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172nd Biweekly Academic Forum

作者:     日期:2016-06-05    来源:

1. Topic: Over-the-counter Search Frictions in Foreign Exchange Market: Theory and Evidence

2. Lecturer: Lu Dong, PhD in economics in Indiana University. He graduated with a bachelor degree in financial engineering from Wuhan University, and got his master degree in finance from Fudan University. His research fields include monetary search theory, financial economics and international economics. His research findings were published in journals like Economic Research Journal Economic Review and so on. He used to work in China Foreign Exchange Trade System.

3. Time: June 8th (Wednesday) 2016, 12:30-13:30

4. Place: Room 913, Main Building

5. Host: Huang Zhigang, Associate Professor of School of Finance, CUFE.

Abstract: Trading in over-the-counter markets, such as the foreign exchange (FX) market, takes time. I construct a dynamic search-and-bargaining model with heterogeneous search ability of investors. The model predicts that asset holding distribution of investors will get more dispersed as search frictions ease. Dealers tend to charge smaller bid-ask spread for sophisticated investors than unsophisticated investors. I provide empirical confirmation for these predictions using the transaction-level data of China’s FX market. After calibrating the model, I find as search frictions diminish the annual welfare gains are less than 5% while a welfare losses can be as large as 18.6% during financial crisis. Absent any search frictions, intraday volatility will increase by 56% or equivalently 60 basis points. Some frictions in the FX market could reduce price volatility in a sense of reminiscent to Tobin’s proposal (1978) to “throw some sand in the wheels” of FX market.