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Ambiguity, Pessimism, Optimism and Financial Crises in a Simple Global Game Model

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  • Daniel Laskar

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA))

Abstract

We use a non-Bayesian approach to uncertainty which allows for both optimism and pessimism in a simple global game, where each signal can exhibit a bias which is ambiguous. We underline a symmetry between two models of financial crises: a liquidity crisis model, and a currency crisis model. We show that one model with pessimism becomes similar to the other model with optimism, and vice versa, which leads ambiguity to have opposite effects in the two models. We can also rationalize non-neutral effects of shifts in "market sentiment" in these models.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number hal-00811923.

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Date of creation: Apr 2013
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Handle: RePEc:hal:psewpa:hal-00811923

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Related research

Keywords: Persistence ; Global game ; Financial crises ; Ambiguity ; Optimism ; Pessimism ; Market sentiment ; Coordination;

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References

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  1. Hyun Song Shin & Stephen Morris, 2001. "Coordination Risk and the Price of Debt," FMG Discussion Papers dp373, Financial Markets Group.
  2. Grant, Simon & Chateauneuf, A. & Eichberger, J., 2002. "Choice under Uncertainty with the Best and Worst in Mind: Neo-additive Capacities," Working Papers 2002-10, Rice University, Department of Economics.
  3. Hans Carlsson & Eric van Damme, 1993. "Global Games and Equilibrium Selection," Levine's Working Paper Archive 122247000000001088, David K. Levine.
  4. Prati, Alessandro & Sbracia, Massimo, 2010. "Uncertainty and Currency Crises: Evidence from Survey Data," MPRA Paper 21209, University Library of Munich, Germany.
  5. Jurgen Eichberger & David Kelsey, 2009. "Optimism and Pessimism in Games," Discussion Papers 0905, Exeter University, Department of Economics.
  6. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  7. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
  8. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  9. Daniel Laskar, 2012. "Ambiguity and Coordination in a Global. Game Model of Financial Crises," Working Papers halshs-00749500, HAL.
  10. Daniel Laskar, 2012. "Ambiguity and Coordination in a Global. Game Model of Financial Crises," PSE Working Papers halshs-00749500, HAL.
  11. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  12. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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Cited by:
  1. Laskar, Daniel, 2014. "Ambiguity and perceived coordination in a global game," Economics Letters, Elsevier, vol. 122(2), pages 317-320.

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