Financial markets and trading networks

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In this doctoral dissertation, I study the market structure and efficiency of over-the-counter (OTC) financial markets. Specifically, I model how financial trading networks endogenously form, and how trading networks and trade protocols affect pricing, trading behavior, liquidity, and efficiency. This dissertation consists of two chapters. The first chapter addresses the endogenous structure of financial networks. Here, I model how core-periphery trading networks arise endogenously in over-the-counter markets as an equilibrium balance between trade competition and inventory efficiency. A small number of firms emerge as core dealers to intermediate trades among a large number of peripheral firms. The equilibrium number of dealers depends on two countervailing forces: (i) competition among dealers in their pricing of immediacy to peripheral firms, and (ii) the benefits of concentrated intermediation for lowering dealer inventory risk through dealers' ability to quickly net purchases against sales. For an asset with a lower frequency of trade demand, intermediation is concentrated among fewer dealers, and interdealer trades account for a greater fraction of total trade volume. I show, party in separate work, that these two predictions are strongly supported by evidence from the markets for German sovereign bonds and U.S. corporate bonds. From a welfare viewpoint, I show that there are too few dealers for assets with frequent trade demands, and too many dealers for assets with infrequent trade demands. The second chapter models bargaining in over-the-counter network markets over the terms and prices of contracts. Of concern is whether bilateral non-cooperative bargaining is sufficient to achieve efficiency in this multilateral setting. For example, will market participants assign insolvency-based seniority in a socially efficient manner, or should bankruptcy laws override contractual terms with an automatic stay? The model provides conditions under which bilateral bargaining over contingent contracts is efficient for a network of market participants. Examples include seniority assignment, close-out netting and collateral rights, secured debt liens, and leverage-based covenants. Given the ability to use covenants and other contingent contract terms, central market participants efficiently internalize the costs and benefits of their counterparties through the pricing of contracts. We provide counterexamples to efficiency for less contingent forms of bargaining coordination.


Type of resource text
Form electronic; electronic resource; remote
Extent 1 online resource.
Publication date 2017
Issuance monographic
Language English


Associated with Wang, Chaojun
Associated with Stanford University, Department of Statistics.
Primary advisor Duffie, Darrell
Primary advisor Jackson, Matthew O
Thesis advisor Duffie, Darrell
Thesis advisor Jackson, Matthew O
Thesis advisor Dembo, Amir
Thesis advisor Krishnamurthy, Arvind
Advisor Dembo, Amir
Advisor Krishnamurthy, Arvind


Genre Theses

Bibliographic information

Statement of responsibility Chaojun Wang.
Note Submitted to the Department of Statistics.
Thesis Thesis (Ph.D.)--Stanford University, 2017.
Location electronic resource

Access conditions

© 2017 by Chaojun Wang
This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).

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