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Game Theory Models in Finance

In: Game Theory and Business Applications

Author

Listed:
  • Franklin Allen

    (University of Pennsylvania)

  • Stephen Morris

    (Princeton University)

Abstract

Finance is concerned with how the savings of investors are allocated through financial markets and intermediaries to firms, which use them to fund their activities. Finance can be broadly divided into two fields. The first is asset pricing, which is concerned with the decisions of investors. The second is corporate finance, which is concerned with the decisions of firms. Game theory is an essential tool for describing the behavior of investors, financial intermediaries, and corporate managers. This chapter provides a broad survey of game-theoretic research bearing on financial decision making, beginning with an assessment of pre-game-theoretic financial models and results – including asset pricing models, market efficiency, and classic results in corporate finance. It goes on to consider game-theoretic models of corporate financial decisions under asymmetric information – signaling models, agency costs, intermediation, the market for corporate control, and initial public offerings. Taking a game-theoretic lens to asset pricing, market microstructure models are also reviewed. A final section assesses recent research concerning higher-order beliefs, informational cascades, and differences in beliefs not explained by differences in information.

Suggested Citation

  • Franklin Allen & Stephen Morris, 2014. "Game Theory Models in Finance," International Series in Operations Research & Management Science, in: Kalyan Chatterjee & William Samuelson (ed.), Game Theory and Business Applications, edition 2, chapter 0, pages 17-41, Springer.
    • Handle: RePEc:spr:isochp:978-1-4614-7095-3_2
    DOI: 10.1007/978-1-4614-7095-3_2
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    Cited by:

    1. Andrey Zaytsev & Ekaterina Mihel & Nikolay Dmitriev & Dmitry Alferyev & Ungvari Laszlo, 2024. "Optimization of Interaction with Counterparties: Selection Game Algorithm under Uncertainty," Mathematics, MDPI, vol. 12(13), pages 1-26, July.

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