Conference Agenda

Session
MM 01: Frictions
Time:
Thursday, 17/Aug/2023:
8:30am - 10:00am

Session Chair: Angelo Ranaldo, University of St.Gallen
Location: 2A-24 (floor 2)


Presentations
ID: 421

Asset Heterogeneity, Market Fragmentation, and Quasi-Consolidated Trading

Wei Li, Zhaogang Song

Johns Hopkins University, United States of America

Discussant: Aytek Malkhozov (Queen Mary University of London)

Asset heterogeneity is widely believed to restrict liquidity in many markets involving important fixed-income assets. We model the impact of quasi-consolidated (QC) trading---a design that allows sellers to deliver heterogeneous assets for identical payments---on over-the-counter (OTC) markets involving assets with varying values. We show that allowing for QC trading reduces market fragmentation but introduces a cheapest-to-deliver (CTD) effect. In consequence, although QC trading increases total trading volume and social welfare, it hurts liquidity for sellers who do not switch to QC trading and lowers profits for both these sellers and some other sellers who switch to QC trading. Consolidating multiple QC contracts increases (decreases) total trading volume and social welfare if the contracts cover assets with similar (distinct) values.

EFA2023_421_MM 01_1_Asset Heterogeneity, Market Fragmentation, and Quasi-Consolidated Trading.pdf


ID: 420

(In)efficient repo markets

Tobias Dieler1, Loriano Mancini2, Norman Schürhoff3

1University of Bristol, United Kingdom; 2Swiss Finance Institute, USI Lugano; 3Swiss Finance Institute, University of Lausanne, CEPR

Discussant: Benedikt Ballensiefen (University of St. Gallen and World Bank Group)

Repo markets suffer from funding misallocations and funding runs. We develop a rollover risk model with collateral to show how repo trading and clearing mechanisms can resolve these inefficiencies. In over-the-counter markets, non-anonymous trading prevents asset liquidations but causes runs on low-quality borrowers. In central-counterparty markets, anonymous trading provides insurance against small funding shocks but causes inefficient asset liquidations for large funding shocks. The privately optimal market structure requires central clearing with a two-tiered guarantee fund to insure against both illiquidity and insolvency. Our findings inform the policy debate on funding crises and explain empirical patterns of collateral premia.

EFA2023_420_MM 01_2_(In)efficient repo markets.pdf


ID: 1184

Intermediary Market Power and Capital Constraints

Jason Allen2, Milena Wittwer1

1Boston College, United States of America; 2Bank of Canada

Discussant: Fabricius Somogyi (Northeastern University)

We examine how intermediary capitalization affects asset prices in a framework that allows for intermediary market power. We introduce a model in which capital constrained intermediaries buy or trade an asset in an imperfectly competitive market, and show that weaker capital constraints lead to both higher prices and intermediary markups. In exchange markets, this results in reduced market liquidity, while in primary markets, it leads to higher auction revenues at an implicit cost of larger price distortion. Using data from Canadian Treasury auctions, we demonstrate how our framework can quantify these effects by linking asset demand to individual intermediaries' balance sheet information.

EFA2023_1184_MM 01_3_Intermediary Market Power and Capital Constraints.pdf