Modern financial markets
Abstract/Contents
- Abstract
- In this dissertation, I assess how well different types of financial markets function and draw implications for policy reforms in three chapters. In the first chapter, co-authored with Jason Allen (Bank of Canada), I focus on over-the-counter (OTC) markets. Traditionally, investors trade bilaterally through intermediaries, referred to as dealers, in OTC markets. An important regulatory question is whether to centralize OTC markets by shifting trades onto centralized platforms. I address this question in the context of the liquid Canadian government bond market. I document that dealers charge markups even in this market and show that there is a price gap between large investors who have access to a centralized platform and small investors who do not. I specify a model to quantify how much of this price gap is due to platform access and assess welfare effects. The model predicts that not all investors would use the platform even if platform access were universal. Nevertheless, the price gap would close by 32%-47%. Welfare would increase by 9%-30% because more trades are conducted by dealers who have high values to trade. In the second chapter, I analyze why securities are traded in isolation in most financial markets. Such a disconnected market design can be inefficient if agents trade more than one security. I assess welfare effects of connecting markets by allowing orders for one security to depend on 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. In the third chapter, co-authored with Jason Allen (Bank of Canada), I study if and how the capitalization of dealers affects asset demand and prices. I introduce a model, in which capital-constrained dealers compete for an asset, and test its predictions with trade-level data on Canadian Treasury auctions by leveraging balance sheet movements and policy interventions during the COVID-19 pandemic. I show that both higher capitalization and weaker capital requirements flattens dealer demand. This increases the asset's price via market clearing. Based on the findings, I propose to use the slope of demand curves in Treasury auctions as a new indicator for dealer capitalization. The slope correlates with existing indicators of the literature but can be estimated easily and frequently for each dealer without balance sheet information.
Description
| Type of resource | text |
|---|---|
| Form | electronic resource; remote; computer; online resource |
| Extent | 1 online resource. |
| Place | California |
| Place | [Stanford, California] |
| Publisher | [Stanford University] |
| Copyright date | 2021; ©2021 |
| Publication date | 2021; 2021 |
| Issuance | monographic |
| Language | English |
Creators/Contributors
| Author | Wittwer, Milena |
|---|---|
| Degree supervisor | Einav, Liran |
| Degree supervisor | Gentzkow, Matthew |
| Thesis advisor | Einav, Liran |
| Thesis advisor | Gentzkow, Matthew |
| Thesis advisor | Duffie, Darrell |
| Thesis advisor | Milgrom, Paul R. (Paul Robert), 1948- |
| Thesis advisor | Piazzesi, Monika |
| Degree committee member | Duffie, Darrell |
| Degree committee member | Milgrom, Paul R. (Paul Robert), 1948- |
| Degree committee member | Piazzesi, Monika |
| Associated with | Stanford University, Department of Economics |
Subjects
| Genre | Theses |
|---|---|
| Genre | Text |
Bibliographic information
| Statement of responsibility | Milena Wittwer. |
|---|---|
| Note | Submitted to the Department of Economics. |
| Thesis | Thesis Ph.D. Stanford University 2021. |
| Location | https://purl.stanford.edu/bd348gx3746 |
Access conditions
- Copyright
- © 2021 by Milena Wittwer
- License
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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