Pierre-olivier Weill - Academia.edu (original) (raw)

Papers by Pierre-olivier Weill

We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the useful... more We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as

We study the efficiency of dealers ’ liquidity provision and the desirability of policy intervent... more We study the efficiency of dealers ’ liquidity provision and the desirability of policy intervention in over-the-counter (OTC) markets during crises. Our theory emphasizes two key frictions in OTC markets: finding counterparties takes time, and trade is bilateral, with quantities and prices determined by bargaining. We model a crisis as a negative shock to investors ’ asset demands that lasts until a random recovery time. In this context, dealers can provide liquidity to outside investors by acting as counterparties in trades and by accumulating asset inventories. We find that, when frictions are severe, even well capitalized dealers may not find it optimal to accumulate inventories, given that investors choose asset positions that require small reallocations. In such circumstances, welfare can increase if the government steps in, purchases private assets on its own account, and resells them

The New Palgrave Dictionary of Economics, 2008

SSRN Electronic Journal, 2000

ABSTRACT The trading of derivative instruments such as such as forwards, swaps, options, and cred... more ABSTRACT The trading of derivative instruments such as such as forwards, swaps, options, and credit derivatives is conducted primarily in over-the-counter (OTC) markets. The recent financial crisis, with the AIG bailout and the failure of Lehman Brothers, a leading OTC market dealer, has raised a variety of concerns about the structure of these markets and their ability to withstand disruptions. In this proposal, we propose a new theoretical framework to formally analyze the manner in which negative shocks propagate and amplify in OTC derivatives market, as well as the effect of associated policy interventions and regulatory proposals.

SSRN Electronic Journal, 2000

ABSTRACT This project studies derivatives markets, where liquidity depends crucially on a small g... more ABSTRACT This project studies derivatives markets, where liquidity depends crucially on a small group of key dealer banks with large trading activities. We plan to consider a theoretical over-the-counter market in which a few large dealer banks searches and establishes long term credit derivative relationships with a large number of smaller banks. We will provide the steady state size and net credit exposure of each dealer, as well as the terms of the credit derivative contracts they negotiate with their customers. We will study the conditions leading to a concentrated market structure, favoring a select few large players. Next, we will analyze how such a structure might be fragile in the sense that what appear to be isolated shocks can have large effects. In this way, this projects seeks to shed light on the tradeoff between efficiency in normal times with robustness during potential crises.

SSRN Electronic Journal, 2000

ABSTRACT We develop a model of equilibrium entry, trade, and price formation in over-the- counter... more ABSTRACT We develop a model of equilibrium entry, trade, and price formation in over-the- counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as “dealers,” trading mainly to provide intermediation services, while medium sized banks endogenously participate as “customers” mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

SSRN Electronic Journal, 2000

ABSTRACT We develop a novel continuous-time equilibrium microstructure model based on the premise... more ABSTRACT We develop a novel continuous-time equilibrium microstructure model based on the premise that, because their cognition is imperfect, investors cannot continuously make new trading decisions. We use our theoretical financial market setup to study price, trading dynamics, and welfare in the aftermath of a liquidity shock. We pursue three objectives. First, we compare market dynamics and welfare across alternative trading mechanisms (market orders, limit orders, algorithms). Second, we study the equilibrium distribution of gains from trade when investors differ in the sophistication of their trading mechanisms. This allows, for instance, to study whether unsophisticated investors are worse off when there is a larger number of sophisticated investors using algorithmic trading. Third, we relate our findings to existing empirical evidence and we provide a calibration to quantify the effects generated by the model.

ABSTRACT We develop a model of a two-sided asset market in which trades are intermediated by deal... more ABSTRACT We develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades—which can include prices, quantities, and execution speed—and investors direct their orders toward dealers who offer the most attractive terms. We characterize the equilibrium in a general setting, and we illustrate theoretically and numerically how the model can account for several important trading patterns in over-the-counter markets, which do not emerge from existing models.

We thank Ruilin Zhou for comments and Monica Crabtree-Reusser for editorial assistance. We also t... more We thank Ruilin Zhou for comments and Monica Crabtree-Reusser for editorial assistance. We also thank seminar participants at

... consume liquidity, by placing market and limit orders, consistent with the empirical findings... more ... consume liquidity, by placing market and limit orders, consistent with the empirical findings of Hendershott and Riordan (2010) and Brogaard (2010). Brogaard also finds that algorithms i) tend not to withdraw from the market after large liquidity shocks; ii) tend to provide liquidity ...

Review of Economic Studies, 2010

We investigate the 30 year increase in the level and dispersion of house prices across U.S. metro... more We investigate the 30 year increase in the level and dispersion of house prices across U.S. metropolitan areas in a calibrated dynamic general equilibrium island model. The model is based on two main assumptions: households flow in and out metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. Feeding in our model the 30 year increase in cross-sectional wage dispersion that we document based on metropolitan-level data, we generate the observed increase in house price level and dispersion. In equilibrium, workers flow towards exceptionally productive metropolitan areas and drive house prices up. The calibration also reveals that, while a baseline level of regulation is important, a tightening of regulation by itself cannot account for the increase in house price level and dispersion: in equilibrium, workers flow out of tightly regulated towards less regulated metropolitan areas, undoing most of the price impact of additional local supply regulations. Finally, the calibration with increasing wage dispersion suggests that the welfare effects of housing supply regulation are large. . The effects of land use regulation on the price of housing: What do we know? what can we learn? Cityscape, 8(1):69-138, 2005. William J. Reed. The pareto, zipf and other power law. Economics Letters, 74:15-19, 2001. William J. Reed. The pareto law of incomes -an explanation and an extension. Physica A, 319: 469-486, 2003. Jennifer Roback. Wages, rent, and the quality of life. Journal of Political Economy, 90(2):191-229, 1982. Sherwin Rosen. Wage-based indexes of urban quality of life. In Mieszkowski and Straszheim, editors,

The Journal of Political Economy, 2010

We study the effect of releasing public information about productivity or monetary shocks when ag... more We study the effect of releasing public information about productivity or monetary shocks when agents learn from nominal prices. While public releases have the benefit of providing new information, they can have the cost of reducing the informational efficiency of the price system. We show that, when agents have private information about monetary shocks, the cost can dominate, in that public releases increase uncertainty about fundamentals. In some cases, public releases can create or eliminate multiple equilibria. Our results are robust to adding velocity shocks, imperfectly observable prices, large idiosyncratic shocks, and introducing a bond market.

Journal of Political Economy, 2012

We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the useful... more We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.

Journal of Money, Credit and Banking, 2011

Journal of Monetary Economics, 2012

... 10% of their idiosyncratic risk. Chris Edmond Department of Economics Stern School of Busines... more ... 10% of their idiosyncratic risk. Chris Edmond Department of Economics Stern School of Business New York University 44 West 4th Street New York NY 10012 cedmond@stern.nyu.edu Pierre-Olivier Weill Department of Economics ...

We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the useful... more We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as

We study the efficiency of dealers ’ liquidity provision and the desirability of policy intervent... more We study the efficiency of dealers ’ liquidity provision and the desirability of policy intervention in over-the-counter (OTC) markets during crises. Our theory emphasizes two key frictions in OTC markets: finding counterparties takes time, and trade is bilateral, with quantities and prices determined by bargaining. We model a crisis as a negative shock to investors ’ asset demands that lasts until a random recovery time. In this context, dealers can provide liquidity to outside investors by acting as counterparties in trades and by accumulating asset inventories. We find that, when frictions are severe, even well capitalized dealers may not find it optimal to accumulate inventories, given that investors choose asset positions that require small reallocations. In such circumstances, welfare can increase if the government steps in, purchases private assets on its own account, and resells them

The New Palgrave Dictionary of Economics, 2008

SSRN Electronic Journal, 2000

ABSTRACT The trading of derivative instruments such as such as forwards, swaps, options, and cred... more ABSTRACT The trading of derivative instruments such as such as forwards, swaps, options, and credit derivatives is conducted primarily in over-the-counter (OTC) markets. The recent financial crisis, with the AIG bailout and the failure of Lehman Brothers, a leading OTC market dealer, has raised a variety of concerns about the structure of these markets and their ability to withstand disruptions. In this proposal, we propose a new theoretical framework to formally analyze the manner in which negative shocks propagate and amplify in OTC derivatives market, as well as the effect of associated policy interventions and regulatory proposals.

SSRN Electronic Journal, 2000

ABSTRACT This project studies derivatives markets, where liquidity depends crucially on a small g... more ABSTRACT This project studies derivatives markets, where liquidity depends crucially on a small group of key dealer banks with large trading activities. We plan to consider a theoretical over-the-counter market in which a few large dealer banks searches and establishes long term credit derivative relationships with a large number of smaller banks. We will provide the steady state size and net credit exposure of each dealer, as well as the terms of the credit derivative contracts they negotiate with their customers. We will study the conditions leading to a concentrated market structure, favoring a select few large players. Next, we will analyze how such a structure might be fragile in the sense that what appear to be isolated shocks can have large effects. In this way, this projects seeks to shed light on the tradeoff between efficiency in normal times with robustness during potential crises.

SSRN Electronic Journal, 2000

ABSTRACT We develop a model of equilibrium entry, trade, and price formation in over-the- counter... more ABSTRACT We develop a model of equilibrium entry, trade, and price formation in over-the- counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as “dealers,” trading mainly to provide intermediation services, while medium sized banks endogenously participate as “customers” mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

SSRN Electronic Journal, 2000

ABSTRACT We develop a novel continuous-time equilibrium microstructure model based on the premise... more ABSTRACT We develop a novel continuous-time equilibrium microstructure model based on the premise that, because their cognition is imperfect, investors cannot continuously make new trading decisions. We use our theoretical financial market setup to study price, trading dynamics, and welfare in the aftermath of a liquidity shock. We pursue three objectives. First, we compare market dynamics and welfare across alternative trading mechanisms (market orders, limit orders, algorithms). Second, we study the equilibrium distribution of gains from trade when investors differ in the sophistication of their trading mechanisms. This allows, for instance, to study whether unsophisticated investors are worse off when there is a larger number of sophisticated investors using algorithmic trading. Third, we relate our findings to existing empirical evidence and we provide a calibration to quantify the effects generated by the model.

ABSTRACT We develop a model of a two-sided asset market in which trades are intermediated by deal... more ABSTRACT We develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades—which can include prices, quantities, and execution speed—and investors direct their orders toward dealers who offer the most attractive terms. We characterize the equilibrium in a general setting, and we illustrate theoretically and numerically how the model can account for several important trading patterns in over-the-counter markets, which do not emerge from existing models.

We thank Ruilin Zhou for comments and Monica Crabtree-Reusser for editorial assistance. We also t... more We thank Ruilin Zhou for comments and Monica Crabtree-Reusser for editorial assistance. We also thank seminar participants at

... consume liquidity, by placing market and limit orders, consistent with the empirical findings... more ... consume liquidity, by placing market and limit orders, consistent with the empirical findings of Hendershott and Riordan (2010) and Brogaard (2010). Brogaard also finds that algorithms i) tend not to withdraw from the market after large liquidity shocks; ii) tend to provide liquidity ...

Review of Economic Studies, 2010

We investigate the 30 year increase in the level and dispersion of house prices across U.S. metro... more We investigate the 30 year increase in the level and dispersion of house prices across U.S. metropolitan areas in a calibrated dynamic general equilibrium island model. The model is based on two main assumptions: households flow in and out metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. Feeding in our model the 30 year increase in cross-sectional wage dispersion that we document based on metropolitan-level data, we generate the observed increase in house price level and dispersion. In equilibrium, workers flow towards exceptionally productive metropolitan areas and drive house prices up. The calibration also reveals that, while a baseline level of regulation is important, a tightening of regulation by itself cannot account for the increase in house price level and dispersion: in equilibrium, workers flow out of tightly regulated towards less regulated metropolitan areas, undoing most of the price impact of additional local supply regulations. Finally, the calibration with increasing wage dispersion suggests that the welfare effects of housing supply regulation are large. . The effects of land use regulation on the price of housing: What do we know? what can we learn? Cityscape, 8(1):69-138, 2005. William J. Reed. The pareto, zipf and other power law. Economics Letters, 74:15-19, 2001. William J. Reed. The pareto law of incomes -an explanation and an extension. Physica A, 319: 469-486, 2003. Jennifer Roback. Wages, rent, and the quality of life. Journal of Political Economy, 90(2):191-229, 1982. Sherwin Rosen. Wage-based indexes of urban quality of life. In Mieszkowski and Straszheim, editors,

The Journal of Political Economy, 2010

We study the effect of releasing public information about productivity or monetary shocks when ag... more We study the effect of releasing public information about productivity or monetary shocks when agents learn from nominal prices. While public releases have the benefit of providing new information, they can have the cost of reducing the informational efficiency of the price system. We show that, when agents have private information about monetary shocks, the cost can dominate, in that public releases increase uncertainty about fundamentals. In some cases, public releases can create or eliminate multiple equilibria. Our results are robust to adding velocity shocks, imperfectly observable prices, large idiosyncratic shocks, and introducing a bond market.

Journal of Political Economy, 2012

We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the useful... more We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.

Journal of Money, Credit and Banking, 2011

Journal of Monetary Economics, 2012

... 10% of their idiosyncratic risk. Chris Edmond Department of Economics Stern School of Busines... more ... 10% of their idiosyncratic risk. Chris Edmond Department of Economics Stern School of Business New York University 44 West 4th Street New York NY 10012 cedmond@stern.nyu.edu Pierre-Olivier Weill Department of Economics ...