Winner of the 2014 PhD Outstanding Paper Award in Honor of Stuart I. Greenbaum, Washington University in St. Louis
Winner of the 2015 Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research.
Abstract: A large literature has shown that asset quality may be signaled by retention, or, in a separate literature, screened by liquidity. I present a general framework to analyze both instruments, offering conditions that characterize which instrument will be used in equilibrium. I then expand the private information to include not only asset quality but also seller patience, showing that both retention and liquidity may be used to fully separate both dimensions of private information. The expanded model offers new predictions about how price, quantity, and liquidity covary with each other and with seller private information.
Abstract: We study whether regulators should reveal the models they use to stress test banks. In our setting, revealing leads to gaming, but not revealing can induce banks to underinvest in socially desirable assets for fear of failing the test. We show that although the regulator can solve this underinvestment problem by making the test easier, some disclosure may still be optimal, which under some conditions takes the simple form of a cutoff rule. We characterize the optimal disclosure policy combined with test difficulty, provide comparative statics, and relate our results to recent policies. We also offer applications beyond stress tests.
Abstract: We present a model of dynamic trading with exogenous and strategic cancellation of orders. We define spoofing as the strategic placing and canceling of orders in order to move prices and trade later in the opposite direction. We show that spoofing can occur in equilibrium. It slows price discovery, raises bid-ask spreads, and raises return volatility. The prevalence of equilibrium spoofing is single-peaked in the measure of informed traders, consistent with industry anecdotes that spoofers target markets of intermediate liquidity. We consider within-market and cross-market spoofing and discuss how regulators should allocate resources towards cross-market surveillance.
Abstract: In many organizations, employees enjoy significant discretion regarding project selection. If projects differ in their informativeness about an employee’s quality, project choices will be distorted whenever career concerns are important. We analyze a model in which an organization can shape its employees’ career concerns by committing to a system for allocating a limited set of promotions. We show that the organization optimally overpromotes certain categories of underperforming employees, trading off efficient matching of employees to promotions in return for superior project selection. When organizations can additionally pay monetary bonuses, we find that overpromotion is a superior incentive tool when the organization needs to offer high-powered incentives; otherwise, bonuses perform better.
Abstract: How informative should bank stress tests be? I use Bayesian persuasion to formalize stress tests and show that regulators can reduce the likelihood of a bank run by performing tests which are only partially informative. Fully disclosing stress tests are never strictly optimal, and I find conditions under which full disclosure is worse than no disclosure. Optimal stress tests give just enough failing grades to keep passing grades credible enough to avoid runs. I find that optimal stress tests, by reducing the probability of runs, reduce the optimal level of banks' liquidity cushions. I also examine the impact of anticipated stress tests on banks' ex ante incentive to invest in risky versus safe assets.