Research

(30) Inventories, Market Making and Liquidity in OTC Markets with Assa Cohen, Mahyar Kargar, and Ben Lester. 

Revise and Resubmit, Journal of Economic Theory.

When inventories are input into the provision of liquidity services. A theoretical framework to study the impact of post-Great Financial Crisis regulations on market liquidity. 

(29) Sequential Search for Corporate Bonds with Mahyar Kargar, Ben Lester and Sébastien Plante

Revise and Resubmit, Journal of Finance.

How long does it take for customers to trade in OTC markets? Between 2 and 3 days.  

Highlighted in the February 2024 NBER Digest.

(28) Liquidity Shocks and Order Book Dynamics,  (addendum), with Bruno Biais.

How  does a limit order market absorb a transient liquidity shock? Equilibrium spread, order submission dynamics, cancellations, volume and depth.        

(27) A Theory of Participation in OTC and Centralized Markets, with Jérôme Dugast and Semih Üslü, Review of Economic Studies, Vol. 89 (2022), pp. 3223–3266.

Are OTC markets too large relative to centralized trading venues? 

Revised version: the least sophisticated investors optimally participate in an OTC market as customers, even when they have the option to join a centralized market: although they receive worse terms of trade in the OTC market, they benefit from the intermediation services provided by the most sophisticated investors, who optimally participate in the OTC market as dealers. We find that more customers should participate in the centralized market, and more dealers in the OTC market.

(26) Heterogeneity in Decentralized Asset Markets, with Julien Hugonnier and Benjamin Lester, Theoretical Economics, Vol. 17 (2022), pp 1313-1356. 

Search and bargaining asset market with arbitrary distribution of valuation.

(25) Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing with Bruno Biais and Johan Hombert.  American Economic Review, Vol. 111 (2021), pp. 3575-3610.

When imperfect asset pledgeability creates endogenous borrowing constraints, asset markets are endogenously segmented, assets trade at a discount relative to replicating portfolios of derivatives, and expected excess returns are concave in beta.

Revised version: the analysis is now based on a dynamic macro-finance model instead of a static model, and introduces Optimal Transport methods to solve for equilibrium patterns of asset market segmentation. The earlier version, which includes a tractable static version of the model, can be found here.

(24) Corporate Bond Liquidity During the COVID-19 Crisis with Mahyar Kargar, Ben Lester, David Lindsay, Shuo Liu, and Diego Zúñiga. Review of Financial Studies, Vol. 34 (2021), pp. 5352–5401.

A study of liquidity conditions in the corporate bond market since the onset of the COVID-19 pandemic.

A non-technical summary by Tom Petruno from the UCLA-Anderson Review.  

Presentation by Mahyar Kargar at the SaMMF workshop on liqudity in fixed-income markets (in the YouTube video, from 1h10 to 1h40).

(23) An Heterogeneous-Agent New-Monetarist Model with  an Application to Unemployment with Guillaume Rocheteau and Tsz-Nga Wong, Journal of Monetary Economics, Vol. 117 (2021), pp. 64-90.

(22) The Search Theory of OTC Markets.  Annual Review of Economics, Vol. 12 (2020), pp. 747-773.

A survey of the recent literature applying search theory to the analysis of over-the-counter (OTC) markets. 

Slides of presentation at the 9th 8th FARFE Conference and Seventh Ross Prize. 

(21) Frictional Intermediation in Over-the-Counter Markets (addendum) with Julien Hugonnier and Benjamin Lester, Review of Economic Studies, Vol. 87 (2020), pp. 1432-1469.

A framework to study, theoretically and quantitatively, the intermediation process in OTC markets. 

(20) Government Guarantees and the Valuation of American Banks, with Andrew Atkeson, Adrien d'Avernas, and Andrea Eisfeldt,   NBER Macroeconomics Annual (2018).

We empirically decompose banks' market to book equity ratio between two components: franchise value and government guarantees.  We find that a large portion of the variation of this ratio over time is due to change in the value of government guarantees.

Interview at NBER, and a non-technical summary by Jeff Bailey from the UCLA-Anderson Review.  

(19) A Tractable Model of Monetary Exchange with ex-post Heterogeneity (addendum) with Guillaume Rocheteau and Tsz-Nga Wong,  Theoretical Economics, Vol. 13 (2018), pp. 1369-1423.

A continuous-time pure-currency model with non degenerate distribution of money holdings. New results: (1) a characterization of welfare improving and nearly efficient incentive-compatible transfer schemes, financed with money creation; (2) an extension to two assets, money and nominal bonds, with an application to liquidity traps.

(18) Measuring the Financial Soundness of US Firms, 1926-2012 (addendum) with Andrew G. Atkeson and Andrea L. Eisfeldt, Research in Economics, Vol. 71 (2017), pp 613-635.

A simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. 

(17) Entry and Exit in OTC Derivatives Markets (addendum) with Andrew G. Atkeson and Andrea L. Eisfeldt. Econometrica, Vol. 83 (2015), pp. 2231-2292.

A framework for addressing positive and normative issues surrounding over-the-counter credit derivatives. A non technical summary can be found at Vox-Eu.

An earlier version of the paper, entitled The Market for OTC Credit Derivatives,  provides stylized facts and analyzes the positive implications of the model.

(16) Competing for Order Flow in OTC Markets, with Benjamin Lester and Guillaume Rocheteau, Journal of Money, Credit, and Banking, Special Issue on Financial Frictions, Vol. 47 (2015), pp. 77-126.

Dealers compete for buy and sell order flow by posting quotes, and investors direct their search towards dealers posting the most attractive terms of trade. 

(15) Equilibrium Pricing and Trading Volume under Preference Uncertainty (addendum) with Bruno Biais and Johan Hombert. Review of Economic Studies,  Vol. 81 (2014), pp. 1401–1437.  

Asset pricing when traders make decisions under preference uncertainty, because their financial firms face challenges collecting, processing, and disseminating information. 

(14) Liquidity and the Threat of Fraudulent Assets (addendum), with Yiting Li and Guillaume Rocheteau. Journal of Political Economy, Vol. 120 (2012), 815-846.

Some assets become harder to sell than others because they are more vulnerable to fraudulent practices. 

(13) Aggregate Implications of Micro Asset Market Segmentation (addendum) with Chris Edmond, Journal of Monetary Economics, Vol. 59 (2012), pp. 319-335. Lead article.

Consumption-based asset pricing when agents trade through a financial system comprised of many micro asset markets partially integrated with one another.

(12) Learning from Private and Public Observation of Others' Actions, (addendum), with Manuel Amador. Journal of Economic Theory, Vol .147 (2012), pp. 910-940.

How information diffuses in a large economy through local interactions and prices. 

An earlier  version of the paper, set in discrete time, circulated under the title Learning by Matching.

(11) Crises and Liquidity in Over the Counter Markets, (addendum) with Ricardo Lagos, and Guillaume Rocheteau, Journal of Economic Theory, Vol.  146 (2011),  pp. 2169–2205. Lead article.

When OTC frictions are large, investors choose to trade so little that even well capitalized dealers don't find it optimal to provide liquidity. This creates a policy role for the government to buy private assets on its own account. 

A non technical summary can be found at Vox-Eu.                 

(10) Liquidity Provision in Capacity Constrained Markets. Macroeconomic Dynamics, Vol. 15 (2010), pp. 119-144.

When competitive marketmakers face a capacity constraint on their number of trades with outside investors, the bid-ask spread is positive, and covaries positively with aggregate inventories. 

(9) Learning from Prices: Public Communication and Welfare, (addendum),  with Manuel Amador. Journal of Political Economy, Vol. 118, (2010), pp. 866-907.

When the information structure of the economy is endogenous, public information about aggregate economic condition can lead to more confusion and greater uncertainty.

(8) Why Has House Price Dispersion Gone Up? with Stijn Van Nieuwerburgh. Review of Economic Studies, Vol. 77 (2010), pp. 1567-1606. 

The increase in wage dispersion across US metropolitan areas can help explain the increase in the level and dispersion of house prices.

(7) Liquidity Premia in Dynamic Bargaining Markets, Journal of Economic Theory, Vol. 140 (2008), pp. 66-96.

The relationship between the distribution of tradeable shares and cross-sectional expected returns. 

Click here for an empirical test of the model key predictions.

(6) A Search-based Theory of the On-the-run Phenomenon, (addendum), with Dimitri Vayanos. Journal of Finance, Vol. 63 (2008), pp. 1351-1389.                                   

Why recently issued bond have higher price than older ones, even if they have the same cash flows. 

Nominated for the 2008 Smith Breeden Prize for the Best Paper in the Journal of Finance.

(5) Leaning against the wind (addendum), Review of Economic Studies, Vol. 74 (2007), pp. 1329-1354.

Do marketmakers provide the efficient amount of  liquidity during a financial crisis?

Referenced by the Nobel Prize Committees Scientific Background, 2010.

(4) Restricted Perception Equilibria and Rational Expectations Equilibrium, with Stephane Gregoir. Journal of Economic Dynamics and Control, Vol. 31 (2007), pp 81-109. 

Equilibria where agents' decisions are based on an optimally misspecified model.

(3) RED Special Issue on Fragmented Financial Markets: An Introduction, with Ben Lester and Ariel Zetlin-Jones, Review of Economics Dynamics, Vol. 33 (2019), pp 1-3.

(2) Models of the Liquidity Effect, with Chris Edmond. The New Palgrave Dictionary of Economics, 2nd edition, edited by S.N. Durlauf and L.E. Blume. Palgrave Macmillan, May 2008.

An increase in the money supply is followed by a temporary fall of short-term interest rates. 

(1) Liquidity in Frictional Asset Markets with Guillaume Rocheteau. Journal of Money, Credit, and Banking, Vol. 43 (2011), pp. 261-282.

An overview of search models applied to financial and monetary economics.