Associate Professor of Finance
Wisconsin School of Business
Research interest: Financial intermediation, Decentralized Trading, Search and matching
Abstract: We propose a dynamic model of the over-the-counter market that jointly determines traders' connections with prices and asset flows. In an environment where ex ante homogeneous traders face uncertainty of other’s trading needs, a multilayered hierarchical market structure emerges to allow traders to better target their counterparties over time. Traders at a higher tier are committed to providing immediacy to those at a lower tier and become more central. Not only does the model rationalize the highly concentrated market and lengthy intermediation chains, it also generates new predictions for dealer centrality and markups that are consistent with the micro-level data.
Abstract: We propose a model that jointly determines risk allocations and banks' bilateral trading networks. In the model, banks use their bilateral connections to either share or concentrate their risk exposures. Even when banks are ex-ante homogeneous and risk-averse, they may take risks collectively by concentrating risks on a small set of banks. Our framework highlights the possibility of a structural shift, which predicts discontinuous changes in aggregate risks and transaction prices. We use this framework to analyze the distribution of bank balance sheets and to evaluate the responses of the market structure to regulations