RESEARCH

[Published Papers]

Disclosure Services and Welfare Gains  in Matching Markets for Indivisible Assets (2024), Review of Economic Design, 28, pp. 485-532

We present a competitive matching model in which indivisible assets are reallocated among many traders. The model has three features: (i) traders are heterogeneous in their prospects as buyers, sellers, and also in their stand-alone values with endowed assets, (ii) buyers do not know true values of assets sold, (iii) sellers can disclose values of their assets by paying fees. Despite its complexity, the model admits closed-form solutions. Two main results emerge. First, if full disclosure is facilitated by a monopolist, it captures a large fraction of the welfare gains. Second, adding the option of minimum disclosure, when combined with a cap regulation on price-dependent fees for full disclosure, significantly weakens the monopolist's power. 

(PDF)  (Old version)

Welfare Consequences of Information Aggregation and Optimal Market Size (2017), American Economic Journal: Microeconomics, 9 (4), pp. 303-323

We analyze the welfare implications of information aggregation in a trading model where traders have both idiosyncratic endowment risk and asymmetric information about security payoffs. The optimal market size balances two forces: (i) the risk-sharing role of markets, which creates a positive externality amongst traders, against (ii) the information-aggregation role of prices, which leads to prices that are more correlated with security payoffs, thereby undermining the hedging function of markets. Our analysis indicates that a market with infinitely many traders may not be the right welfare benchmark in the presence of risk aversion and information aggregation.

(PDF)  (Online appendix)

Market Size Matters: A Model of Excess Volatility in Large Markets (2016), Journal of Financial Markets, 28, pp. 24–45

We present a model of excess volatility based on speculation and equilibrium multiplicity. Each trader has two distinct motives to trade: (i) speculation based on noisy signals, and (ii) hedging against endowment shocks. The key to equilibrium multiplicity is the self-fulfilling nature of information aggregation: if individuals trade relatively more on the basis of speculation rather than hedging, then prices reveal more information on payoff risk which in turn justifies less need for hedging. We first show that multiplicity arises only in large markets where aggregate shocks in prices are sufficiently more important than idiosyncratic shocks. We then show that (i) in a given equilibrium, excess volatility increases with payoff volatility, (ii) comparing across different equilibria, excess volatility is negatively associated with liquidity, trading volume, and social welfare. We also show that an increase in market size either creates high-volatility equilibria or eliminates low-volatility equilibria. Among other things, the model predicts that given two assets identical in their fundamental properties, the one that attracts more traders overtime is more likely to experience a jump in excess volatility.

(PDF)  (Online appendix)

Posterior Renegotiation-Proofness in a Two-Person Decision Problem (2016), International Journal of Game Theory, 45 (4), pp. 893–931

When two agents with private information use a mechanism to determine an outcome, what happens when they are free to revise their messages and cannot commit to a mechanism? We study this problem by allowing agents to hold on to a proposed outcome in one mechanism while they play another mechanism and learn new information. A decision rule is posterior renegotiation-proof if it is posterior implementable and robust to a posterior proposal of any posterior implementable decision rule. We identify conditions under which such decision rules exist. We also show how the inability to commit to the mechanism constrains equilibrium: a posterior renegotiation-proof decision rule must be implemented with at most five messages for two agents.

(PDF)

Conditional Forecast Selection from Many Forecasts: An Application to the Yen/Dollar Exchange Rate (2013), Journal of The Japanese and International Economies, 28, pp. 1–18

This paper proposes a new method for forecast selection from a pool of many forecasts. The method uses conditional information as proposed by Giacomini and White (2006). It also extends their pairwise switching method to a situation with many forecasts. I apply the method to the monthly yen/dollar exchange rate and show empirically that my method of switching forecasting models reduces forecast errors compared with a single model.

(PDF)

[Accepted Papers]

A Quick Route to Powers of Sums

We derive a formula for powers of sum. A simple proof by mathematical induction shows that any powers of sum (i.e., (∑i)²,(∑i)³,...) can be expressed as the weighted average of sums of odd powers (i.e., ∑i³, ∑i⁵,...), where the weights add up to one.

(PDF)

[Working Papers]

Generalized Means and Sums:  Applications to Comparative Risk and Risk Aversion

A generalized sum, k⁻¹(k(x₁)+k(x₂)), is a binary operator defined by an increasing and continuous function k(x), which generalizes a sum x₁+x₂. We show that a generalized mean operator k⁻¹(E[k(X)]) is separable with respect to a generalized sum. Using this property we study comparative risk (a random variable Y "riskier" than X) and comparative risk aversion (a utility function v "more risk averse" than u). We present three main results: (i) a "noise" characterization of mean-utility-preserving increases in risk (Diamond and Stiglitz (1974)), (ii) a generalized Ross preference order (Ross (1981)), (iii) a generalized risk aversion function that nests absolute and relative risk aversion functions, and a generalized risk index (Aumann and Serrano (2008)).

(PDF)  (Slides)  (Short slides)

Multidimensional Matching with Endogenous Sides: An Application to Takeover Announcement Returns

We develop a matching model in which agents choose one side based on their comparative advantage as a seller (quality of "projects") or a buyer ("skill" to manage a project). Because some agents choose to manage their endowed projects, marginal sellers and buyers are characterized by endogenous participation functions. A unique equilibrium exists if a production function has a positive and smooth cross-partial derivative. Without distortions, participation is monotone on each side. With distortions, the monotone participation requires a stronger complementarity condition. Applying the model to takeovers, we show that the monotone participation leads to structural interpretations of announcement returns.

(PDF)  (Slides)  (Short slides)

Reallocation of the Intermediation Risk: The Role of Interbank Markets and Interest on Reserves in the Macroeconomy

(joint with Shuyun May Li)

We present a theory of the interbank market, where banks are risk averse and subject to idiosyncratic intermediation risk. Because banks face heterogeneous risk-return trade-offs, there are gains from reallocating loans among banks. In a partial equilibrium setup, the model admits closed form solutions for bank variables, allowing for their comparative statics with respect to the level of bank risk aversion and interest on reserves (IOR). We embed the interbank market in a simple general equilibrium model to measure its contribution to welfare. The interbank loan trading significantly increases banks' risk-taking, thereby increasing production and the household consumption. The average household consumption in a stochastic steady state increases by 13.56% -- 23.53%, depending on the treatment of the intermediation loss. At the same time, the interbank market raises volatility of production and consumption. These real effects of the interbank market become smaller when IOR is increased.

(PDF)  (Slides)

[Work-in-Progress]

Defying Gravity:  The Role of Intermediaries for Cross-Border Mergers and Acquisitions

(joint with Banri Ito and Junhyung Ko) 

This study examines the determinants of cross-border mergers and acquisitions (M&A) using the gravity approach. We show that a relatively high presence of M&A advisers is conductive to M&A, particularly for cross-border deals, and their impacts are pronounced in acquirer countries. Further, for acquirer countries, we find substitutability between the use of M&A advisers and the extent of financial development for financial institutions and markets, whereas complementarities exist for target countries.

(Slides)