Persuasion in Global Games with Application to Stress Testing

58 Pages Posted: 22 Sep 2021

See all articles by Alessandro Pavan

Alessandro Pavan

Northwestern University

Nicolas Inostroza

University of Toronto

Date Written: August 1, 2021

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: Adversarial Information Design, Bayesian persuasion, Coordination under Incomplete Information, global games, stress tests

JEL Classification: D83, G28, G33

Suggested Citation

Pavan, Alessandro and Inostroza, Nicolas, Persuasion in Global Games with Application to Stress Testing (August 1, 2021). CEPR Discussion Paper No. DP16484, Available at SSRN: https://ssrn.com/abstract=3928781

Alessandro Pavan (Contact Author)

Northwestern University

Nicolas Inostroza

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

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