Abstract for: A Multi-Player Game Theoretic Framework to Modeling the Global Capital Markets
Conventional finance theory is based on the idea that market prices incorporate all known market information, therefore changes in market prices are considered to move randomly. However, System Dynamics approaches have demonstrated that complex systems of interrelated variables (such as the global capital markets) often produce behavior that may appear to be random, but in fact results from the causal relationships, nonlinearities, feedback loops and time delays inherent in complex systems. Since the financial crisis of 2008, central banks have injected an unprecedented degree of monetary stimulus into the global capital markets, distorting market pricing behavior in ways not experienced historically. In addition, central banks have become increasingly reactive to market behavior and to the actions of other central banks, resulting in a new network of interrelationships across central banks and global capital markets. Without the ability to rely on historical precedent, a multi-player game theoretic framework has been created using a System Dynamics approach to understand the nature of these new interrelationships and their impact on the global capital markets. The purpose of this paper is to share the underlying principles and logic supporting the development of a mathematical model which is employed to construct portfolio strategies on behalf of clients.