Olkhov, Victor
(2023):
*Economic Theory as Successive Approximations of Statistical Moments.*

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## Abstract

This paper highlights the links between the descriptions of macroeconomic variables and statistical moments of market trade, price, and return. We consider economic transactions during the averaging time interval Δ as the exclusive matter that determines the change of any economic variables. We regard the stochasticity of market trade values and volumes during Δ as the only root of the random properties of price and return. We describe how the market-based n-th statistical moments of price and return during Δ depend on the n-th statistical moments of trade values and volumes or equally on sums during Δ of the n-th power of market trade values and volumes. We introduce the secondary averaging procedure that defines statistical moments of trade, price, and return during the averaging interval Δ2>>Δ. As well, the secondary averaging during Δ2>>Δ introduces statistical moments of macroeconomic variables, which were determined as sums of economic transactions during Δ. In the coming years, predictions of the market-based probabilities of price and return will be limited by Gaussian-type distributions determined by the first two statistical moments. We discuss the roots of the internal weakness of the conventional hedging tool, Value-at-Risk, that could not be solved and thus remain the source of additional risks and losses. One should consider economic theory as a set of successive approximations, each of which describes the next array of the n-th statistical moments of market transactions and macroeconomic variables, which are repeatedly averaged during the sequence of increasing time intervals.

Item Type: | MPRA Paper |
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Original Title: | Economic Theory as Successive Approximations of Statistical Moments |

English Title: | Economic Theory as Successive Approximations of Statistical Moments |

Language: | English |

Keywords: | economic theory; price and return; statistical moments; market-based probabilities |

Subjects: | C - Mathematical and Quantitative Methods > C0 - General > C00 - General E - Macroeconomics and Monetary Economics > E0 - General > E00 - General E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation |

Item ID: | 118722 |

Depositing User: | Victor Olkhov |

Date Deposited: | 11 Oct 2023 07:02 |

Last Modified: | 11 Oct 2023 07:02 |

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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/118722 |