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Finance Applications of Game Theory

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  • Franklin Allen
  • Stephen Morris

Abstract

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.

Suggested Citation

  • Franklin Allen & Stephen Morris, 1998. "Finance Applications of Game Theory," Center for Financial Institutions Working Papers 98-23, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:98-23
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    References listed on IDEAS

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    6. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. " The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, vol. 47(4), pages 1605-1621, September.
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    8. John Seely Brown & Paul Duguid, 1991. "Organizational Learning and Communities-of-Practice: Toward a Unified View of Working, Learning, and Innovation," Organization Science, INFORMS, vol. 2(1), pages 40-57, February.
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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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