DP16484 Persuasion in Global Games with Application to Stress Testing

Author(s): Nicolas Inostroza, Alessandro Pavan
Publication Date: August 2021
Keyword(s): Adversarial Information Design, Bayesian persuasion, Coordination under Incomplete Information, global games, stress tests
JEL(s): D83, G28, G33
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16484

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.