Associate Professor of Finance
Wisconsin School of Business
Research interest: Financial intermediation, Decentralized Trading, Search and matching
Abstract: We propose a new framework of the financial over-the-counter market that jointly determines traders' interconnectedness with asset prices and allocations. Traders are homogeneous and face uncertainty about their trading needs ex ante. We establish that traders adopt asymmetric trading strategies to target their future counterparties more efficiently. In markets where holding unbalanced inventory is costly, a multilayer hierarchical market structure emerges, where traders at a higher tier are committed to providing immediacy to traders at lower tiers and become more central and have higher expected volumes. Such predictions are consistent with the empirical evidence in the interdealer market for dealer centrality, intermediation markups, and the distribution of intermediation chain lengths.
Selected conferences: the 2015 NBER/NSF/CEME Mathematical Economics Conference, the 2016 Minnesota Workshop in Macroeconomic Theory, FTG Meeting 2015, SED 2015, World Congress 2015
Abstract: We present a framework that jointly determines trading networks and risk allocation among banks. Banks are ex-ante homogeneous and risk-averse, but their marginal costs of bearing risks may be diminishing. The optimal trading network is determined by the tradeoff between risk sharing vs. concentration, which in turn determines the level of aggregate risk exposures, amount of intermediate trades, dispersion of transaction prices, and distribution of risk exposure across financial institutions. We show that a continuous change in fundamentals or regulations may lead to a structural change in the market structure, causing discontinuous changes in these observables.
Selected conferences: 2022 SITE - Dynamic Games, Contracts, and Market, AFA 2022, SED 2022, SAET 2022, 2023 North American Summer Meetings of the Econometric Society