Game theory and speculation on government bonds

The aim of this paper is to propose a method to stabilize the rapid variations on the value of government bonds issued by the States, using Game Theory. In particular, we focus our attention on three players: a large speculative bank (hereinafter called Speculator), having immediate access to the market of government bonds, the European Central Bank (ECB) and a State in economic crisis, with a high public debt. In this regard, we will analyze the interaction between these three subjects: the Speculator, our first player, the ECB, our second player, and the State, our third player. The financial crisis, that hit the market of European government bonds, showed us that large speculators can influence the financial markets and benefit from the creation of arbitrage opportunities caused by themselves. In this way, the default probability of States in economic difficulty increases significantly and alarmingly. We already heard to talk about concepts like “spread” and “public debt,” which has crippled the economies of great States, for instance Italy. In this paper we propose on financial transactions the introduction of a tax, which hits only the speculative profits. We show how the above tax would probably be able to avert the speculation. For this purpose, we compare the different behaviors adopted by the Speculator and by the ECB in case of absence or presence of the tax, with the consequent effects on the State that sells its government bonds, paying particular attention to the movement of the game equilibria. In fact, with the introduction of our tax, all equilibria of the game become excellent for the State in economic difficulty.

► Our model proposes a method to stabilize the market of government bonds. ► We focus on three players: a speculative bank, the ECB and a State in difficulty. ► We propose the introduction of a tax, which hits only the speculative profits. ► Our tax is a preventive deterrent for the presence of speculators in bonds market. ► We find a solution convenient for all players, without losses of collective gain.