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We propose a parsimonious model of over-the-counter trading with asymmetric information to rationalize the existence of intermediation chains that stand between buyers and sellers of assets. Trading an asset through several heterogeneously informed intermediaries can preserve the efficiency of trade by reallocating an information asymmetry over many(More)
We develop econometric tools for studying jump dependence of two processes from high-frequency observations on a fixed time interval. In this context, only segments of data around a few outlying observations are informative for the inference. We derive an asymptotically valid test for stability of a linear jump relation over regions of the jump size domain.(More)
I use the cross section of bid-ask spreads to develop a new measure of extreme event risk. Equilibrium spreads embed tail risk information because (1) sharp changes in underlying asset values harm liquidity providers and (2) price movements and potential costs are linear in factor loadings. Using this insight, simple regressions relating spreads and trading(More)
No. Regulation often mandates increased transparency to improve how informative prices are about fundamentals. We show that such policy can be counterproductive. We study the optimal decision of an investor who can choose to acquire costly information not only about asset fundamentals but also about the behavior of liquidity traders. We characterize how(More)
The high-frequency trading arms race is a symptom of flawed market design. Instead of the continuous limit order book market design that is currently predominant, we argue that financial exchanges should use frequent batch *First version: July 2013. Project start date: October 2010. For helpful discussions we are grateful to numerous industry practitioners;(More)
We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors’ private information, an irrelevance result emerges when investors are ex-ante identical: price informativeness is independent of the level of trading costs. This result holds for quadratic, linear, and fixed trading costs(More)
A risk-averse agent can sell claims to an asset of uncertain value to investors who have private information. When investors can choose how much information to acquire, the agent optimally issues information-sensitive securities in each market (e.g., debt and equity). When the value of the asset varies over time, the agent chooses to retain and, at times,(More)