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Financial Instability Under Innovation Development: Reasons and Regulation Within the Model of Evolutionary Processes

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Abstract

In this paper, we suggest an approach to the study of the financial instability based on the model of evolutionary processes. In the first place, we present some empirical facts that confirm that the stock’s price dynamics is better described by the Markov switching model rather than by the pure random walk. Further, using the equilibrium model of price formation, we show that the temporary price trends on stock market are evolutionary processes that occur in the conditions of a duality of the equilibrium between the market price and the fair value. Then, within the framework of the constructed model, we analyze the causes of the financial market instability and its impact on the real sector, and show how the financial markets create a destructive impulse under the economic growth slowdown, and therefore adversely affect the process of innovations diffusion into the market. The conducted study shows that the causes of the financial instability are the capital concentration in the narrow circles of society and the lack of investment opportunities, as compared with the available financial resources, whereas the symptoms are frequently recurring financial bubbles and crises.

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Notes

  1. 1.

    If |λ| > 0 and ω = we have Markov switching model, proposed by Hamilton (1989) and widely discussed nowadays.

  2. 2.

    This regression, but not a random walk, take place because the initial data in the Schiller’s base include autocorrelation coefficient of 0.28, as they perform data smoothed as for daily sliding averages.

  3. 3.

    All model parameters are evaluated applying least square method.

  4. 4.

    Unfortunately, achieving positive results from implementation of this strategy may require decades.

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Acknowledgments

The research and its findings has been supported by the Grant of the Russian Science Foundation (Research project No. 14-28-00065 “Structural and cyclical paradigm of economic and technological renovation of macro-systems (World and Russia in the first half of the XXI century)”).

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Authors and Affiliations

  1. Department of Finance, National Research University Higher School of Economics, Kantemirovskaya Street 3, St-Petersburg, Russia

    Yuri Ichkitidze

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  1. Yuri Ichkitidze
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Correspondence to Yuri Ichkitidze .

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Editors and Affiliations

  1. University of Beira Interior, Covilhã, Portugal

    Tessaleno Devezas

  2. University of Beira Interior, Covilhã, Portugal

    João Leitão

  3. Saint-Petersburg State University of Architecture and Civil Engineering, Saint Petersburg, Russia

    Askar Sarygulov

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Ichkitidze, Y. (2017). Financial Instability Under Innovation Development: Reasons and Regulation Within the Model of Evolutionary Processes. In: Devezas, T., Leitão, J., Sarygulov, A. (eds) Industry 4.0. Studies on Entrepreneurship, Structural Change and Industrial Dynamics. Springer, Cham. https://doi.org/10.1007/978-3-319-49604-7_7

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