Macro-Finance Surface-Like Waves of Investment and Profits

Abstract

This paper studies quantitative macro-finance model and describes Investment and Profits surface-like risk waves. 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 by hydrodynamic-like equations. Minimum and maximum risk grades define most secure and most risky agents respectively. That determines borders of macro-finance domain on economic space that is filled by economic agents. Perturbations of agent’s risk coordinates near risk borders of macro domain cause disturbances of macro financial variables, for instance - Investment and Profits. Such disturbances can generate financial risk waves that propagate along risk borders. These waves may exponentially amplify perturbations inside of macro domain and impact financial sustainability. We study simple model relations between 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.