Financial Crises and Equilibrium Uniqueness in Global Games Models of Crises-Peking University HSBC Business School(PHBS)

Financial Crises and Equilibrium Uniqueness in Global Games Models of Crises

2016-05-13 10:29:15

by Myungkyu Shim, Shanghai University of Finance and Economics

Wednesday, May 18, 2016 | 2:00 - 3:30 PM | Room 337, HSBC Business School

Abstract

We uncover a novel interaction between strategic uncertainty in coordination

games of incomplete information - such as currency crises, bank runs and finan-

cial crises - and the informativeness of rational expectations equilibrium prices

in financial markets with risk averse traders: when the private information of

players in the coordination game is increased, the information conveyed by fi-

nancial prices falls. We use this property to show that, differently from what

argued by Angeletos and Werning (2006), information transmission from prices

in financial markets can be consistent with the emergence of a unique equilib-

rium in global games of regime change, exactly when the private information of

players in the game is sufficiently precise. In this sense, the original equilibrium

uniqueness result of Morris and Shin (1998) for global games is robust to the

introduction of endogenous information from financial markets.