Multi Agent Modeling of a Competitive Bond Market : An Heterogeneous Beliefs Approach

Abstract. In this work we create a model for a competitive bond market where investors have heterogeneous beliefs regarding the issuers’ future income. The model takes any finite number N of bond issuers and a continuum of investors, exploring different ways in which they can be distributed. We found what we call a Complete Funding Nash Equilibrium (CFNE) for this case. We then add protection selling in the form of Credit Default Swaps (CDS) by a third agent, discussing how this affects the competition. We found sufficient conditions under which a CFNE can be found. Finally we make some numerical simulations to explore the possibility of CDS being used as an speculation tool if they act as credit rating, and observe the effects of the utility of the underlying asset’s issuer and the incentive the protection-seller may have to cooperate with one of the players against the interests of the other