Decision Making & Negotiations

This paper studies the asset pricing implications of Bayesian learning about the parameters, states, and models determining aggregate consumption dynamics. Our approach is empirical and focuses on the quantitative implications of learning in real-time using post World War II consumption data. We characterize this learning process and provide empirical evidence that revisions in beliefs stemming from parameter and model uncertainty are significantly related to aggregate equity returns.

For better or worse, most of us find ourselves surrounded by others whose goals and interests are not perfectly aligned with our own. And so each day, most of us face one or more versions of the same basic question: How hard should I push? When people assert themselves forcefully, they may get their way in some instrumental fashion, but they may fail to get along with their counterparts. When people forego pursuing their interests, they may get along with others, but their acquiescence may mean a failure to get their way.

We propose and study a market microstructure model of a stochastic and dynamic matching problem. Sellers arrive over time supplying capacity to this market that is characterized by a feature set that includes its price. Sellers are also characterized by their delay tolerance and financial considerations. In turn, buyers arrive over time seeking capacity and are endowed with a choice model that allows them to compare and tradeoff options that differ in their features and price.

Flow internalization is a prevalent feature of our markets. Broker dealers that internalize flow, defend the practice on the basis that it offers potential price improvement and lowers take fees. This paper studies a mathematical model of limit order book dynamics with and without flow internalization, and derives insights on the effect of the latter on price dynamics and long-run execution costs that are of interest in optimal trade execution and in policy considerations.

In modern equity markets, traders have a choice of many exchanges, each operating as an electronic limit order book that can be modeled as a pair of multi-class queues operating under the "time/price" priority rule. The dynamics of the exchanges are coupled via price protection mechanisms. We present mathematical models to study the order routing problem, characterize market equilibria, and derive insights about the queue, delay and adverse selection measures for different exchanges. We present some empirical data that supports our findings.

Does private regulation work to provide and preserve collective benefits, and if so, when? To answer these questions, we focus on social structure and competitive exclusion. We argue that effective private regulation depends on social structures that support normative control of interested parties. However, competitive dynamics may transform private regulation into an instrument to defend the interest of institutional incumbents.