Research

Publications

Centralizing Over-The-Counter Markets? (with Jason Allen)

Journal of Political Economy, 131 (12), 2023

Selected conferences: NBER IO, AFA, Annual International Industrial Organization Conference, Northern Finance Association, Microstructure Exchange, Columbia Workshop in New Empirical Finance, Bank of England Research Workshop

In traditional over-the-counter markets, investors trade bilaterally through intermediaries. We assess whether and how to shift trades on a centralized platform with trade-level data on the Canadian government bond market. We document that intermediaries charge a markup when trading with  investors, and specify a model to quantify price and welfare effects from market centralization. We find that many investors would not use the platform, even if they could, because it is costly,  competition for investors is low, and investors value relationships with intermediaries. Market centralization can even decrease welfare, unless  competition is sufficiently strong.

Exchanges for Government Bonds? Evidence During COVID-19  (with Ari Kutai, and Daniel Nathan) 

Management Science, forthcoming

Selected conferences: Annual Meeting of Central Bank Reserach Association, EFA, Darrell Duffie PhD Mentorship and Student Celebration

We leverage the unique institutional feature whereby the Israeli government bond market operates on an exchange rather than over-the-counter to analyze whether and why having an exchange affects market liquidity during a crisis. To achieve this, we  conduct difference-in-differences analyses, comparing bid-ask spreads in exchange markets (such as the Israeli government bond market and the U.S. future market) with markets lacking an exchange (like  the U.S. government bond market) when COVID was declared a global pandemic. Our findings support the idea that having an exchange enhances market liquidity. A counterfactual analysis using trade data from the Israeli exchange suggests that this is due to the ability of investors to readily provide liquidity to one another and the efficient netting of trade flows on an exchange.

Connecting Disconnected Financial Markets? 

American Economic Journal: Microeconomics, 13, 2021, 252-282

In most financial markets, securities are traded in isolation. Such a disconnected market design can be inefficient if agents trade more than one security. I assess the welfare effects of connecting markets by allowing orders for one security to depend on the prices of other securities. I show that everyone trades identical amounts under both market structures if and only if the clearing prices are perfectly correlated or all are price-takers. Prices in disconnected markets might allow strategic traders to extract higher rents from non-strategic traders. In expectation, connected markets generate higher welfare, but all markets become efficient as they grow large.

Interconnected Pay-As-Bid Auctions 

Games and Economic Behavior, 121, 2020, 506-530

I develop a framework to study common situations, in which substitute goods are sold in separate, good-specific multi-unit (pay-as-bid) auctions. I characterize bidding behavior and investigate auction design features that could increase revenues. The setting I develop gives rise to an essentially unique symmetric Nash equilibrium in which bidders shade their bids more strongly when goods are close substitutes. To increase revenues, the seller can offer total supply quantities that are (stochastically) unequal in size. This fosters more aggressive bidding and provides a rationale to hold separate, parallel auctions instead of selling all in one auction.

Under Revision

Market Power and Capital Constraints (with Jason Allen) 

R&R (2nd round) at the American Economic Review

Selected conferences: NBER Market Design, SFS Cavalcade, Financial Intermediation Research Society, Meeting of the European Finance Assosication, NYU IO day, European Winter Meeting of the Econometric Society, Boston Conference on Markets and Competition, 9th International Conference on Sovereign Bond Markets, AFA, EARIE, Finance Theory Group Meeting

We explore how traders' equity capitalization influences asset prices in a framework that accounts for market power. In our model  traders with capital constraints engage in transactions in an imperfectly competitive market. We demonstrate that looser capital constraints elevate both asset prices and price impact, which diminishes market liquidity. Using Canadian Treasury auction data, we illustrate how to apply our model to quantify these effects. We estimate the shadow costs of capital constraints by exploiting a temporary policy exemption during 2020-2021. Our analysis reveals that while these constraints are only occasionally binding, their relative  impact is sizable when activated.

Estimating Demand Systems with Bidding Data (with Jason Allen, and Jakub Kastl)

R&R at the Journal of Finance

Selected conferences: AEA, Annual International Industrial Organization Conference, Annual Meeting of the European Econometric Society, European Association for Research in Industrial Economics,  MIT Dynamic Structural Econometrics Conference, European Association for Research in Industrial Economics, Money Markets and Central Bank Balance Sheets, CEPR Asset Pricing Meeting Gerzensee

Exploiting the fact  that  auctions of related securities or commodities are often held simultaneously, we propose  a method for estimating demand systems, avoiding the usual price endogeneity issues in demand estimation. We implement our method using bidding data from Canadian T-bill auctions, and find that different types of bills are only weak substitutes, despite their cash-like nature. We  illustrate  how demand elasticities, together with the auction format, determine how to  allocate debt on a given day across maturities.

Working Papers

Entry and Exit in Treasury Auctions (with Jason Allen, Ali Hortaçsu, and Eric Richert) 

Winner of the WFA Two Sigma Awards for Best Paper on Investment Management 2024; Selected conferences: NBER Market Design, SITE Market Design, 18th Central Bank Market Microstructure Conference, Meeting of the Society of Advanced Economic Theory, Treasury Market Conference at the University of Chicago, Financial Intermediation Research Society Meeting, Western Finance Association Meeting

Many financial markets are populated by dealers, who commit to regularly participate in the market, and non-dealers who do not commit. This market structure introduces a trade-off between competition and volatility, which we study using data on Canadian Treasury auctions. We document a consistent exit trend by dealers and increasing, but irregular participation by non-dealer hedge funds. Using a structural model, we evaluate the impact of dealer exit on hedge fund participation and its consequences on market competition and volatility. We find that hedge fund entry was partially driven by dealer exit, and that  gains thanks to stronger competition associated with hedge fund entry are off-set by  losses due to their irregular market participation. We propose an issuance policy that stabilizes hedge fund participation at a sufficiently high average level and achieves sizable revenue gains.

Market Segmentation Across Stocks, Bonds, and Derivatives (with Andreas Uthemann)

We examine the role of dealer trading activity in market segmentation across stocks, bonds, and derivatives using a unique dataset covering all major Canadian financial markets. We find significant segmentation both across markets and within products, driven partially by in-house specialization within institutions. While many dealers specialize in specific products, particularly in the bond and derivative markets, stock markets show less segmentation. None of the markets are sufficiently frictionless to prevent certain dealers from consistently securing better prices, though we find no evidence of cross-market trading synergies. Our results challenge the conventional view of seamless market participation of financial intermediaries  and highlight the impact of market structure and product complexity on segmentation.

Work in Progress

Relationships and Asset Complementarities (with Jason Allen)

Estimating Demand Systems with Trade Data (with Rebekah Dix)

How Market Power Affects Asset Prices and Quantities: A Dynamic Perspective (with Rebekah Dix)