Game Theory Models in Finance

  • Franklin AllenEmail author
  • Stephen Morris
Part of the International Series in Operations Research & Management Science book series (ISOR, volume 194)


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.


Asset Price Asymmetric Information Capital Structure Initial Public Offering Capital Asset Price Model 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Wharton SchoolUniversity of PennsylvaniaPhiladelphiaUSA
  2. 2.Department of EconomicsPrinceton UniversityPrincetonUSA

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