MIT Sloan School of Management
100 Main Street, E62-623
Cambridge, MA 02142
NBER Program Affiliations:
NBER Affiliation: Faculty Research Fellow
Institutional Affiliation: Massachusetts Institute of Technology
NBER Working Papers and Publications
|May 2019||Premium for Heightened Uncertainty: Solving the FOMC Puzzle|
with Grace Xing Hu, Jun Pan, Jiang Wang: w25817
The substantial stock market return prior to FOMC announcements without major increase in conventional measures of risk, as documented by Lucca and Moench (2015), presents a “puzzle” to the simple notion of risk-return trade off. We hypothesize that the arrival of macroeconomic news, with FOMC announcements leading the list, brings heightened uncertainty to the market as an additional source of risk. While this heightened uncertainty may not be accurately captured by common risk measures, its dissolution occurs mostly during a short time window prior to the announcement and brings a significant price appreciation, reflecting the risk premium associated with it. This hypothesis leads to two testable implications: First, we should see similar return patterns for other pre-scheduled macroecon...
|November 2015||Size Discovery|
with Darrell Duffie: w21696
Size-discovery trade mechanisms allow large quantities of an asset to be exchanged at a price that does not respond to price pressure. Primary examples include “workup” in Treasury markets, “matching sessions” in corporate bond and CDS markets, and block-trading “dark pools” in equity markets. By freezing the execution price and giving up on market-clearing, size-discovery mechanisms overcome concerns by large investors over their price impacts. Price-discovery mechanisms clear the market, but cause investors to internalize their price impacts, inducing costly delays in the reduction of position imbalances. We show how augmenting a price-discovery mechanism with a size-discovery mechanism improves allocative efficiency.
Published: Darrell Duffie & Haoxiang Zhu, 2017. "Size Discovery," The Review of Financial Studies, vol 30(4), pages 1095-1150. citation courtesy of
|October 2014||Benchmarks in Search Markets|
with Darrell Duffie, Piotr Dworczak: w20620
We characterize the price-transparency role of benchmarks in over-the-counter markets. A benchmark can, under conditions, raise social surplus by increasing the volume of beneficial trade, facilitating more efficient matching between dealers and customers, and reducing search costs. Although the market transparency promoted by benchmarks reduces dealers' profit margins, dealers may nonetheless introduce a benchmark to encourage greater market participation by investors. Low-cost dealers may also introduce a benchmark to increase their market share relative to high-cost dealers. We construct a revelation mechanism that maximizes welfare subject to search frictions, and show conditions under which it coincides with announcing the benchmark.
Published: DARRELL DUFFIE & PIOTR DWORCZAK & HAOXIANG ZHU, 2017. "Benchmarks in Search Markets," The Journal of Finance, vol 72(5), pages 1983-2044. citation courtesy of
|Welfare and Optimal Trading Frequency in Dynamic Double Auctions|
with Songzi Du: w20588
This paper studies the welfare consequence of increasing trading speed in financial markets. We build and solve a dynamic trading model, in which traders receive private information of asset value over time and trade strategically with demand schedules in a sequence of double auctions. A stationary linear equilibrium and its efficiency properties are characterized explicitly in closed form. Infrequent trading (few double auctions per unit of time) leads to a larger market depth in each trading period, but frequent trading allows more immediate asset re-allocation after new information arrives. Under natural conditions, the socially optimal trading frequency coincides with information arrival frequency for scheduled information releases, but can (far) exceed information arrival frequency fo...