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.
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