The Methods of Operation Researches on Russian Financial Markets

Agasandian G.A., Ereshko F.I.&A.F, Gasanov 1.1.

Computing Centre of Russian Academy of Sciences
E-mail: ereshko@ccas.ru
Preface
Financial Market is not widely and deeply developed in modem Russian economy. But there are several
examples where such essential volumes of information have been accumulated that constructions of adequate
stochastic or other models of uncertain factors are possible. So after that, applications of the various approaches and
methods of system analysis and operation researches are possible, useful and profitable.
We investigated the market of Russian Government Bills (RGBs) from two points of view: the
macroeconomics ($1) and RGB-portfolio management by small investors ($2). Also, the approach to the elaboration
of the rational politic for big producers in the real Russian economy that use the barter and bill contracts is described
(3).
8 1. Financial flows in macroeconomics.
We consider a simplest dynamic model of financial flows in the closed economic system that consists of the
Center Bank, the government, the bank system, the production and population. The model doesn't concern transition
processes and risk issues and studies only long-term trends. The fundamental aggregates of the model are: (1) the
debt A of the production to the bank system, (2) the debt S of the bank system to population, (3) the debt T of the
government to population, (4) the debt T of the government to the Center Bank and ( 5 ) the cash volume M. All these
aggregates are assumed to be proportional to Y the GNF' (Gross National Product) in the time unit - with the
coefficients (a, s, t, t* and m correspondingly) that depend (except T and T*) on the discount rate r of the Center
Bank and the inflation rate i. The production growth rate g depends on r and i too. The government is assumed to
borrow the money fiom population and from the Center Bank to manage social problems and to cover its budget
deficit. The Center Bank lends the bank system and subsidizes the government by buying the governmental securities
when operating in the open market. The coefficients r, t, and t* are the control parameters. The choice of parameters
t and t* are beyond our model and the interest rate r is chosen by the Center Bank to maximize the economic growth
rate. The balance considerations give the equation
(a(r,i)-s(r,i)+t+t*)(i+g(r,i)-r))~(r,i)(i+g(r,i)).
(1)
There are four unknown parameters in this equation. Three of them are control parameters. We suppose that
t and t* are already given from whatever considerations. So we can fmd the interest rate i as the function of r: i=I(r).
Hence, we can find the optimal r as the solution of the problem:
r: g(r,I(r)) + max.
It is of interesting that the parameters t and t* have the same influence on the system dynamics (in contrast
with the settled opinions). This property, however, is likely to be explained by the simplificationsof our model.
Theoretically, there can be four qualitatively different solutions of the problem according to the signs of the
multipliers in (1). And only two of them are of practical meaning. The first one occurs when a(r,i>s(r,i)+t+t*>O and
i+g(r,i)-r>O, and the second one occurs when a(r,i)-s(r,i)+t+t*<O and i+g(r,i)-60.
In essence, the constructions of the aggregates T and T* are financial pyramids. The only difference is that
our model assumes these aggregates to be stable - their ratio to GNP is constant in time. For a stable pyramid, when
the condition i+g-r>O holds, there exists the steady financial flow from population to the government. Let the
government use this flow to cover the budget deficit d (as the share of GNP). Then for the pyramid to be stable the
following condition must hold:
t(i+g-r)=d, where d/(i+g-r)<s.

$ 2. Decision support system in RGB-market.

RGBs were issued by Ministry of Finance. The small investors bought the bills on the secondary market at
the price c . If they held it during the time interval t till the maturity, they received the nominal price 1 and the
1-c
1-c 365
period yield equal -- or annual yield of __ * __ . But during the time before the maturity the RGBs were
C

high liquid securities. The remote terminals in the bank-dealers were used for trading on the secondary RGB-market.
The prices of securities changed both over the trade session and ffom one session to another. The successful trading
of RGBs could significantly increase the profit of the investor in comparison with the passive strategy of the waiting
of the maturity. Obviously, the Russian RGB-market was constructed similarly to the west markets.

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The model of portfolio management on the interval [I,T ] was considered. Denote t E [l,T ] the number

of a trade session. We assume that there are

where

- the

securities on the market during the period

depth of Markovian process used to imitate RGB's prices. Let

[-p

+ 1,T ] , p 2 0,

be the price of the last trade on

i -th security at t -th session.

S , , f ) describes the current position of the portfolio where
The vector of values (So,t,Sl,f,...,
S;,, = c ;,,* hi,,and hi,,- the quantity of securities i in the portfolio at the moment t . The number 0 is applied to
describe cash portfolio component. Let

S,:, and S,If+ be the value of i-th component of portfolio before and after the
n

trade operation correspondingly.

S; =

S,yt

the value of the portfolio before the trade operation,

i=O
n

- the

S: =

value of the portfolio after the trade operation. The dynamic of the portfolio value is described

i=O

as
.

..N
-S,y, I,S,Tf 20, ,
:
S 20, i = O J

S
: =S; - z k j

,...JV,t=1,2 ,..., T ,

i=O

where the coefficient k; is the transaction fee,

portfolio before and after the trade as
r-

r-

r+

r-

=.O ,we suppose ki= k for i > 0 . We define the structures of

r+

r+

correspondingly.
In our problem, the structures of portfolio after the trade
portfolio restructuring is accomplished at the prices

Ci,t

are the control variables. We suppose that

no more than one time in the session.

S'
SO

We define the transformation of the values for the period R as the ratio G, = - ,where So and
the values at the initial and final moments of the period

S' are

R correspondingly. If tl,t 2 ,t, - three consequent time

= G[C,f,,* G[fz,f31
*
moments, *en G[/,J3]
The goal of the portfolio management on the whole interval [l,T] will be the maximization of the
transformation of the value
We'll consider the dynamics of RGB prices from one session to another as a

Marcovian process with the depth

e(cf

p , i.e.

c , = (c,,,, c2,, ,..., cN,/) at the time t is a random vector with the

I c ~ - ~ , c,...,
~ - ~c + ~ ) , t =1,2,..., T .
distribution F(c,) =
The control variables are searched as the function of the history, that is

y+ =y+(C,,C,-'

,..., c-p+,,l?,Kl,Kl
,..., K,Y),
t = 1 , 2 ,..., T-1.

Let the set of these functions { ~ ( - ) } ~ =

define
; ' the control strategy and the set of such strategies is
denoted by

. The

every strategy U E

dis@ibution on the trajectories (I.;",c 2 ,

and matrix

4= (c

l=-p+2
together determine the probability

v,v ,c, ,..., v-],c T ) which induces the probability distribution for the

transformationG[,,,l as the random value. The optimization problem is to maximize the expected transformation

G[l,TJ
for the class of strategies r .

187

WG,l,T,)

max

(*I

uEr

The following fimdamental statement is established:

Theorem 1. The problem (*) has a solution in the class of simple strategies, when the whole current capital
is concentrated in the only security.
This result is obtained by the use of the stochastic optimal control theory [I].
In practice, we used the local optimal strategy which was calculated by maximizing of the expectation of
transformation G,,,,+llstep-by-step. This strategy is good approximation of the global optimal strategy in problem
(*) at least under weak dependence of the prices c i,l from their history.

The concrete realization of the algorithm for the solution of the problem (*) is based on the stochastic
process model elaborated on real RGB-market information of 1994-1997. The application of this algorithm to the
portfolio management in 1994-1997 on RGB-market have provided the profit per month 66% greater than the
averaged profit through the whole market.

$3 Modelling of the goods exchange by the use of bills.

The wide expansion of the goods exchange (barter) take place now in the modern Russia economy. Without
concerning the reasons of these phenomena, let us consider the procedures that can be offered for decision makers to
solve the problem of the default of payments and to obtain the cash from companies that consume resources having
continuos character (gas, oil, electric energy, etc.)
The typical scheme of the goods exchange is as follows,

7
Resource Company

Agency

Electric Station

188

Auto Company

To solve the problem of the default payment reduction let us consider the matrix form of mutual debts.

Building

...

...

...
...

x5 1

x52

x53

...
...

...
...

...
...

...
...
...

...
...
...

x5 n

...
...

...
...
~

Where T,j - the debt of j -th company to i -th company,

%,j

2 0,y i - the goods of i -th company available for selling to reduce the debts.

The basic problem is formulated as follows: to find all possible payments sequences and to represent them
to decision makers.

Special algorithm is elaborated to find all possible transfer chains that can be one of three types: Circle,
Cash, Deadlock, that mean the situations of mutual payments, cash receiving and impossibilityof debt
retirement correspondingly.
Obviously, the necessary information must be prepared to use the algorithm in practice. So, the information
obtained by the operation researchers determines the character of the model and the sense of computational results in
each concrete case.
Literature:
1. Bertsekas D.P., Shreve S.E. Stochastic Optimal Control. The Discrete Time Case. - New York, San
Francisko, London: Academic Press, 1978.

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