Research

Dealer Intermediation in OTC Markets with Private Valuation (with Julien Hugonnier)

We develop a general equilibrium theory of dealer intermediation in over-the-counter (OTC) markets with private investor valuations. Trading occurs through a competitive request-for-quote (RFQ) protocol in which dealers submit price quotes without observing investor types. The model nests the standard voice trading channel. We prove the existence and uniqueness of a stationary equilibrium and characterize it through a system of functional equations. We decompose the effects of adverse selection into a scale effect, reflecting the total mass of investors on each side of the marginal type, and a composition effect, reflecting the shape of the distribution. This decomposition characterizes how equilibrium outcomes respond to changes in supply. General equilibrium feedback effects overturn standard intuitions about how dealer competition affects prices: greater competition does not uniformly improve trading terms and induces some investors to trade less. The economy with private valuations is equivalent to an economy without private information but with type-dependent trading frictions and effective bargaining power. In equilibrium, quote distributions generate bid–ask spreads, price dispersion, and strictly positive probabilities of trade failure. Our theory characterizes these objects in terms of the primitives of the economy.

Leverage Dynamics with Segmented Capital Markets (Job Market Paper)

I develop a dynamic capital structure model without commitment in which equity and debt are priced in segmented capital markets. I model this segmentation by allowing shareholders and debtholders to value cash flows with different stochastic discount factors. This difference in valuation creates a new force in corporate financing decisions. Even in the absence of taxes and costs of financial distress, equilibrium leverage can mean revert toward an interior target. Moreover, segmented valuation can overturn the standard leverage ratchet effect: equityholders may repurchase debt even without commitment when debtholders value debt cash flows sufficiently less than shareholders. The model also has implications for derivative prices. Environments that generate similar equilibrium equity and debt values can imply different prices for credit and equity derivatives because they induce different future leverage dynamics. I decompose the price impact of debt issuance into a cash-flow component, which captures changes in default risk, and a new valuation component, which captures the effect of additional issuance on the marginal valuation of debt. I test these predictions using data on debt issuance and derivative prices. The evidence suggests that segmented valuation is a first-order determinant of corporate debt issuance and leverage dynamics.