Persuasion in Global Games with Application to Stress Testing
58 Pages Posted: 22 Sep 2021
Date Written: August 1, 2021
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: Suggested Citation