Semih Uslu

Johns Hopkins University, Carey Business School, Faculty Member

Followers

Following

Public Views

Semih Üslü, PhD (Economics, UCLA), joined the Johns Hopkins Carey Business School in 2016. He is an Assistant Professor of Finance in the research track with expertise in the areas of market microstructure, applied theory, and macro-finance. His current interests include the role of search and information-related frictions in financial markets. In particular, his most recent research explores the nature and impact of bilateral interactions in decentralized and centralized asset markets.

less

Christophe Faugère

Kedge Business School

Remo Caponi

University of Cologne

Armando Marques-Guedes

UNL - New University of Lisbon

Rachel E Smith

University of Aberdeen

Shabib H . Syed

University of the Punjab, Lahore, Pakistan

Francisco López-Herrera

Universidad Nacional Autónoma de México

Allan Hernandez

Universidad de Costa Rica

omer emirkadi

Karadeniz Technical University

Nicola Lupo

LUISS Guido Carli

ELCHİN SULEYMANOV

Azerbaijan National Academy of Sciences

InterestsView All (10)

Uploads

Drafts by Semih Uslu

Pricing and Liquidity in Decentralized Asset Markets

I develop a search-and-bargaining model of endogenous intermediation in over-the-counter markets.... more I develop a search-and-bargaining model of endogenous intermediation in over-the-counter markets. Unlike the existing work, my model allows for rich investor heterogeneity in three simultaneous dimensions: preferences, inventories, and meeting rates. By comparing trading-volume patterns that arise in my model and are observed in practice, I argue that the heterogeneity in meeting rates is the main driver of intermediation patterns. I find that investors with higher meeting rates (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold more extreme inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. On social welfare, I show that the interaction of meeting rate heterogeneity with optimal inventory management makes the equilibrium inefficient. I provide a financial transaction tax/subsidy scheme that corrects this inefficiency, in which fast investors cross-subsidize slow investors.

Download

Papers by Semih Uslu

Fiscal-Monetary Interactions: Pre-Announcement Liquidity Effects After Bond Issuance

Social Science Research Network, 2022

A Theory of Participation in OTC and Centralized Markets

The Review of Economic Studies, Feb 22, 2022

Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized mar... more Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we study a model in which banks make costly decisions to participate in an OTC market, a centralized market, or both markets at the same time. Banks differ in their ability to take large positions, what we call their trading capacity. In equilibrium, intermediate-capacity banks find it optimal to participate in the centralized market. In contrast, low-and high-capacity banks find it optimal to participate in the OTC market, due to an endogenous complementarity. Namely, low capacity banks receive worse terms of trade than in the centralized market but better risk sharing, thanks to the intermediation services offered by high-capacity banks. High-capacity banks receive worse risk sharing than in the centralized market, but profit from the provision of intermediation services to low-capacity banks. While the social optimum has qualitatively similar participation patterns, it prescribes that more customers migrate to the centralized market, and that more dealers enter the OTC market.

Download

Essays on Search Frictions in Financial Markets

Author(s): Uslu, Semih | Advisor(s): Weill, Pierre-Olivier | Abstract: This dissertation consists... more Author(s): Uslu, Semih | Advisor(s): Weill, Pierre-Olivier | Abstract: This dissertation consists of three chapters about search frictions in financial markets.Chapter 1: “Pricing and Liquidity in Decentralized Asset Markets”I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. I also calibrate the model, demonstrate that it produces realistic quantitative outcomes, and use it to study the effect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule. Chapter 2: “Price Dispersion and Trading Activity during Turbulent Times”I construct a dynamic model of crises in a decentralized asset market that operates via search and bargaining. The crisis is modeled as a one-time aggregate shock to uncertainty with a random recovery. The arrival of the crisis shock leads to an increase in both the volatility of asset payoff and the volatility of investors’ background risk. The equilibrium path for investors’ valuations, terms of trade, and the distribution of investors’ positions is characterized in closed form both during the crisis and during the recovery. Tractability of the model allows me to derive natural proxies for price dispersion and trading activity. I show that both volatility of asset payoff and volatility of background risk contribute to higher level of price dispersion during the crisis. Trading activity might be higher or lower depending on the increase in the volatility of background risk relative to the increase in the volatility of asset payoff, consistent with the “flight-to-quality” observations during extreme episodes. A flight to the asset market always starts with a “heating-up” in trading activity but a flight from the market might start with a dry-up or heating-up during the onset of the crisis. If the relative increase in the volatility of asset payoff is too high, a period of fire sales is triggered leading to a short heating-up before the complete dry-up of the trading activity. I calibrate the model according to the U.S. corporate bond market data and show that it captures the observations during the subprime crisis.Chapter 3: “Endogenous Liquidity and Cross-section of Returns in Dynamic Bargaining Markets”The empirical analysis of liquid/illiquid asset pairs reveals the existence of a return differential (liquidity premium) between those types of assets. The time variation in liquidity premia is delineated by the term "flight-to-liquidity," meaning that liquidity premia are higher during extreme market episodes. In this paper, I extend the search-and-bargaining model of Weill (2008) by allowing for risk aversion, to explain this observation. Risk-averse investors optimally allocate their limited budgets of search efforts to various assets. This extension allows me to examine the relationship between risk and liquidity of assets in the cross-section and over time. My model generates endogenous cross-sectional liquidity differentials corroborating much of the empirical evidence. Furthermore, I show that when asset payoffs are more volatile, trade surpluses are higher because idiosyncratic hedging quality differentials are wider. Higher trade surpluses lead to higher value of search, and in turn, higher opportunity cost of committing to a particular asset, especially to an illiquid one. Therefore, periods of high volatility are associated with a flight-to-liquidity.

Comparing Search and Intermediation Frictions across Markets

Social Science Research Network, 2022

Price formation in markets with trading delays

SSRN Electronic Journal

Fiscal-Monetary Interactions: Pre-Announcement Liquidity Effects After Bond Issuance

SSRN Electronic Journal

Essays on Search Frictions in Financial Markets

Comparing Search and Intermediation Frictions Across Markets

SSRN Electronic Journal

Platform Trading with an OTC Market Fringe

We study the privately and socially optimal participation of investors in a centralizedplatform o... more We study the privately and socially optimal participation of investors in a centralizedplatform or in an over-the-counter (OTC) market. Investors incur costs to trade in theplatform, in the OTC market, or in both at the same time. Investors differ from eachother in risk-sharing needs and OTC market trading capacities. We show that investorswith low risk-sharing needs and large trading capacities endogenously emerge as OTCintermediaries, and have the strongest private incentives to enter the OTC market vs. thetrading platform. Investors with strong risk-sharing needs and low trading capacities endogenously emerge as OTC customers, and have the weakest private incentive to enterthe OTC market vs. the trading platform. Turning to social welfare, we provide twonecessary conditions for customers' private incentives to be excessively large relative totheir social contribution. Mandating or subsidizing trade in a centralized venue can bewelfare improving only if these conditions are sa...

Informed Trading in Markets with Trading Delays

SSRN Electronic Journal, 2021

Liquidity in the Cross Section of OTC Assets

SSRN Electronic Journal, 2019

We construct a dynamic model of a multi-asset over-the-counter (OTC) market that operates via sea... more We construct a dynamic model of a multi-asset over-the-counter (OTC) market that operates via search and bargaining and empirically test its implications using data from the US corporate bond market. The key novelty in our model is that investors can hold and manage portfolios of OTC-traded assets. We characterize the stationary equilibrium in closed form which includes investors' valuations, terms of trade, and the characteristic function of the distribution of investors' states. Tractability of the model allows us to derive natural proxies for important measures of market liquidity such as trading volume, price dispersion, and price impact. Among other within-market and cross-market comparative statics, we find that the alleviation of search frictions in one market may lead to opposite observations regarding liquidity in other markets depending on which liquidity measure is used. For example, a reduction of search frictions in one market decreases trade volume in other markets implying lower liquidity. At the same time, it decreases price dispersion and price impact implying higher liquidity. We test empirically these key liquidity equations that come out of our model. Our regressions indicate significant support for the search-and-bargaining framework in uncovering the determinants of endogenous liquidity differentials across OTC assets. Finally, we argue that, among the liquidity measures we analyze, price impact can serve as a good measure of welfare loss caused by OTC frictions, while other measures overstate or understate this deadweight loss.

Download

Pricing and Liquidity in Decentralized Asset Markets

SSRN Electronic Journal, 2016

I develop a search-and-bargaining model of endogenous intermediation in over-the-counter markets.... more I develop a search-and-bargaining model of endogenous intermediation in over-the-counter markets. Unlike the existing work, my model allows for rich investor heterogeneity in three simultaneous dimensions: preferences, inventories, and meeting rates. By comparing trading-volume patterns that arise in my model and are observed in practice, I argue that the heterogeneity in meeting rates is the main driver of intermediation patterns. I find that investors with higher meeting rates (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold more extreme inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. On social welfare, I show that the interaction of meeting rate heterogeneity with optimal inventory management makes the equilibrium inefficient. In the equilibrium, investors have less dispersed inventories than the socially efficient allocation. I provide a financial transaction tax/subsidy scheme that corrects this inefficiency, in which fast investors cross-subsidize slow investors.

Download

A Theory of Participation in OTC and Centralized Markets

SSRN Electronic Journal, 2019

Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized mar... more Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we consider a model of equilibrium and socially optimal market participation of heterogeneous banks in an OTC market, in a centralized market, or in both markets at the same time. We find that banks have the strongest private incentives to participate in the OTC market if they have the lowest risk-sharing needs and highest ability to take large positions. These banks endogenously assume the role of OTC market dealers. Other banks, with relatively higher risk-sharing needs and lower ability to take large positions, lie at the margin: they are indifferent between the centralized market and the OTC market, where they endogenously assume the role of customers. We show that more customer banks participation in the centralized market can be welfare improving only if investors are mostly heterogeneous in their ability to take large positions in OTC market, and if participation costs induce banks to trade exclusively in one market. Empirical evidence suggest that these necessary conditions for a welfare improvement are met.

Download

Pricing and Liquidity in Decentralized Asset Markets

Download

Fiscal-Monetary Interactions: Pre-Announcement Liquidity Effects After Bond Issuance

Social Science Research Network, 2022

A Theory of Participation in OTC and Centralized Markets

The Review of Economic Studies, Feb 22, 2022

Download

Essays on Search Frictions in Financial Markets

Comparing Search and Intermediation Frictions across Markets

Social Science Research Network, 2022

Price formation in markets with trading delays

SSRN Electronic Journal

Fiscal-Monetary Interactions: Pre-Announcement Liquidity Effects After Bond Issuance

SSRN Electronic Journal

Essays on Search Frictions in Financial Markets

Comparing Search and Intermediation Frictions Across Markets

SSRN Electronic Journal

Platform Trading with an OTC Market Fringe

Informed Trading in Markets with Trading Delays

SSRN Electronic Journal, 2021

Liquidity in the Cross Section of OTC Assets

SSRN Electronic Journal, 2019

Download

Pricing and Liquidity in Decentralized Asset Markets

SSRN Electronic Journal, 2016

I develop a search-and-bargaining model of endogenous intermediation in over-the-counter markets.... more I develop a search-and-bargaining model of endogenous intermediation in over-the-counter markets. Unlike the existing work, my model allows for rich investor heterogeneity in three simultaneous dimensions: preferences, inventories, and meeting rates. By comparing trading-volume patterns that arise in my model and are observed in practice, I argue that the heterogeneity in meeting rates is the main driver of intermediation patterns. I find that investors with higher meeting rates (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold more extreme inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. On social welfare, I show that the interaction of meeting rate heterogeneity with optimal inventory management makes the equilibrium inefficient. In the equilibrium, investors have less dispersed inventories than the socially efficient allocation. I provide a financial transaction tax/subsidy scheme that corrects this inefficiency, in which fast investors cross-subsidize slow investors.

Download

A Theory of Participation in OTC and Centralized Markets

SSRN Electronic Journal, 2019

Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized mar... more Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we consider a model of equilibrium and socially optimal market participation of heterogeneous banks in an OTC market, in a centralized market, or in both markets at the same time. We find that banks have the strongest private incentives to participate in the OTC market if they have the lowest risk-sharing needs and highest ability to take large positions. These banks endogenously assume the role of OTC market dealers. Other banks, with relatively higher risk-sharing needs and lower ability to take large positions, lie at the margin: they are indifferent between the centralized market and the OTC market, where they endogenously assume the role of customers. We show that more customer banks participation in the centralized market can be welfare improving only if investors are mostly heterogeneous in their ability to take large positions in OTC market, and if participation costs induce banks to trade exclusively in one market. Empirical evidence suggest that these necessary conditions for a welfare improvement are met.

Download

Semih Uslu

Uploads

Drafts by Semih Uslu

Papers by Semih Uslu

Log In