Essays on Decentralized Asset Markets
2023-07
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Essays on Decentralized Asset Markets
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2023-07
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This dissertation consists of three chapters. In chapter 1, we examine the regulations implemented following the financial crisis, focusing on the aspects that had the greatest impact on the market for US corporate bonds. Chapter 2 focuses on decentralized bilateral trade in asset markets, examining price and quantity behavior in the presence of coordination frictions, capacity constraints, and risk aversion in both small and large markets. We demonstrate that the markup over expected asset returns in equilibrium is influenced by the buyer-to-seller ratio and the level of buyer risk aversion. Sellers ration buyers in equilibrium, and the level of rationing depends negatively on the buyer-seller ratio and positively on the concavity of the buyer's utility function. Coordination between buyers intensifies rationing, increases prices, and reduces buyer welfare. We then emphasize the importance of model choice by comparing our results to a model of random search and find that the latter can produce too much or too little seller entry depending on which side of the Hosios condition is analyzed. In chapter 3, we develop a theory of decentralized trade in Over-The-Counter markets, where bank and nonbank-affiliated dealers trade with individual investors and one another. Dealers build inventory positions and face heterogeneous costs of inventory and search. We apply our theory to the US Corporate Bonds market and find that bank-affiliated dealers have higher inventory costs and lower search costs. As a result, they hold lower inventory and charge higher bid-ask spreads while trading higher quantities compared to nonbank-affiliated dealers, in line with recent empirical findings. Higher inventory costs induce bank dealers to commit more resources when selling, which increases sale prices and reduces buyer participation. When they act as buyers, the lower search costs allow them to commit a higher number of buyers to the market, which induces lower prices. We then use the model to run policy experiments on inventory costs, search frictions, and barriers to entry into the market.
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University of Minnesota Ph.D. dissertation. July 2023. Major: Economics. Advisor: Loukas Karabarbounis. 1 computer file (PDF); ix, 88 pages.
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Dalani, Lejvi. (2023). Essays on Decentralized Asset Markets. Retrieved from the University Digital Conservancy, https://hdl.handle.net/11299/258722.
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