Business Economics and Finance with MATLAB, GIS, and Simulation Models

by Anderson; Patrick L.

• ISBN13: 9781584883487
• ISBN10: 1584883480
• Edition: 1st
• Format: Hardcover
• Copyright: 2004-07-27
• Publisher: Chapman & Hall/

Summary

This book takes recent theoretical advances in Finance and Economics and shows how they can be implemented in the real world. It presents tactics for using mathematical and simulation models to solve complex tasks of forecasting income, valuing businesses, predicting retail sales, and evaluating markets and tax and regulatory problems.Business Economics and Finance with Matlab, GIS, and Simulation Models provides a unique overview of sophisticated business and financial applications. It describes models that have been developed for analysis of retail sales, tax policy, location, economic impact, public policy issues, and other challenges faced by executives, investors, and economists on a daily basis. It also offers groundbreaking insight into the many calculation and modeling tools that can be remotely hosted and run over the Internet, resulting in substantial user benefits and cost savings.This book is the first to fully explore the capabilities of MATLAB in the field of business economics, and explain how the benefits of sophisticated mathematical models can be provided to users via the Internet, using a thin-client environment. Many techniques directly incorporate geographic information and GIS in a way that was impossible until quite recently. Some techniques, such as fuzzy logic, retail sales, economic and fiscal impact models, and other Matlab and Simulink models, are described for the first time in print in this book. The sections on business income and value break new ground by directly incorporating uncertainty, real option value, and prediction of variables using Ito and jump processes. Using dozens of examples, hundreds of references, and rigorous explanations of both theory and practice, it will become a prized reference for analysts demanding the best techniques.

Table of Contents

Table of Contents	ix
List of Tables	xxi
List of Figures	xxiii
List of Code Fragments	xxv
1 How to Use This Book	1	(18)
Organization of the Book	1	(3)
Intended Audience	4	(1)
Prerequisite Knowledge	4	(1)
Suggested Reading Plans	5	(1)
Typographic Conventions	5	(2)
Changing Software Commands	6	(1)
MATLAB Programming and Code	6	(1)
Main Purpose of Code	6	(1)
Version Notes	7	(1)
Accessing Files and Online Resources	7	(1)
Accessing the Economics Toolbox	8	(1)
Disclaimers and Limitations	8	(1)
Contacting the Author and Publisher	9	(1)
Contacting the Author	9	(1)
Contacting the Publisher	9	(1)
Contacting The MathWorks	9	(1)
References on MATLAB and Applied Economics	9	(6)
Suggested Resources for MATLAB Users in Business, Economics, and Finance	10	(1)
General Books on Using MATLAB	10	(1)
MATLAB Explanations in This Book	11	(2)
Books on Applying MATLAB for Business, Economics, and Related Fields	13	(1)
Fundamental and Historical References	14	(1)
Books for Other Fields	14	(1)
Maxims of Business Economics	15	(3)
Conclusion	18	(1)
2 Mathematical and Simulation Models in Business Economics	19	(10)
Business Economics vs. Academic Economics	19	(2)
Why Practice Business Economics?	19	(1)
Why Study Academic Economics?	20	(1)
Why Use Mathematical and Simulation Software?	21	(4)
Software Environments	21	(1)
Simulation Models vs. Spreadsheets	22	(3)
Why Use MATLAB and Simulink?	25	(4)
Using MATLAB	25	(1)
Using Simulink	25	(1)
Drawbacks of MATLAB and Simulink	26	(1)
When To Use Mathematical or Simulation Models	26	(1)
When To Use GIS and Database Software	26	(2)
An Admonition	28	(1)
3 MATLAB and Simulink Design Guidelines	29	(34)
The Importance of Good Design	29	(1)
What is Design?	29	(1)
Why Use Good Design?	30	(1)
Setting Up the MATLAB Workspace	30	(1)
Organizing MATLAB Models	31	(3)
MATLAB Scripts and Functions	31	(1)
Callbacks	32	(1)
Design Guidelines for m-files	32	(1)
Initializing a Model	33	(1)
Initializing a MATLAB Model	33	(1)
Initializing a Simulink Model	34	(1)
Introduction to Simulink Models	34	(2)
The Simulink Model Schematic	35	(1)
Time and States in a Simulink Model	35	(1)
Example Simulink Models	36	(1)
Example Economics Model	36	(1)
House Net Benefits Model	36	(1)
Top View	36	(3)
Costs and Rental Value Subsystem	37	(1)
Other Costs Subsystems	37	(2)
Output Blocks	39	(1)
Simulink Model Design Considerations	39	(6)
Style Guidelines for Models	39	(6)
Organizing Simulink Models	45	(1)
The Art of Model Organization	46	(3)
Style Guidelines for Specific Blocks	46	(1)
Initializing a Model	46	(3)
Simulation Parameters and the SIM command	49	(3)
Time and Solver Parameters in Simulink	49	(1)
Setting Parameters through a Menu	50	(1)
The SIM Command	50	(2)
A Master Simulation Callback	52	(1)
Using the Master Simulation Callback	53	(1)
Documenting Your Models	53	(1)
Masked Message Boxes	53	(1)
Trigger Boxes	53	(1)
Callback Messages	54	(2)
Complex String Arrays	54	(2)
String Commands	56	(1)
A Custom Business Economics Simulink Library	56	(2)
To Set Up a Library	57	(1)
To Put Blocks in the Library	57	(1)
To Make the Library Appear in the Simulink Browser	57	(1)
Troubleshooting	58	(1)
Appendix: Master Simulation Callback	58	(5)
4 Importing and Reporting Your Data	63	(34)
The Importance of Data	63	(1)
Know Your Data	64	(2)
The Critical Need	64	(2)
Getting Data into a Model	66	(6)
Getting Data from the Internet	66	(1)
Getting Data From HTML Pages	67	(2)
Direct Internet Data Acquisition	69	(1)
Using Excel Link	70	(1)
Importing Your Data: A General Strategy	70	(1)
Reporting Your Data	71	(1)
Debugging Excel Link	72	(1)
Reporting Your Results	72	(2)
The Diary Command	72	(1)
MATLAB Report Engine	73	(1)
Careful Programming	73	(1)
Recommended Practices	73	(1)
Using Structures to Organize Data	74	(7)
Data Arrays and Data Structures	74	(1)
Uses and Limitations of Arrays	74	(7)
Data Organizing Tools	81	(1)
Discussion: Spreadsheets and Databases	81	(1)
A Note on GIS Databases	82	(1)
Creating Custom Structures	82	(1)
Additional Methods	82	(2)
Command History, Diary, and Notebook	83	(1)
Custom Interfaces	83	(1)
MATLAB Web Server	83	(1)
Appendix I: XML and Structured Data	84	(2)
Limitations of HTML	84	(1)
History of HTML, Other Formats, and XML	84	(1)
Use of XML Today: Its Use in MATLAB	85	(1)
XML and the Document Object Model	85	(1)
Recommendation: Plan for Future Data Exchange	86	(1)
Appendix II: Custom Data Structure Creation	87	(7)
Variables in This Custom Structure	88	(6)
Appendix III: File Importing with MATLAB	94	(3)
Delimited Files	94	(1)
Web-Based Data: HTML	94	(1)
Web-Based Data: XML	94	(1)
Compressed Files	95	(1)
Formatted Files	95	(1)
Databases and Data Feeds	95	(1)
Excel Link	95	(2)
5 Library Functions for Business Economics	97	(32)
Common Analytical Tools in Economics	97	(1)
Library of Tools in MATLAB and Simulink	97	(1)
Microeconomic Theory and Practical Applications	97	(8)
Comparative Statics	98	(7)
Supply Function	105	(3)
Desirable Qualities of the Supply Function	106	(1)
Elasticity of Supply	107	(1)
Putting It Together	108	(1)
Graphics Techniques	109	(1)
Libraries in Simulink	110	(1)
Set Up a Library	110	(1)
To Put Blocks in the Library	110	(1)
Making the Library Appear in the Simulink Browser	110	(1)
Troubleshooting Libraries	111	(1)
Modifying an Existing Library	111	(1)
Special Library Blocks	111	(2)
Growth Models	111	(2)
Custom Business Economics Blocks	113	(1)
Compound Growth	113	(1)
Varying Growth	113	(1)
Elasticity	113	(1)
Example Simulink Model	114	(1)
Purpose of the Model	114	(1)
Top-Level View of Model	115	(1)
Running the Example Model	115	(14)
Master Simulation Callback	115	(14)
6 Economic Impact Models	129	(30)
Economic and Fiscal Impact Models	129	(1)
Ethics in Economic Impact	129	(1)
Sports Exaggerations	130	(2)
A Syndrome: The Missing Report	130	(1)
A Sports Example: The Super Bowl	131	(1)
Non-Sports Exaggerations	132	(2)
Economic Impact of Y2K	132	(1)
Economic Impact of Broadband	133	(1)
An Example: The Fantasy Game	134	(1)
Sum of Benefits from the Fantasy Game	135	(2)
A Plea for Ethics in Impact Analysis	137	(1)
The Economics of Impact Models	137	(2)
History and Current Usage	138	(1)
Widespread Lack of Knowledge	139	(1)
Input-Output Equations	139	(3)
The Technology Matrix	140	(1)
The Fundamental Equation	141	(1)
A Robinson Crusoe Example	141	(1)
Restrictive Assumptions	142	(1)
Mathematics of Multiplier Analysis	143	(6)
Total Output Multipliers	144	(1)
Uses of Input-Output Analysis	145	(1)
Rules for the Proper Use of Multipliers	145	(4)
Conclusion: Rules for the Use of Multipliers	149	(1)
Economic Impact Simulation Models	149	(2)
Economic and Fiscal Impacts: City of Detroit Model	149	(2)
Implementing the Model	151	(1)
Schematics of the Simulink Model	152	(4)
Modeling Dynamic Behavior: Adjustment	156	(3)
Option I: Borrow Depreciation Algorithms	156	(1)
Option II: Specify Partial Adjustment Model	157	(2)
7 Fiscal Impact Models	159	(14)
Fiscal Impact Methodology	159	(1)
Definition of Fiscal Impact	159	(1)
Relationship between Economic and Fiscal Impacts	159	(1)
On the Political Economy of Taxes	160	(1)
Fiscal Impact of Industrial Development	161	(1)
Methodology Summary	161	(1)
Description of Each Part of the Model	161	(2)
Overview: Fiscal Impact Model	161	(2)
Notes on Model Structure	163	(1)
Source Data	163	(1)
Recapitulation of Exhibits	164	(1)
Additional Technical Notes	164	(9)
8 Tax Revenue and Tax Policy	173	(16)
Introduction	173	(1)
Advantages of Simulation Models	173	(1)
Sections in This Chapter	174	(1)
Income and Payroll Taxes	174	(3)
Federal Income Taxes	174	(1)
State and Local Income Taxes	175	(1)
OASDI (Social Security and Medicare) Taxes	175	(1)
FUTA (Federal Unemployment Tax Act)	176	(1)
Unemployment Insurance	176	(1)
Who Pays Payroll Taxes?	176	(1)
Modeling Income and Payroll Taxes	177	(1)
Earned Income Tax Credit	178	(11)
Introduction	178	(1)
Tax Policy Analysis Methodology	178	(1)
Payroll Taxes As a Share of Taxes on Wages	179	(1)
Results of Tax Incidence Analysis	179	(2)
Fiscal Analysis	181	(1)
Fiscal Impact of Tax Policy Change	181	(8)
9 Regional Economics	189	(18)
The Primacy of Regional and Local Economies	189	(1)
Diversification and Recession Risk	189	(3)
Traditional Measures of Diversification	190	(1)
Recession-Severity Measure of Diversification	191	(1)
Portfolio Theory Analysis	192	(5)
Methodology	194	(2)
Example Analysis of Cass Country, MI	196	(1)
Urban Sprawl	197	(2)
Defining Sprawl	197	(2)
Calculating Sprawl	199	(1)
Rural Sprawl	199	(1)
Limitations of the Sprawl Index	200	(1)
Preliminary Findings	200	(2)
Conclusions	202	(1)
Appendix I: The Sprawl Index in Mathematical Terms	203	(1)
Example Calculations	203	(1)
Appendix II: Risk and Return Measures for Diversification Risk and Return	204	(1)
Standard Diversification Measures	204	(1)
Recession-Severity Risk Statistic	205	(2)
10 Applications for Business	207	(36)
Introduction	207	(1)
Contents of this Chapter	207	(1)
Projecting Trend Growth: Simple Uncertainty	208	(4)
Simple Uncertainty: Baseline, High, and Low Scenarios	208	(1)
A Trend Projection Function	209	(1)
Uses for this Function	209	(1)
Trend Projection Code, Graphics, and Output	209	(1)
Function Details	210	(1)
Other Methods for Compound Growth Projections	211	(1)
Projection: Complex Uncertainty	212	(6)
Markov Processes, States, and Uncertainty	212	(1)
Simple Uncertainty: Deviation Around a Trend	213	(1)
Problems with Simple Uncertainty	213	(1)
Another Simple Uncertainty: Random Walk	214	(1)
Complex Uncertainty: Geometric Brownian Motion	215	(2)
Complex Uncertainty: Jump Processes	217	(1)
The Value of a Financial Asset	218	(5)
Earnings or Discount Rate?	219	(1)
Deriving the Present Value of a Financial Asset	219	(3)
Importance of Income Growth vs. Discount Rate	222	(1)
Present Value of a Future Stream With Poisson Risk	222	(1)
Income Under Uncertainty	223	(2)
A Recommended Approach	224	(1)
A Business Income Model	225	(1)
Earnings Drive a Firm	225	(1)
A Business Income Simulation Model	225	(1)
Running the Business Income Model	226	(1)
Application: Real Estate	226	(1)
Iterative Market Value and Tax Model	226	(9)
Simplifying Assumptions Allowing an Iterative Method	230	(1)
An Iterative Model to Estimate Market Value and Taxation	231	(4)
Appendix: Computer Code for Selected Utility Programs	235	(8)
11 Business Valuation and Damages Estimation	243	(54)
Economics, Finance, and Valuation	243	(4)
Use of This Chapter by Readers of Different Backgrounds	243	(1)
What Is To Be Valued?	244	(1)
Difference between Market Value and Accounting Concepts	245	(1)
Book Value and Market Value	246	(1)
The Role of Economist and Accountant in Business Valuation	247	(1)
Concepts of Value	248	(3)
Fair Market Value	248	(3)
Valuation Methods	251	(3)
Approaches to Valuation	251	(2)
Fundamental Equivalence of Methods	253	(1)
New Approaches to Valuation	254	(1)
Recommended Order of Methods	254	(5)
Best Evidence: Market Price	254	(1)
Second Best Method: Income Method	255	(2)
Third Best Method: Asset-Based Methods	257	(2)
Dynamic Programming and Real Options Methods	259	(8)
The Real Options Approach	259	(4)
Dynamic Programming Methods	263	(4)
Conclusion: Real Options and Dynamic Programming Methods	267	(1)
Information Necessary To Value a Firm	267	(4)
Accounting Information	268	(1)
Economic Assumptions	269	(1)
Management Policies	269	(2)
Example Business Valuations	271	(6)
Steps To Value a Business or Estimate Damages	271	(1)
Example: Beverage Distributors	272	(2)
Creating the Structure	274	(3)
Estimating Business Values	277	(5)
Valuation Estimates by Multiple Methods	277	(4)
Graphical Output from Valuation Calculations	281	(1)
Summary of Valuation Session	281	(1)
Importance of Judgment	281	(1)
Rational Damages	282	(3)
Economic Structure of Corporate Law	283	(1)
Economics of Sanctions	283	(2)
The Discount Rate	285	(12)
General Principle: Match Rate with Purpose, Duration, and Risk	286	(11)
12 Applications for Finance	297	(30)
Finance and Economics	297	(1)
Consumer Lending	298	(3)
Mortgage Analysis	298	(3)
Depreciation	301	(2)
Auto Depreciation	301	(2)
Investment Portfolio Analysis	303	(3)
Mean-Variance Analysis	304	(1)
Portfolio Analysis in MATLAB	305	(1)
The GetStocks Function	305	(1)
Other Topics in Finance	306	(21)
Portfolio Theory and Economic Diversification	306	(1)
Growth Models and Simulink	307	(1)
Credit Risk	308	(19)
13 Modeling Location and Retail Sales	327	(46)
Introduction: The Spatial Dimension in Economics	327	(1)
The Location Poverty of Modern Economics	327	(1)
Location and the Birth of Economics	328	(1)
Business Economics and Location	329	(1)
What is "Retail"?	330	(1)
A Note on GIS	330	(1)
Applying Economic Theory to Sales Location	330	(2)
The Economics of Time	330	(1)
Increased Distance Means Increased Costs	331	(1)
Newton's Law of Gravity	332	(4)
The Social Gravity Model	333	(1)
The Quadratic Human?	334	(2)
The Social Gravity Model: Application	336	(1)
Retail Sales Adaptation of the Gravity Model	336	(1)
Uses for Distance-Sales Analysis	337	(1)
Customer Location Data	337	(27)
What Is Location?	338	(1)
Sources of Customer Location Data	338	(1)
Initial Analysis of Regional Sales Data	339	(1)
Geographic Analysis of Sales	340	(1)
Equal-Distance Rings	341	(1)
Sales Patterns by Area	342	(3)
Finding Distances	345	(3)
Applying a Gravity Model to the Distance-Sales Analysis	348	(3)
Data Collection and Formatting	351	(1)
Specifying and Estimating a Sales-Distance Model	352	(5)
Nonlinear Optimization and Gravity Model Estimation	357	(1)
Alternative Specification: Best-Fit Polynomials	358	(1)
Comparison: Gravity and Polynomial Models	359	(1)
Weaknesses of Polynomial Equations	360	(1)
Conclusion: Gravity Models vs. Polynomials	361	(1)
Complex Models with Additional Variables	362	(2)
Determining Sales and Market Areas	364	(2)
Projecting Total Sales	364	(2)
Defining Market Areas	366	(1)
Estimating Sales Shifts and Cannibalization	367	(2)
Cannibalization in Retail Franchises	367	(1)
Required Data	368	(1)
Changes in Total Product Sales	369	(4)
Measuring Changes in Sales by Retailer	370	(1)
Measuring Changes to Sales	370	(3)
14 Applications for Manufacturing	373	(10)
Statistical Quality Control	373	(1)
Statistics and Statistical Process Control	373	(1)
Purposes, Innovations, and Limitations of this Chapter	373	(5)
History and Uses of SPC	374	(1)
Principles of SPC	374	(1)
The Classic Shewhart Charts	375	(1)
A Simple SPC Program	376	(2)
A "Thin-Client" Approach	378	(5)
SPC Using MATLAB Web Server	379	(1)
Customizing the Application	379	(1)
Extending Beyond SPC: Taguchi Methods	380	(3)
15 Fuzzy Logic Business Applications	383	(22)
Human Logic and Fuzzy Thinking	383	(1)
An Extension of Boolean Logic	383	(1)
Probability Statements	384	(2)
Example: Selection of Investments	384	(2)
Equivalence of Boolean and Fuzzy Logic	386	(1)
History of Fuzzy Logic	386	(1)
Current Uses and Names of Fuzzy Logic	387	(1)
References on Fuzzy Logic	387	(1)
An Income Tax Audit Predictor	387	(7)
Example: Income Tax Audit Predictor	387	(1)
Purpose of the Predictor	388	(1)
History and Structure of the Predictor	388	(1)
The Rules of the Audit Predictor	389	(3)
Graphical Illustration	392	(2)
Running a Fuzzy Logic System	394	(3)
Variation: Simulation Models	396	(1)
A Credit Risk Fuzzy Logic Simulation Model	397	(3)
Using a Simple Credit Risk FIS	397	(1)
Structure of the Credit Risk Model	398	(1)
Extensions of This Model	398	(1)
Conclusion: Credit Risk Simulation Model	398	(2)
Implementation Issues and Troubleshooting Tips	400	(5)
Fuzzy Logic Models in MATLAB	400	(1)
Fuzzy Logic Models in Simulink	400	(5)
16 Bringing Analytic Power to the Internet	405	(16)
Static and Dynamic Data on the Web	405	(1)
The Third Wave: Complex Analysis	405	(2)
Example 1: Financial Industry	406	(1)
Example 2: Automotive Retail	407	(1)
Key Advances	407	(1)
Information in This Chapter	407	(1)
The Network as Platform	408	(2)
Choosing the Platform: Windows vs. the Web	408	(1)
Controlling the Desktop	409	(1)
Calculations, Databases, and Dynamic Pages	409	(1)
MATLAB on the Web	410	(1)
Design Considerations for Web Server Applications	410	(2)
A Difference in Windows	410	(1)
Other Differences	411	(1)
Setting Up the Web Server Model	412	(1)
Planning for the Future	412	(1)
Text and Data Formats on the Web	413	(3)
Graphics Formats	413	(1)
Publishing Your Results on the Internet or an Intranet	414	(1)
Limitations of HTML	414	(1)
The Coming XML Standard	415	(1)
Structured Data and the Document Object Model	415	(1)
MATLAB and XML	416	(3)
Example 1: Generating Help Files	416	(1)
Example 2: Creating Custom Information Files	417	(1)
Other XML Tools Available	417	(1)
Conclusion: Using XML in MATLAB	417	(2)
Scalable Vector Graphics	419	(2)
SVG and Traditional Graphics	419	(1)
Extending beyond Static Display	419	(1)
Business Applications for SVG Images	420	(1)
17 Graphics and Other Topics	421	(28)
Purpose	421	(1)
Tufte Principles	421	(5)
Graphical Excellence	422	(4)
Rules for Effective Graphics	426	(1)
Methods of Specific Plots	427	(1)
Handle Graphics in MATLAB	427	(1)
References on Graphics in MATLAB	427	(1)
The Testplot Function	428	(6)
Line Graphs	428	(1)
Pie Charts	429	(2)
Bar Charts	431	(2)
Subplots	433	(1)
Adjusting Axes	433	(1)
Generating Test Graphics	434	(15)
Appendix A: Troubleshooting	449	(6)
Introduction to Troubleshooting	449	(1)
Troubleshooting MATLAB	449	(2)
Path Command	449	(1)
Data Type Mismatches	450	(1)
Checking MATLAB Paths and References (Windows)	451	(1)
A Note on Operating Systems	451	(1)
Troubleshooting Simulink Models	452	(3)
Data Problems in Simulink Models	452	(1)
Calculation Problems	453	(1)
Model Structure Problems	454	(1)
Appendix B: Excel Link Debugging	455	(4)
Excel Link Debugging	455	(3)
Common Excel Link Problems	455	(3)
Other Recommendations	458	(1)
Index	459