Tehran Institute for Advanced Studies (TeIAS)

/ Market-making with Search and Information Frictions __ Ali Shourideh

Talk

Market-making with Search and Information Frictions

July 15, 2018

Venue

Khatam University, Building No2.
Address: Mollasadra Blvd., North Shirazi St., East Daneshvar St., No.17. See location on Google map

+982189174612

Dr. Ali Shourideh

Assistant Professor of Economics at Tepper School of Business
Carnegie Mellon University

Overview

We develop a dynamic model of trading through market-makers that incorporates two canonical sources of illiquidity: trading (or search) frictions, which imply that market-makers have some amount of market power; and information frictions, which imply that market-makers face some degree of adverse selection. We use this model to study the effects of various technological innovations and regulatory initiatives that have reduced trading frictions in over-the-counter markets.  Our main result is that reducing trading frictions can lead to less liquidity, as measured by bid-ask spreads. The key insight is that more frequent trading—or more competition among dealers—makes traders’ behavior less dependent on asset quality. As a result, dealers learn about asset quality more slowly and set wider bid-ask spreads to compensate for this increase in uncertainty.

Biography

Ali Shourideh is an Assistant Professor of Economics and Frank A. and Helen E. Risch Faculty Development Professor of Business at Carnegie Mellon University, Tepper School of Business. He conducts research in the fields of macroeconomics, public finance, and contract theory. In his research, he has studied optimal taxation of various forms of income and expenditure in presence of international trade and specific knowledge about technology as well as determinants of sovereign debt and government pensions when governments have redistributional motives. He has also studied markets with adverse selection and the role of imperfect competition and learning in such markets. Professor Shourideh received his B.S. in Mechanical Engineering from Sharif University of Technology in Tehran, Iran and his Ph.D. in Economics from University of Minnesota. Previously, he has taught in New York University and Wharton School, University of Pennsylvania.