Nicola Branzoli
Ph.D. Candidate
Department of Economics
University of Wisconsin–Madison
Fields of Interest: Industrial Organization, Finance
References: Alan Sorensen (Co-chair), Dean Corbae (Co-chair), Mark Ready and Francesco Decarolis
Contact Information: e-mail:branzoli@wisc.edu, Phone: (608) 263-2327
Curriculum Vitae (PDF)
Job Market Paper
The Effect of Intermediaries' Market Power in Decentralized Asset Markets
SUMMARY
In many financial markets trading takes place through bilateral negotiations between investors and intermediaries. During such bilateral negotiations, intermediaries may charge different prices when investors have a high need of trading the asset. I call this ability of dealers to price discriminate investors depending on their need of trading an asset as dealer market power. This paper studies how - and how much - dealer market power affects the trading activity in asset markets.
I develop a search-and-bargaining model to show that dealer market power reduces volumes traded and increases price volatility. To estimate the model, I collect a new dataset containing all trades executed in a secondary market of municipal bonds whose liquidity plummeted after the recent financial crisis. Using observations about prices and volumes traded in each order, inter-dealer trades and the frequency of trades, I estimate the distribution of investors’ unobserved valuations for the bonds, the arrival rate of trading possibilities and measure the distortions induced by dealer market power. Given the estimated structural parameters, I simulate the model to study investors' behavior under alternative market structures.