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Strategic behavior in financial markets

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  • Kannai, Yakar
  • Rosenmüller, Joachim
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    Abstract

    We describe a financial market as a noncooperative game in strategic form. Agents may borrow or deposit money at a central bank and use the cash available to them in order to purchase a commodity for immediate consumption. They derive positive utility from consumption and from having cash reserves at the end of the day, whereas being bankrupt entails negative utility. The bank fixes interest rates. The existence of Nash equilibria (both mixed and pure) of the ensuing game is proved under various assumptions. In particular, no agent is bankrupt at equilibrium. Asymptotic behavior of replica markets is discussed, and it is shown that given appropriate assumptions, the difference between a strategic player and a price taker is negligible in a large economy.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Mathematical Economics.

    Volume (Year): 46 (2010)
    Issue (Month): 2 (March)
    Pages: 148-162

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    Handle: RePEc:eee:mateco:v:46:y:2010:i:2:p:148-162

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    Web page: http://www.elsevier.com/locate/jmateco

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    Keywords: Strategic market games Nash equilibria Interest rates Bankruptcy;

    References

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    1. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2000. "Default in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1247, Cowles Foundation for Research in Economics, Yale University.
    2. Pradeep Dubey & John Geanakoplos, 2003. "Monetary Equilibrium with Missing Markets," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1389, Cowles Foundation for Research in Economics, Yale University.
    3. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 39(5-6), pages 585-618, July.
    4. Gaetano Bloise & J. H. Dreze & H. M. Polemarchakis, 2003. "Monetary Equilibria over an Infinite Horizon," Discussion Papers, University of Copenhagen. Department of Economics 03-19, University of Copenhagen. Department of Economics.
    5. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Model to Analyse Financial Fragility: Applications," OFRC Working Papers Series, Oxford Financial Research Centre 2004fe05, Oxford Financial Research Centre.
    6. Giraud, Gael, 2003. "Strategic market games: an introduction," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 39(5-6), pages 355-375, July.
    7. Tsomocos, Dimitrios P., 2003. "Equilibrium analysis, banking and financial instability," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 39(5-6), pages 619-655, July.
    8. Martin Shubik & Ward Whitt, 1973. "Fiat Money in an Economy with One Nondurable Good and No Credit (A Noncooperative Sequential Game)," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 355, Cowles Foundation for Research in Economics, Yale University.
    9. Geanakoplos, J. & Karatzas, I. & Shubik, M. & Sudderth, W., 2000. "A strategic market game with active bankruptcy," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 34(3), pages 359-396, November.
    10. Gaël Giraud & Hubert Stahn, 2008. "On Shapley–Shubik equilibria with financial markets," Economic Theory, Springer, Springer, vol. 35(3), pages 469-496, June.
    11. Dubey, Pradeep & Shapley, Lloyd S., 1994. "Noncooperative general exchange with a continuum of traders: Two models," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 23(3), pages 253-293, May.
    12. M. Shubik & D. Tsomocos, 1992. "A strategic market game with a mutual bank with fractional reserves and redemption in gold," Journal of Economics, Springer, Springer, vol. 55(2), pages 123-150, June.
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    Cited by:
    1. Smith, Eric & Shubik, Martin, 2011. "Endogenizing the provision of money: Costs of commodity and fiat monies in relation to the value of trade," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 47(4-5), pages 508-530.

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