Persuasion in Global Games with Application to Stress Testing

Alessandro Pavan and Nicolas Inostroza

No 16484, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study robust/adversarial information design in global games, with an application to stress testing. We show that the optimal policy coordinates all market participants on the same course of action. Importantly, while it removes any “strategic uncertainty,†it preserves heterogeneity in “structural uncertainty†(that is, in beliefs over payoff fundamentals). We identify conditions under which the optimal policy is a “pass/fail†test, show that the optimal test need not be monotone in fundamentals, but also identify conditions under which it is monotone. Finally, we show how the effects of an increase in market uncertainty on the toughness of the optimal stress test depend on the securities issued by the banks.

Keywords: Global games; Coordination under incomplete information; Bayesian persuasion; Adversarial information design; Stress tests (search for similar items in EconPapers)
JEL-codes: D83 G28 G33 (search for similar items in EconPapers)
Date: 2021-08
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