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Finance Applications of Game Theory

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Traditional finance theory based on the assumptions of symmetric information and perfect and competitive markets has provided many important insights. These include the Modigliani and Miller Theorems, the CAPM, the Efficient Markets Hypothesis and continuous time finance. However, many empirical phenomena are difficult to reconcile with this traditional framework. Game theoretic techniques have allowed insights into a number of these. Many puzzles remain. This paper argues that recent advances in game theory concerned with higher order beliefs, informational cascades and heterogeneous prior beliefs have the potential to provide insights into some of these remaining puzzles.

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  • Franklin Allen & Stephen Morris, 1998. "Finance Applications of Game Theory," Cowles Foundation Discussion Papers 1195, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1195
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    Cited by:

    1. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.
    2. Yorulmazer, Tanju, 2003. "Herd Behavior, Bank Runs and Information Disclosure," MPRA Paper 9513, University Library of Munich, Germany.
    3. Diana Larisa Țâmpu & Carmen Costea, 2012. "A Concerning View In The Liquidity Crisis Through The Game Theory," Romanian Economic Business Review, Romanian-American University, vol. 6(1), pages 175-184, May.
    4. repec:oup:rcorpf:v:4:y:2015:i:2:p:258-320. is not listed on IDEAS

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