Jeongmin "Mina" Lee's website

Hello! I'm a senior economist at the Federal Reserve Board. 

My research interests are Market Structure and Design, FinTech, and Financial Institutions.

CV

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Working Papers

• Who is Minding the Store? Order Routing and Competition in Retail Trade Execution with Xing Huang, Philippe Jorion, and Chris Schwarz 

  • Using 150,000 actual trades, we examine competition among wholesalers, to which brokers route orders from their retail investors. We find that each broker's wholesaler execution prices have substantial dispersion and are persistent. However, most brokers do not adjust their routing even when they are sending more orders to higher-cost wholesalers. We also observe that the entry of a new wholesaler improves other wholesalers' execution quality. Finally, we present a stylized model that illustrates how brokers’ limited response to execution allows wholesalers to exercise their market power. Overall, our findings are inconsistent with perfect competition.

•  When Are Financial Markets Perfectly Competitive?  with Pete Kyle, Revise & Resubmit Journal of Finance

  • We revisit the classic question of whether markets become perfectly competitive in the limit as the number of traders approaches infinity. Perfect competition in the limit is equivalent to vanishing price efficiency, which occurs when traders’ motives to speculate on private information vanish or gains from trade become infinitely larger than speculation.  Even when traders’ strategic behaviors prevent perfect competition, competitive and strategic equilibrium prices are equal if and only if all traders are symmetric in their competitiveness. We further study qualitative properties of prices and quantities and discuss implications for efficiency and the financial market design.

• Flow Trading with Eric Budish, Peter Cramton, Pete Kyle and David Malec, Revise & Resubmit American Economic Review

  • We propose a new market design for trading financial assets. The design has three elements: (1) traders may place orders for any user-defined linear combination of assets, with arbitrary positive and negative weights; (2) orders are downward-sloping piecewise-linear demand curves with quantities expressed as flows; (3) markets clear jointly for all assets in discrete time using batch auctions. Market-clearing prices and quantities are shown to exist, with the latter unique, despite the wide variety of preferences that can be expressed. Calculating prices and quantities is shown to be computationally feasible using an interior point method to solve a quadratic program. Microfoundations for our approach to trading portfolios are provided using a CARA-normal framework. The proposal has several advantages over the status quo market design, arising from the novel approach to trading portfolios and the combination of discrete time and continuous prices and quantities (the status quo has these reversed).

•  Passive Investing and Price Efficiency

  • This paper studies how falling fees for delegated investments  affect  price efficiency in a theoretical framework, in which the investors' allocations, management fees,  and asset prices are  all determined in a general equilibrium.  Importantly, investors optimally decide whether to participate in the financial market or simply hold the safe asset, and active managers  trade strategically, adjusting the traded quantities according to market liquidity.   Perhaps surprisingly, and in contrast to the broad theoretical literature, prices of the index fund become more efficient as passive fees decrease and  more investors choose the uninformed index fund.   Prices can become more efficient  even when the inflow to passive funds comes at the expense of the outflow from active funds, as  has been the case more recently since 2007. Combined  with the observed downward trend in fees, the finding  is consistent with recent empirical evidence  that prices, especially those of S\&P 500, have become more informative over time.

•   The Opportunity Cost Channel of Collateral  with Jason Donaldson and Giorgia Piacentino

  • We develop a dynamic model of borrowing and lending in the interbank market in which banks fund investments through short-term collateralized debt, like repos. This debt is not a perfect substitute for cash: lending banks may not be able to convert their loans to cash to fund their own investments. Hence, lending comes with an opportunity cost that generates positive spreads even absent any credit risk. These spreads enter banks’ collateral constraints, generating a two-way feedback between the opportunity cost in the credit market and the price of collateral in the asset market. This feedback results in instability in the form of multiple equilibria, casting light on repo runs. It highlights the unique fragility present in the bilateral repo market, in which banks borrow from one another, but not in the tri-party repo market, in which banks borrow from passive cash investors, who do not suffer the opportunity cost. We show that high-leverage equilibria are inefficient in booms; hence, the model suggests a new rationale for counter-cyclical capital regulation: to select the efficient equilibrium. 

•   Revisiting Habit and Heterogeneous Preferences  with Tao Li and Mark Loewenstein

  • Do heterogeneous preferences matter for explaining dynamics of asset prices? We study this question in a model, in which agents form external habits and have heterogeneous risk aversion. After fully characterizing equilibrium and providing necessary and sufficient conditions for the existence of equilibrium, we show that only heterogeneous preferences, but not homogeneous preferences, can generate the predictability of the price-dividend ratio for future stock returns, consistent with the data. This result contrasts with that of Xiouros and Zapatero (2010), in whose model we show that equilibrium does not exist. Our results highlight the importance of verifying the existence of equilibrium, a step that is often neglected in the literature.  

Publications and Forthcoming

1.  Consumers as Financiers: Consumer Surplus, Crowdfunding, and Initial Coin Offerings, with Christine Parlour;  Review of Financial Studies 2022 (Editor's Choice) 

   • We study the efficiency implications of funding directly provided by consumers. Intermediaries fail to finance all efficient projects, and crowdfunding can improve efficiency. Whereas intermediaries value projects based on cash flows, consumers also receive a consumption benefit. Unique to crowdfunding is the ability of consumers to commit to pay for the benefit, and the degree to which they can do so determines its efficiency. We discuss the implications of introducing a resale market for consumers’ claims, as in the case of initial coin offerings, and the speculation that necessarily accompanies such markets. We provide testable and policy-related implications.

2.  Toward a Fully Continuous Exchange  with Pete Kyle; Oxford Review of Economic Policy 2017

   • We propose a new market design for a securities exchange that matches ‘continuous scaled limit orders’. This new order type differs from standard limit orders in two ways. First, orders to buy and sell represent flows of shares over time rather than stocks of shares available for immediate purchase or sale. Second, orders are expressed as continuous piecewise linear functions relating price to quantity rather than step functions defined on a discrete grid of prices and quantities. Continuous scaled limit orders implement Fischer Black’s vision of traders limiting temporary price impact by trading gradually over time. They dramatically lessen the rents high-frequency traders earn from the current market design. The proposal is compatible with frequent batch auctions and random time delays.

Working Papers Partially Incorporated in Later Work

1.   Information and Competition with Speculation and Hedging  with Pete Kyle

   • Superseded by "When Are Financial Markets Perfectly Competitive?"

2.  Collateral Circulation and Repo Spreads

   • Superseded by "The Opportunity Cost Channel of Collateral"

Teaching

Investments:  Undergraduate/MBA

Risk Managements: MS in Finance

Contact

Email:  mina(dot)lee(at)frb(dot)gov