Christine Parlour - Academia.edu (original) (raw)
Papers by Christine Parlour
We study the difference between loan sales and credit default swaps. A bank lends money to an ent... more We study the difference between loan sales and credit default swaps. A bank lends money to an entrepreneur to undertake a positive NPV project. After the loan has been made, the bank finds out if the project benefits from monitoring and if it should sell the loan to release regulatory capital. A bank can lay off credit risk by either selling the loan or by buying credit insurance through a credit default swap. Finally, a bank holding a loan may monitor which in some cases increases the success probability. We characterize equilibria when banks choose how to lay off risk. We find that there there can be excessive monitoring if there are loan sales, and insufficient monitoring if there is both an active CDS and loan sale market. We find that an active CDS market makes loan prices less informative about the success probability of the project.
Games and Economic Behavior, 2007
We conduct experiments on common value auctions with rationing. In each auction, the good is rand... more We conduct experiments on common value auctions with rationing. In each auction, the good is randomly allocated to one of the k highest bidders, at the (k+1)st highest price. When k>1, bidders are rationed. As the degree of rationing increases, the equilibrium bid function increases. Consistent with prior literature, we find that bidders suffer from the winner's curse and lose
SSRN Electronic Journal, 2001
Journal of Financial Economics, 2009
We consider a dynamic limit order market in which traders optimally choose whether to acquire inf... more We consider a dynamic limit order market in which traders optimally choose whether to acquire information about the asset and the type of order to submit. We numerically solve for the equilibrium and demonstrate that the market is a “volatility multiplier”: prices are more volatile than the fundamental value of the asset. This effect increases when the fundamental value has
Review of Finance, 2005
... We are grateful to Peter Boatwright, Bhagwan Chowdhry, Francesca Cornelli, Simon Gervais, Pau... more ... We are grateful to Peter Boatwright, Bhagwan Chowdhry, Francesca Cornelli, Simon Gervais, Paul Klemperer, Adam Koch, Vlad Mares, Kjell Nyborg, Ann Sherman, Fallaw Sowell, Chester Spatt, and Jeroen Swinkels for helpful comments, and to participants at the Summer ...
Journal of Financial Economics, 2003
We develop a dynamic model of price competition in broker and dealer markets. With no payment for... more We develop a dynamic model of price competition in broker and dealer markets. With no payment for order flow, a zero-profit equilibrium exists. With payment for order flow, spreads widen to more than compensate for this payment; hence, there is no equilibrium in which market makers earn zero profits. While brokerage commissions for market orders can fall, the total transactions
SSRN Electronic Journal, 1998
this paper, we describe the model and provide empirical supportfor our assumptions. Section II ex... more this paper, we describe the model and provide empirical supportfor our assumptions. Section II examines two benchmark cases which lead tothe Bertrand and monopoly outcomes. If borrowers are restricted to accepting onlyone contract, competitive pricing prevails in the unique outcome. We characterizepossible outcomes under multiple contracting in Section III, and show how these areindexed by the incentive to default. If
Review of Corporate Finance Studies, 2014
SSRN Electronic Journal, 2000
We model endogenous information acquisition in a limit order market for a single financial asset.... more We model endogenous information acquisition in a limit order market for a single financial asset. The asset has a common value; in addition, each trader has a private value for it. Traders randomly arrive at the market, after choosing whether to purchase information about the common value. They may either post prices or accept posted prices. If a trader's order has not executed, he randomly reenters the market, and may change his previous order. The model is thus a dynamic stochastic game with asymmetric information. We numerically solve for the equilibrium of the trading game, and characterize equilibria with endogenous information acquisition. Over a range of information acquisition costs, the game exhibits a prisoner's dilemma-all agents, including those who acquire information, are worse off. Agents with the lowest intrinsic benefit from trade have the highest value for information and also tend to supply liquidity. As a result, market observables such as bid and ask quotes, in addition to transaction prices, are informative about the common value of the asset. Adverse selection is important for individuals (agents have lower payoffs when uninformed), but in the aggregate it has little effect on investor surplus, unless gains to trade are small. Comparisons to a frictionless benchmark show that the limit order market is effective at consummating trade and generating consumer surplus, even in the presence of asymmetric information.
SSRN Electronic Journal, 2000
We develop a model in which two profit maximizing exchanges compete for IPO listings. They choose... more We develop a model in which two profit maximizing exchanges compete for IPO listings. They choose the listing fees paid by entrepreneurs wishing to go public and control the trading costs incurred by investors. All entrepreneurs prefer lower costs, however entrepreneurs differ in how they value a decrease in trading costs. Hence, in equilibrium, competing exchanges obtain positive expected profits by offering different execution costs and different listing fees.
We model competition between risk-neutral principals who hire weakly risk-averse agents to produc... more We model competition between risk-neutral principals who hire weakly risk-averse agents to produce a good of variable quality. The agent can increase the likelihood of producing a high-quality good by providing costly eort. We demonstrate that, when the agent is strictly risk-averse, the cost of providing incentives increases in the number of other firms in the industry. We characterize
SSRN Electronic Journal, 2000
In this paper, we study how rational agents infer the quality of a good (a product or a service) ... more In this paper, we study how rational agents infer the quality of a good (a product or a service) by observing the queue that is formed by other rational agents to obtain the good. Agents also observe privately the realization of a signal that is imperfectly correlated with the true quality of the good. Based on the queue length information and the signal realization, agents decide whether to join the queue and obtain the good or to balk. The time to produce the good is exponentially distributed. Agents arrive according to a Poisson process at a market and are served according to a FIFO discipline. We find that when waiting costs are zero, agents receiving a bad signal join the queue only if it is long enough. When waiting costs are strictly positive, agents do not join the queue if it is too long. Furthermore, there may exist a set of isolated queue lengths ("holes") at which agents with a bad signal do not join. In equilibrium, queues are shorter for low quality goods and an agent is more likely to erroneously join a queue for a low quality good than erroneously balk from a queue for a high quality good. When decreasing the service rate, more agents may join queues for high quality goods, even when waiting is costly. *
The Journal of Finance, 2005
We model a dynamic limit order market as a stochastic sequential game. Since the model is analyti... more We model a dynamic limit order market as a stochastic sequential game. Since the model is analytically intractable, we provide an algorithm based on to find a stationary Markov-perfect equilibrium. Given the stationary equilibrium, we generate artificial time series and perform comparative dynamics. We demonstrate that the order flow displays persistence. As we know the data generating process, we can compare transaction prices to the true value of the asset, as well as explicitly determine the welfare gains accruing to investors. Due to the endogeneity of order flow, the midpoint of the quoted prices is not a good proxy for the true value. Further, transaction costs paid by market order submitters are negative on average. The effective spread is negatively correlated with true transaction costs, and largely uncorrelated with changes in investor surplus. As a policy experiment, we consider the effect of a change in tick size, and find that it has a very small positive impact on investor surplus.
The Journal of Business, 2006
Journal of Financial Economics, 2009
We consider firms that, all else equal, wish to minimize variability in their internal capital (d... more We consider firms that, all else equal, wish to minimize variability in their internal capital (due to convex costs of raising external funds). The firms can hedge the cash flow risk of the project, but not that of winning or losing the auction. We characterize optimal hedging and bidding strategies in this competition framework. We show that access to financial markets makes firms bid more aggressively, possibly even above their valuation for the project. In addition, hedging increases the variance of bids and makes firm values more dispersed. Further, with hedging, the covariance of internal capital changes with the risk factor is negative, and is more negative, the higher the correlation of the hedging instrument with the risk factor.
Journal of Financial Economics, 2003
We develop a dynamic model of price competition in broker and dealer markets. With no payment for... more We develop a dynamic model of price competition in broker and dealer markets. With no payment for order flow, a zero-profit equilibrium exists. With payment for order flow, spreads widen to more than compensate for this payment; hence, there is no equilibrium in which market makers earn zero profits. While brokerage commissions for market orders can fall, the total transactions
Journal of Financial Economics, 2012
We investigate the relationship between workers' labor income and capital market investment. Usin... more We investigate the relationship between workers' labor income and capital market investment. Using a detailed Swedish data set on employment and portfolio holdings we estimate wage volatility, and labor productivity for Swedish industries and, motivated by theory, demonstrate that highly labor productive industries are more likely to pay workers variable wages. We also find that both levels and changes in wage volatility are significant in explaining changes in household investment portfolios. A household going from an industry with low wage volatility to one with high volatility will ceteris paribus decrease its portfolio share of risky assets by 25%, i.e., 7,750 USD. Similarly, a household that switches from a low labor productivity industry to one with high labor productivity decreases its risky asset share by 20%. Our results suggest that human capital risk is an important determinant of household portfolio holdings. * Preliminary version, comments are welcome. We have benefited from helpful comments
This paper develops a framework for aggregating the marginal rate of substitution of individuals ... more This paper develops a framework for aggregating the marginal rate of substitution of individuals under heterogeneity. The heterogeneity in the model stems from differences in personalized return densities and risk aversion. When investors ascribe to beliefs that depart from the norm, long and short equity positions become an equilibrium feature of the economy as a solution to their portfolio optimization problem. We develop restrictions that give rise to U-shaped aggregate marginal rate of substitution function, and present parametric examples that support such economies. The theory is consistent with extant empirical studies and relies on short equity positions, the absence of which leads to completely monotone aggregate marginal rate of substitution functions.
This paper develops a framework for deriving and inferring the distribution of relative risk aver... more This paper develops a framework for deriving and inferring the distribution of relative risk aversion from financial markets. The theoretical constructions (i) rely on a fairly robust form of aggregating the marginal rate of substitution of individuals that are either long or short the market-index, and (ii) specifies a positive measure for the risk aversion coefficient capturing the feature that a proportion of the population possesses a distinct risk aversion. The implementation of the theoretical model reveals substantial heterogeneity in the coefficient of relative risk aversion. Our empirical approach supports the competitive markets paradigm that enforces positive skewness in the risk aversion distribution. The evidence also points to the presence of a risk aversion distribution that is characterized by heavy tails. We discuss the asset pricing implications of theory and empirical findings.
We consider the role of product market competition in disciplining managers in a moral hazard set... more We consider the role of product market competition in disciplining managers in a moral hazard setting. Competition has two effects on a firm. First, the expected revenue or the marginal benefit of effort declines, leading to weakly lower effort. Second, the cost of inducing high effort increases (decreases) if competition increases (decreases) the probability of failure at a firm. Both
We study the difference between loan sales and credit default swaps. A bank lends money to an ent... more We study the difference between loan sales and credit default swaps. A bank lends money to an entrepreneur to undertake a positive NPV project. After the loan has been made, the bank finds out if the project benefits from monitoring and if it should sell the loan to release regulatory capital. A bank can lay off credit risk by either selling the loan or by buying credit insurance through a credit default swap. Finally, a bank holding a loan may monitor which in some cases increases the success probability. We characterize equilibria when banks choose how to lay off risk. We find that there there can be excessive monitoring if there are loan sales, and insufficient monitoring if there is both an active CDS and loan sale market. We find that an active CDS market makes loan prices less informative about the success probability of the project.
Games and Economic Behavior, 2007
We conduct experiments on common value auctions with rationing. In each auction, the good is rand... more We conduct experiments on common value auctions with rationing. In each auction, the good is randomly allocated to one of the k highest bidders, at the (k+1)st highest price. When k>1, bidders are rationed. As the degree of rationing increases, the equilibrium bid function increases. Consistent with prior literature, we find that bidders suffer from the winner's curse and lose
SSRN Electronic Journal, 2001
Journal of Financial Economics, 2009
We consider a dynamic limit order market in which traders optimally choose whether to acquire inf... more We consider a dynamic limit order market in which traders optimally choose whether to acquire information about the asset and the type of order to submit. We numerically solve for the equilibrium and demonstrate that the market is a “volatility multiplier”: prices are more volatile than the fundamental value of the asset. This effect increases when the fundamental value has
Review of Finance, 2005
... We are grateful to Peter Boatwright, Bhagwan Chowdhry, Francesca Cornelli, Simon Gervais, Pau... more ... We are grateful to Peter Boatwright, Bhagwan Chowdhry, Francesca Cornelli, Simon Gervais, Paul Klemperer, Adam Koch, Vlad Mares, Kjell Nyborg, Ann Sherman, Fallaw Sowell, Chester Spatt, and Jeroen Swinkels for helpful comments, and to participants at the Summer ...
Journal of Financial Economics, 2003
We develop a dynamic model of price competition in broker and dealer markets. With no payment for... more We develop a dynamic model of price competition in broker and dealer markets. With no payment for order flow, a zero-profit equilibrium exists. With payment for order flow, spreads widen to more than compensate for this payment; hence, there is no equilibrium in which market makers earn zero profits. While brokerage commissions for market orders can fall, the total transactions
SSRN Electronic Journal, 1998
this paper, we describe the model and provide empirical supportfor our assumptions. Section II ex... more this paper, we describe the model and provide empirical supportfor our assumptions. Section II examines two benchmark cases which lead tothe Bertrand and monopoly outcomes. If borrowers are restricted to accepting onlyone contract, competitive pricing prevails in the unique outcome. We characterizepossible outcomes under multiple contracting in Section III, and show how these areindexed by the incentive to default. If
Review of Corporate Finance Studies, 2014
SSRN Electronic Journal, 2000
We model endogenous information acquisition in a limit order market for a single financial asset.... more We model endogenous information acquisition in a limit order market for a single financial asset. The asset has a common value; in addition, each trader has a private value for it. Traders randomly arrive at the market, after choosing whether to purchase information about the common value. They may either post prices or accept posted prices. If a trader's order has not executed, he randomly reenters the market, and may change his previous order. The model is thus a dynamic stochastic game with asymmetric information. We numerically solve for the equilibrium of the trading game, and characterize equilibria with endogenous information acquisition. Over a range of information acquisition costs, the game exhibits a prisoner's dilemma-all agents, including those who acquire information, are worse off. Agents with the lowest intrinsic benefit from trade have the highest value for information and also tend to supply liquidity. As a result, market observables such as bid and ask quotes, in addition to transaction prices, are informative about the common value of the asset. Adverse selection is important for individuals (agents have lower payoffs when uninformed), but in the aggregate it has little effect on investor surplus, unless gains to trade are small. Comparisons to a frictionless benchmark show that the limit order market is effective at consummating trade and generating consumer surplus, even in the presence of asymmetric information.
SSRN Electronic Journal, 2000
We develop a model in which two profit maximizing exchanges compete for IPO listings. They choose... more We develop a model in which two profit maximizing exchanges compete for IPO listings. They choose the listing fees paid by entrepreneurs wishing to go public and control the trading costs incurred by investors. All entrepreneurs prefer lower costs, however entrepreneurs differ in how they value a decrease in trading costs. Hence, in equilibrium, competing exchanges obtain positive expected profits by offering different execution costs and different listing fees.
We model competition between risk-neutral principals who hire weakly risk-averse agents to produc... more We model competition between risk-neutral principals who hire weakly risk-averse agents to produce a good of variable quality. The agent can increase the likelihood of producing a high-quality good by providing costly eort. We demonstrate that, when the agent is strictly risk-averse, the cost of providing incentives increases in the number of other firms in the industry. We characterize
SSRN Electronic Journal, 2000
In this paper, we study how rational agents infer the quality of a good (a product or a service) ... more In this paper, we study how rational agents infer the quality of a good (a product or a service) by observing the queue that is formed by other rational agents to obtain the good. Agents also observe privately the realization of a signal that is imperfectly correlated with the true quality of the good. Based on the queue length information and the signal realization, agents decide whether to join the queue and obtain the good or to balk. The time to produce the good is exponentially distributed. Agents arrive according to a Poisson process at a market and are served according to a FIFO discipline. We find that when waiting costs are zero, agents receiving a bad signal join the queue only if it is long enough. When waiting costs are strictly positive, agents do not join the queue if it is too long. Furthermore, there may exist a set of isolated queue lengths ("holes") at which agents with a bad signal do not join. In equilibrium, queues are shorter for low quality goods and an agent is more likely to erroneously join a queue for a low quality good than erroneously balk from a queue for a high quality good. When decreasing the service rate, more agents may join queues for high quality goods, even when waiting is costly. *
The Journal of Finance, 2005
We model a dynamic limit order market as a stochastic sequential game. Since the model is analyti... more We model a dynamic limit order market as a stochastic sequential game. Since the model is analytically intractable, we provide an algorithm based on to find a stationary Markov-perfect equilibrium. Given the stationary equilibrium, we generate artificial time series and perform comparative dynamics. We demonstrate that the order flow displays persistence. As we know the data generating process, we can compare transaction prices to the true value of the asset, as well as explicitly determine the welfare gains accruing to investors. Due to the endogeneity of order flow, the midpoint of the quoted prices is not a good proxy for the true value. Further, transaction costs paid by market order submitters are negative on average. The effective spread is negatively correlated with true transaction costs, and largely uncorrelated with changes in investor surplus. As a policy experiment, we consider the effect of a change in tick size, and find that it has a very small positive impact on investor surplus.
The Journal of Business, 2006
Journal of Financial Economics, 2009
We consider firms that, all else equal, wish to minimize variability in their internal capital (d... more We consider firms that, all else equal, wish to minimize variability in their internal capital (due to convex costs of raising external funds). The firms can hedge the cash flow risk of the project, but not that of winning or losing the auction. We characterize optimal hedging and bidding strategies in this competition framework. We show that access to financial markets makes firms bid more aggressively, possibly even above their valuation for the project. In addition, hedging increases the variance of bids and makes firm values more dispersed. Further, with hedging, the covariance of internal capital changes with the risk factor is negative, and is more negative, the higher the correlation of the hedging instrument with the risk factor.
Journal of Financial Economics, 2003
We develop a dynamic model of price competition in broker and dealer markets. With no payment for... more We develop a dynamic model of price competition in broker and dealer markets. With no payment for order flow, a zero-profit equilibrium exists. With payment for order flow, spreads widen to more than compensate for this payment; hence, there is no equilibrium in which market makers earn zero profits. While brokerage commissions for market orders can fall, the total transactions
Journal of Financial Economics, 2012
We investigate the relationship between workers' labor income and capital market investment. Usin... more We investigate the relationship between workers' labor income and capital market investment. Using a detailed Swedish data set on employment and portfolio holdings we estimate wage volatility, and labor productivity for Swedish industries and, motivated by theory, demonstrate that highly labor productive industries are more likely to pay workers variable wages. We also find that both levels and changes in wage volatility are significant in explaining changes in household investment portfolios. A household going from an industry with low wage volatility to one with high volatility will ceteris paribus decrease its portfolio share of risky assets by 25%, i.e., 7,750 USD. Similarly, a household that switches from a low labor productivity industry to one with high labor productivity decreases its risky asset share by 20%. Our results suggest that human capital risk is an important determinant of household portfolio holdings. * Preliminary version, comments are welcome. We have benefited from helpful comments
This paper develops a framework for aggregating the marginal rate of substitution of individuals ... more This paper develops a framework for aggregating the marginal rate of substitution of individuals under heterogeneity. The heterogeneity in the model stems from differences in personalized return densities and risk aversion. When investors ascribe to beliefs that depart from the norm, long and short equity positions become an equilibrium feature of the economy as a solution to their portfolio optimization problem. We develop restrictions that give rise to U-shaped aggregate marginal rate of substitution function, and present parametric examples that support such economies. The theory is consistent with extant empirical studies and relies on short equity positions, the absence of which leads to completely monotone aggregate marginal rate of substitution functions.
This paper develops a framework for deriving and inferring the distribution of relative risk aver... more This paper develops a framework for deriving and inferring the distribution of relative risk aversion from financial markets. The theoretical constructions (i) rely on a fairly robust form of aggregating the marginal rate of substitution of individuals that are either long or short the market-index, and (ii) specifies a positive measure for the risk aversion coefficient capturing the feature that a proportion of the population possesses a distinct risk aversion. The implementation of the theoretical model reveals substantial heterogeneity in the coefficient of relative risk aversion. Our empirical approach supports the competitive markets paradigm that enforces positive skewness in the risk aversion distribution. The evidence also points to the presence of a risk aversion distribution that is characterized by heavy tails. We discuss the asset pricing implications of theory and empirical findings.
We consider the role of product market competition in disciplining managers in a moral hazard set... more We consider the role of product market competition in disciplining managers in a moral hazard setting. Competition has two effects on a firm. First, the expected revenue or the marginal benefit of effort declines, leading to weakly lower effort. Second, the cost of inducing high effort increases (decreases) if competition increases (decreases) the probability of failure at a firm. Both