UCLA

This dissertation consists of three essays on financial intermediation and international economics. In the first two essays, I study how new regulations and technologies affect liquidity in decentralized over-the-counter (OTC) markets. These markets are defined by the lack of a centralized exchange, which forces customers to search for trading counterparties and encourages dealers to provide financial intermediation. In the first essay, I address the trade-off between trading speed and transaction costs investors face in a context where dealers face higher regulatory costs. In the second essay, I explore portfolio trading, the latest innovation in the corporate bond market --one of the biggest OTC markets--, highlighting its effect on market liquidity. In the third essay, I consider a scenario where countries issue assets with different liquidity and study its macroeconomic and asset pricing effects.

In recent years, stringent financial regulations and advancing trading technologies have reshaped over-the-counter intermediation, discouraging dealers from providing immediacy to customers using their own inventories (principal trades) in favor of a larger matchmaking activity (agency trades). The first chapter of this dissertation studies how customers optimally choose between these two trading mechanisms and the implications of this choice for market liquidity. I develop a quantitative search model where heterogeneous customers choose between immediate but expensive and delayed but less costly trades, i.e., principal and agency trades, respectively. Each customer solves this speed-cost trade-off, jointly determining her optimal mechanism, transaction costs, and trading volume. When market conditions change, customers migrate across mechanisms in pursuit of higher trading surpluses. I show that this migration is not random, thus liquidity measures change not only because of changes in market conditions but also because of a composition effect. To quantify such an effect, I structurally estimate my model and build counterfactual measures that control for migration. I replicate the major innovations seen in these markets and find that composition effects explain more than a third of the increase in principal transaction costs.

The second chapter studies a recent innovation in the corporate bond market: portfolio trading. In contrast to sequential trading, this new protocol allows customers to trade a list of bonds as a single security. I show that these trading features have significant consequences on market liquidity. Particularly, I present novel evidence of asymmetrical transaction costs: compared to sequential trading, portfolio trading is less expensive when customers buy bonds and more expensive when they sell them. I find that dealers’ balance sheet costs and portfolios’ diversification explain such differences.

Finally, the third chapter presents a two-country model where the government bonds issued by one country can be used to ease financial transactions globally, resulting in endogenous convenience yields for these assets. I find that the new issuance of convenience assets spills over to foreign households, as their equilibrium transaction costs are reduced. Moreover, a global liquidity shock affects both countries differently, as the pricing of convenience assets increases in this shock and allows the issuing country to reduce taxes. Finally, I study the asset pricing implications of convenience yields in light of existing puzzles.