I am a post-doctoral researcher (research officer) at the LSE's Systemic Risk Centre. My research is in financial economics with a particular interest in market microstructure, market design, financial intermediation and financial regulation. (CV)
Higher-Order Uncertainty in Financial Markets: Evidence from a Consensus Pricing Service (with Lerby Ergun, Bank of Canada) ( Best Applied Paper Award, ESEM 2017 )
We assess the ability of an information aggregation mechanism to reduce valuation uncertainty in an over-the-counter market. The analysis is based on a unique dataset of price estimates for S&P 500 index options that major financial institutions provide to a consensus pricing service. We consider two dimensions of uncertainty: uncertainty about fundamental asset values and strategic uncertainty about competitors' valuations. We estimate a structural model of learning from prices. From this, we obtain empirical measures of fundamental and strategic uncertainty that are based on market participants' posterior beliefs. Both dimensions of valuation uncertainty vary substantially across the different segments of the market. We use the structural model to assess subscribers' welfare under alternative information structures. We show that the main contribution of the service is to reduce subscribers' uncertainty about competitors' valuations rather than uncertainty about asset values themselves.
Financial Transaction Taxes and the Informational Efficiency of Financial Markets: A Structural Estimation (with Marco Cipriani, NY Fed, and Antonio Guarino, UCL)
We develop a new methodology to estimate the impact of a financial transaction tax (FTT) on informational efficiency, liquidity and volatility. In our sequential trading model there are price elastic noise traders and traders with private information of heterogeneous quality. We estimate the model without a tax and then quantify the effect of an FTT. In our sample, noise traders are price elastic but less so than informed traders. The introduction of an FTT changes the composition of the market, lowering informational efficiency. Even a small, 5 bps, FTT impedes correct price convergence on a sizeable percentage of days.
Short-term debt that is exposed to roll-over risk creates pre-emption motives among investors. I show that these preemption motives can facilitate the efficient liquidation of underperforming investment projects when investors are heterogeneously informed. The ability to observe other investors' funding decisions can inefficiently delay the withdrawal of funding - waiting has an option value as it reveals new information. Providing financial rewards for early withdrawers incentivises the revelation of private information and counteracts the option value of waiting. The optimal debt maturity structure depends on the quality of investors' private information. First-best liquidation decisions can be implemented via the correct mix of short-term and long-term debt.
This paper shows that the use of menus of tariffs to sell seemingly identical products can be understood as a device to screen boundedly rational consumers. Two competing firms offering menus of non-linear price schedules to customers with biased beliefs about their future demand are able to screen these customers on the basis of their priors. However, while such menus allow firms to screen their customers according to their ability to correctly forecast future demand, they do not allow them to extract additional rents provided the market is sufficiently competitive and firms have identical priors concerning their customers' types. While competition between firms guarantees that each tariff only covers the fixed costs of the firm it cannot correct consumer biases. Offered tariffs will typically be inefficient.
Work in progress
Limits to Arbitrage in the Market for Collateral (with Lerby Ergun, Adrian Wolton, Bank of Canada, and Shengxing Zhang, LSE)
We study the interaction between the repo market and the securities lending market for Canadian Treasury securities. Identical trades can be carried out in either market. This imposes a firm link between the repo rate and the securities lending fee. We use transaction-level data for both markets to study the spread between the repo rate and the securities lending rate for functionally equivalent transactions. We find that the spread between both markets is economically significant, time-varying in sign and persistent. We analyse the magnitude and sign of the spread from a ``preferred habitat'' perspective: both repo and securities lending market have large ``local'' trading populations that are only active in one of the two markets. Arbitrageurs provide the link between the two markets. We relate the repo-securities lending spread to changes in the risk-taking capacity of arbitrageurs.
The Term Structure of Variance Risk Premia (with Jon Danielsson, LSE, Lerby Ergun, Bank of Canada , Paul Whelan, Copenhagen Business School, and Jean-Pierre Zigrand, LSE)
We use a rich dataset on S&P500 index option consensus prices to construct volatility indices with terms ranging from one month to ten years for the period of January 2002 to June 2018. We decompose monthly changes in the volatility term structure into variance risk premia, news about future realized variance, and news about future risk premia. We confirm that the term structure of risk premia is downward sloping and that risk premia become economically insignificant for horizons beyond one year. However, we show that monthly changes in volatility indices for horizons beyond one year predominantly reflect news about future risk premia rather than news about future realized variance. This calls into question the current economic interpretation of changes in the volatility term structure.
Artificial Intelligence, Financial Risk Management and Systemic Risk, SRC Special Paper, November 2017 (with Jon Danielsson, LSE and Robert Macrae, LSE)
SME Financing in a Capital Markets Union, SIEPS Policy Report 2016:6 (with Morgane Fouche, LSE and Katja Neugebauer, European Commission)
Europe’s proposed capital markets union, Voxeu.org. February 2015 (with Jon Danielsson, Eva Micheler, Katja Neugebauer and Jean-Pierre Zigrand, LSE)