Game theory and speculation on government bonds

David Carfì () and Francesco Musolino

Economic Modelling, 2012, vol. 29, issue 6, 2417-2426

Abstract: The aim of this paper is to propose a method to stabilize the rapid variations on the value of government bonds issued by the States, using Game Theory. In particular, we focus our attention on three players: a large speculative bank (hereinafter called Speculator), having immediate access to the market of government bonds, the European Central Bank (ECB) and a State in economic crisis, with a high public debt. In this regard, we will analyze the interaction between these three subjects: the Speculator, our first player, the ECB, our second player, and the State, our third player. The financial crisis, that hit the market of European government bonds, showed us that large speculators can influence the financial markets and benefit from the creation of arbitrage opportunities caused by themselves. In this way, the default probability of States in economic difficulty increases significantly and alarmingly. We already heard to talk about concepts like “spread” and “public debt,” which has crippled the economies of great States, for instance Italy. In this paper we propose on financial transactions the introduction of a tax, which hits only the speculative profits. We show how the above tax would probably be able to avert the speculation. For this purpose, we compare the different behaviors adopted by the Speculator and by the ECB in case of absence or presence of the tax, with the consequent effects on the State that sells its government bonds, paying particular attention to the movement of the game equilibria. In fact, with the introduction of our tax, all equilibria of the game become excellent for the State in economic difficulty.

Keywords: Financial Markets; Financial Risk; Financial Crises; Game Theory; Speculation; Government Bonds (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:6:p:2417-2426

DOI: 10.1016/j.econmod.2012.06.037

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