Finance Applications of Game Theory

Franklin Allen and Stephen Morris

No 1195, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Pages: 45 pages
Date: 1998-09
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Citations: View citations in EconPapers (4)

Published in Advances in Business Applications of Game Theory, ed. by Chatterjee and Samuelson, Kluwer Academic Press, 2001

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Working Paper: Finance Applications of Game Theory (1998)
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