Equilibrium Theory of Financial Markets: Recent Developments

Dollar Dominance in FX Trading

“…Hence, the residual market is less elastic when currency pairs are either more risky or when other traders are more risk-averse. Consequently, if the residual market is very inelastic, an additional trade has a larger price impact because of the greater price concession required to absorb the extra marginal unit such that markets clear (Rostek and Yoon, 2021b).…”

“…A promising avenue for future research would be to explore the welfare consequences of dollar dominance. Demand submission games are particularly well-suited to welfare analysis since they do not rely on the presence of noise traders or not-fully-optimising traders (Rostek and Yoon, 2021b). For example, one might ask how the potential costs and benefits of being the dominant international currency are distributed between the hegemon (i.e., the United States) and the rest of the world.…”

Information, Market Power and Welfare

“…Unlike the papers cited in this paragraph, we do not impose any restrictions on the correlation matrix of bidder values. Rostek and Yoon (2020) provide a general overview of the literature on uniform-price double auctions in a linear-normal setting. A number of papers study competitive equilibria with interdependent values, sidestepping the difficulties that arise when agents have market power and act strategically: Vives (2014) studies a perfectly competitive version of Vives (2011); Rahi and Zigrand (2018) and Rahi (2021) analyze learning externalities in information production.…”

Innovation in Decentralized Markets: Technology versus Synthetic Products

“…In particular, the effects we report do not rely on the inference about asset value across traders. Relatively little is known about inference across assets because models for multiple assets commonly apply the assumption that demands are fully contingent (e.g., the survey by Rostek and Yoon (2021c)). 12 We explore how information about traders' asset holdings carried by the asset prices differs when the design allows synthetic products versus demand conditioning among the underlying assets, and how it changes when both instruments are allowed (Corollary 1 and Example 3).…”