS TO TRY

SNAPSHOTS

  • [Snapshot]
  • [Snapshot]
  • [Snapshot]

DETAILS

In the current environment of financial distress, many governments are likely to soon become major holders of financial assets, but the debate focuses only on short-term market stabilization. This Demonstration shows that government intervention and propping up are likely to lead to bubbles and possibly chaos. The critical value of capital that generates discontinuities is the reciprocal of the product of the proportion squared and the impact. Further details on the model can be found at http://papers.ssrn.com/abstract=1282711.
    • Share:

Embed Interactive Demonstration New!

Just copy and paste this snippet of JavaScript code into your website or blog to put the live Demonstration on your site. More details »

Files require Wolfram CDF Player or Mathematica.









 
RELATED RESOURCES
Mathematica »
The #1 tool for creating Demonstrations
and anything technical.
Wolfram|Alpha »
Explore anything with the first
computational knowledge engine.
MathWorld »
The web's most extensive
mathematics resource.
Course Assistant Apps »
An app for every course—
right in the palm of your hand.
Wolfram Blog »
Read our views on math,
science, and technology.
Computable Document Format »
The format that makes Demonstrations
(and any information) easy to share and
interact with.
STEM Initiative »
Programs & resources for
educators, schools & students.
Computerbasedmath.org »
Join the initiative for modernizing
math education.
Step-by-step Solutions »
Walk through homework problems one step at a time, with hints to help along the way.
Wolfram Problem Generator »
Unlimited random practice problems and answers with built-in Step-by-step solutions. Practice online or make a printable study sheet.
Wolfram Language »
Knowledge-based programming for everyone.
Powered by Wolfram Mathematica © 2014 Wolfram Demonstrations Project & Contributors  |  Terms of Use  |  Privacy Policy  |  RSS Give us your feedback
Note: To run this Demonstration you need Mathematica 7+ or the free Mathematica Player 7EX
Download or upgrade to Mathematica Player 7EX
I already have Mathematica Player or Mathematica 7+