ESSAYS ON INTERMEDIATED MARKETS

Abstract

In three essays, this dissertation examines the role of intermediaries in determining market outputs and trends in a variety of different settings.

Chapter 1 studies the motives for trade for financial intermediaries in OTC markets. In these markets, public information about fundamentals is limited, and trade takes place under conditions of asymmetric information. Financial intermediaries, then, may rely on their trading activity to acquire information about the state of market fundamentals. Information acquisition, therefore, becomes an additional motive for trade. In this paper, my co-authors and I use a combination of reduced- form techniques and structural analysis to characterize and measure experimentation motives for trade in the U.S. secondary market for municipal bonds. We find that financial intermediaries are willing to pay up to 15% of the intermediation spread to improve their information. Furthermore, we argue that experimentation explains up to 10% of the volume of trade in the market.

In Chapter 2, my co-authors and I leverage detailed data on vessel movements and shipping contracts to shed new light on how the world shipping industry affects world trade costs and trade flows. We build a framework for modeling how decisions of exporters and ships jointly determine trade costs and trade flows. This framework provides a novel link to understand trade patterns and we showcase this by studying the impact on trade flows of different trade shocks.

Finally, in Chapter 3, my co-authors and I investigate the importance of fuel oil costs in shaping world trade, through the shipping industry. We use a rich dataset on ships’ movements and contracts, along with a dynamic model describing the world shipping industry, to measure the elasticity of trade with respect to ship fuel costs. We find that the average estimated elasticity is 0.35, but ranges from 0.1 to about 1.2 depending on the level of the fuel cost. Strikingly, the trade elasticity features a pronounced asymmetry in low vs. high oil prices, which is attributed to the equilibrium of the transportation sector. Finally, we use the estimated elasticity to assess the importance of ship design on trade flows.