Theory+of+Financial+Intermediation

Theory+of+Financial+Intermediation - Game Theory and...

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Game Theory and Financial Markets
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Recent events in the financial markets July 2007: "Subprime mortgage" problems in the US. August: International interbank market "freeze". US Fed and ECB inject liquidity. Trading volumes remain low. September: Depositors queue at Northern Rock (UK). Bank of England offers liquidity support. Treasury guarantees deposits.
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Let's step back a 100'000 years: Why are your brains so large? Man against nature: human brain "too large". But: men/women are social animals. Man in society: genetic fitness depends on social success! Social success is decided in strategic situations. Strategic situation: my success depends on your actions, your success depends on my actions. Theory of strategic behavior = "game theory"
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Why study game theory? "Increase your strategic IQ!" (the optimist view) (Dixit and Nalebuff: Thinking Strategically ) Deal consistently with information in economic models Understand real world phenomena like overbidding in auctions adverse selection in insurance markets contracts, mechanisms and institutions bank runs and speculative attacks Remain modest (the cautious view) It's fun
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Players Rules sequence of moves possible decisions at any node players' information at every node Payoff function: a mapping from decisions into results Players' preferences over results Game = a multi-person situation characterized by: What is a "game"?
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An example A lender is contacted by a borrower. The borrower needs $1 for an investment that yields $2. The borrower promises to repay $1.5 for a credit of
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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Theory+of+Financial+Intermediation - Game Theory and...

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