Research
Research
Published work
Execution Risk and Price Improvement under Dark Pools (Forthcoming: Journal of Economic Dynamics and Control)
Joint with: Alejandro Bernales , Dan Ladley & Marcela Valenzuela
We develop a dynamic trading model with heterogeneous agents to analyze welfare in dark pools. Our model’s computational simulations reveal two channels with opposing effects on trade gains. First, dark pools offer price improvements for liquidity takers but price deterioration for liquidity providers compared to limit order markets. Second, dark pools impose higher (lower) delay costs on liquidity takers (liquidity providers) than limit order markets. The overall welfare—affecting the trading system, liquidity takers, and providers—depends on which of the two channels dominates, ultimately determining participation in the dark pool of different trader types.
Working Papers
Financial Innovation under a Technological Innovation: The case of the Size Execution Priority in Dark Pools
Joint with: Alejandro Bernales , Dan Ladley & Marcela Valenzuela
Our paper contributes to the limited literature on innovation about trading mechanisms. We examine the impact on market quality of a trading financial innovation related to the new size execution priority rule for executing dark orders, which has been implemented within the recent technological innovation concerning dark pools. The size execution priority rule in dark pools, designed to attract large investors, enhances welfare and liquidity while mitigating adverse selection for the whole trading system, compared to the time execution priority rule (typically observed in traditional exchanges). Surprisingly, large traders do not always prefer dark pools over traditional exchanges, even when dark orders follow the trading innovation related to size execution priority (which is beneficial for large traders), because their submission strategies also depend on the endogenous liquidity of each trading venue. Our study provides a fresh viewpoint for understanding the market effects of the trading innovation related to the size execution priority rule in dark pools, and thus to implement regulations that encourage or discourage its potential benefits or drawbacks for market quality, which has important implications in terms of market developments and economic growth.
Endogenous Information Acquisition in an Investment-Trading Game (draft available upon request)
Joint with: Pasqualina Arca & Anastasia Papadopoulou
In an investment trading game where the profitability of the new investment (the fundamental) is a random variable, entrepreneurs’ higher-order beliefs about the future asset price of the realised investment enter into their investment decisions. The financial market uses aggregate investment as a signal of the underlying fundamental. If agents have dispersed information, endogenous strategic complementarity in actions emerges owing to the information spillover and generates inefficiency in the economy. We introduce endogenous information acquisition and study what information is acquired and how it affects the equilibrium outcome.
A Nonparametric Analysis of Portfolio Choice (draft available upon request)
Joint with: David Rojo Arjona
The project focuses on the recent strand of papers that have been developed and implemented (in a laboratory setting) related to nonparametric asset demand tests. In most of these papers, asset demand tests make use of the Arrow-Debreu contingent claim setting; that is an individual has preferences over state contingent consumption. To test this, we design an experiment in which each subject is asked to purchase securities under four different scenarios in the asset space with contingent claims fixed across frames. In our analysis, using Afriat's theorem (Afriat, 1967), we derive conditions that are necessary and sufficient for the dataset to be consistent with utility maximization within and across the available scenarios.
Selected work in progress
The co-complementarity between human capital and generative-AI usage skills
Joint with: Aris Boukouras & Sotiris Georganas