Speculative and hedging interaction model in oil and U.S. dollar markets: Nash equilibria for one or more banks

Authors

  • David Carfì University of California at Riverside
  • Michael Campbell Veritone Inc.

DOI:

https://doi.org/10.1478/AAPP.96S1A1

Keywords:

Airlines, Bank, Financial Risk, Hedging, Speculation, Potential Games

Abstract

We determine the (refined) Nash equilibria for a bounded rational Carfi'-Musolino speculative and hedging model. This model shows two types of operators: a real economic subject (Air) and one or more investment banks (Bank). We consider the bank agents' behavior to equilibrate much more quickly than that of Air, as they react to the move of Air. In this sense, Air is an acting external agent, whereas the action of the banks is `annealed' - i.e., equilibrates before Air makes its next transaction. When Air makes no purchases of oil futures as a hedge, two Nash equilibria exist for the bank agents. However, a unique Nash equilibrium exists for the bank agents when Air makes a purchase. This is a result of Air's purchase breaking a symmetry of the potential. The existence of multiple equilibriums in this two-market model is in the spirit of the Sonnenschein-Mantel-Debreu theorem, and is associated with phase transitions in statistical mechanics.

Author Biographies

  • David Carfì, University of California at Riverside
    Department of Mathematics, Institute for the Applications of Mathematics and Integrated Sciences (IAMIS), Riverside, CA
  • Michael Campbell, Veritone Inc.
    Department of Research and Development, Costa Mesa, California
Gustave Dorè: Dante Alighieri, Inferno, Canto 34 (https://commons.wikimedia.org/wiki/File:Inferno_Canto_34,_Gustave_Dor%C3%A8_3.jpg#file)

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Published

2018-08-13

Issue

Vol 96, SUPPL NO 1 (2018): Special Issue in Memory of Prof. Gaetano Giaquinta

Section

Special issue in memory of Prof. Gaetano Giaquinta

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