Time: 10am – 5pm
Tutors: Prof Frank Page (Indiana University) and Jieshuang He (Indiana University)
In all financial interactions, individuals and institutions choose not only with whom to interact but also how to interact, and over time both the structure (the "with whom") and the strategy ("the how") of interactions change.
The main objectives of these lectures will be to develop a dynamic, stochastic game theoretic model of the interactions of network structure, strategic behavior and uncertainty to better understand the emergence of equilibrium networks dynamics as well as the stability properties of equilibrium network dynamics.
To focus our thinking, we will address the following question in the strategic theory of network formation: given rules of network formation, preferences of individuals and institutions over networks, the strategic behavior of individuals and institutions in seeking to influence network structure, and dynamic uncertainty, what financial network dynamics are likely to emerge and persist.
The approach taken here is motivated by the observation that the stochastic process governing network formation is determined not only by randomness through time - as envisioned in random graph theory - but also by the strategic behavior of individuals and institutions through time in attempting to influence the network that emerges. We will take the position that in order to truly understand the nature and consequences of systemic risk, it is essential that systemic risk be viewed as an endogenously determined property of the equilibrium process of network formation. We also believe that discounted stochastic games of network formation provide the best possible model for developing such an understanding. Moreover, in our opinion, in order to even define systemic risk rigorously, we must first model the emergence of equilibrium network dynamics from the interactions of network structure and strategic behavior over time under conditions of uncertainty and incomplete information. Here we will present just such a model and we will analyze the stability properties of the strategically determined equilibrium process of network formation.