Essays in Financial EconomicsPublic Deposited
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My primary interest is in markets as aggregators of information. To study this I create a benchmark market-microstructure model of sequential trading on posted prices. I have a competitive market maker and rational profit-maximizing traders with different tastes over a single asset and heterogeneous information over its value. The differences from previous literature is that everyone is informationaly equivalent and there are no pure liquidity-driven traders. I prove that the market price will tend to the fundamental value of the asset, and hence the market is (strong form) efficient. The fundamental value is defined as the price that would prevail if all information for the asset were pooled; it is thus the fully revealing Rational Expectations Equilibrium (REE) price for my model. Hence, I provide a justification for the use of the REE machinery to make predictions in such environments. Furthermore, I am the co-author, with Mark Satterthwaite, of a paper on how fast the strategic behavior of traders in a double-auction vanishes. We consider the same number of buyers and sellers and an indivisible asset. Traders have heterogeneous valuations and diverse beliefs over the asset. The mechanism of trade is a buyers bid double auction: m buyers and m sellers submit offers and the price is set equal to the (m+1)-st one; buyers with offers greater or equal to the price trade, while sellers with offers strictly less to the price trade. We show how traders misrepresent their information in order to manipulate the price and that misrepresentation goes away at the rate of O(1/m) as the number of traders goes to infinity. I am, also, the co-author, with Ioan Olaru, of a paper on hedge fund practices as related to the corporate governance of financially distressed firms. Specifically, we build a framework to analyze the effect of hedge funds holding both equity, usually short, and debt in firms. It might then be beneficial for the fund (but not for the firm) that the firm files for bankruptcy. Our study suggests that a full disclosure of positions of the fund can secure the efficient outcome for the firm.
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