Research Interests: Microeconomic Theory, Finance
    Market Design; Asset pricing in Thin Markets; Decision Theory
 

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Finance:

     It is now well documented that large institutional investors have significant price impact and they mitigate its adverse effects when choosing their trading strategies. The competitive equilibrium asset-pricing models, such as CAPM or consumption CAPM, assume price-taking and are thus not suitable to model markets with such large investors. We build a dynamic model with multiple assets in which traders take into account their impact on prices. To our knowledge, we are the first to derive equilibrium for non-competitive markets in which the price impact does not arise due to asymmetric information or exogenous costs (transaction, search or financing). Rather, it is derived from the market primitives: number of traders, return variability and risk attitudes.

• "Frequent Trading and Price Impact in Thin Markets," (with Marek Weretka) December 2006, pdf
       The model predicts that the price impact is not constant over a trading period, but varies with time-to-maturity. The results match a number of empirical facts that cannot be reconciled with price-taking behavior: e.g., optimal execution of trade through breaking-up orders into blocks, asset price overshooting, dynamics of trade volume. Since in the presence of price impact cash and market values of portfolios no longer coincide, we also study dynamic asset valuation.

• "Liquidity Concerns in Thin Financial Markets," (with Marek Weretka), in progress
       Extensive empirical evidence shows that assets are priced not only for their risk and return but also liquidity. We model asset illiquidity as a price concession required to liquidate a block of assets. In a stochastic non-competitive model, we show that the interaction of uncertainty about asset returns with price impact gives rise to equilibrium liquidity premia. By contrast to the existing literature, liquidity effects arise without appealing to costs or asymmetric information. Apart from characterizing equilibrium portfolios and prices, this allows us to ask new questions about behavior of aggregate market liquidity and cross-market liquidity effects. We study implications for optimal trading strategies and asset valuation.

Market Design:

• "Discriminatory or Uniform? Design of Divisible Good Auctions," (with Marek Pycia and Marek Weretka), coming soon

• "Dynamic Thin Markets," (with Marek Weretka), coming soon
       We identify new effects of market power on dynamic trading in markets where all traders (buyers and sellers) have market power.

Decision Theory:

• "Quantile Maximization in Decision Theory," revised May 2007, pdf
       This paper introduces a model of preferences in which an individual compares uncertain alternatives through a quantile of the induced utility distributions. The choice rule of Quantile Maximization nests maxmin and maxmax but also captures less extreme preferences. Although largely ignored in decision theory literature, quantiles are present in many applied areas of economics: finance (Value at Risk), econometrics (robust estimation and quantile regression), measurement (population-based poverty lines, order statistics), and others. The two key distinctive features of the model are robustness (to fat tails) and ordinality (robustness to the assumptions about risk attitudes). Taking preferences over acts as a primitive, I axiomatize Quantile Maximization in a Savage setting. Check out the new construction of a probability-measure representation of beliefs