Chaojun Wang is an assistant professor of finance at the Wharton School of the University of Pennsylvania.
His primary research interests are in over-the-counter financial markets, market structure and market design. His research has received the 2017 FTG first prize for Best Job Paper, the 2017 Marshall Blume Prize, the 2017 Cubist Ph.D. Candidate Award and the 2017 Young Scholars Finance Consortium award for Best Ph.D. Student Paper.
He earned his PhD from Stanford University.
Despite the availability of low-cost exchanges, over-the-counter (OTC) trading is pervasive for most assets. We explain the prevalence of OTC trading using a model of adverse selection, in which informed and uninformed investors choose to trade over-the-counter or on an exchange. OTC dealers’ ability to price discriminate allows them to imperfectly cream-skim the uninformed investors from the exchange. Assets with lower adverse selection risk are predicted to have a higher fraction of trades over-the-counter, as observed in practice. The presence of an OTC market increases aggregate trade volume and reduces average bid-ask spread; nonetheless, welfare declines when adverse selection risk is low. Surprisingly, for assets that are mostly traded over-the-counter, closing the OTC market improves welfare, providing support for recent regulatory efforts to end OTC trading in those assets.
Core-periphery trading networks arise endogenously in over-the-counter markets as an equilibrium balance between trade competition and inventory efficiency. A small number of firms emerge as core dealers to intermediate trades among a large number of peripheral firms. The equilibrium number of dealers depends on two countervailing forces: (i) competition among dealers in their pricing of immediacy to peripheral firms, and (ii) the benefits of concentrated intermediation for lowering dealer inventory risk through dealers' ability to quickly net purchases against sales. For an asset with a lower frequency of trade demand, intermediation is concentrated among fewer dealers, and interdealer trades account for a greater fraction of total trade volume. These two predictions are strongly supported by evidence from the Bund and U.S. corporate bond markets. From a welfare viewpoint, I show that there are too few dealers for assets with frequent trade demands, and too many for assets with infrequent trade demands.
We model bargaining in over-the-counter network markets over the terms and prices of contracts. Of concern is whether bilateral non-cooperative bargaining is sufficient to achieve efficiency in this multilateral setting. For example, will market participants assign insolvency-based seniority in a socially efficient manner, or should bankruptcy laws override contractual terms with an automatic stay? We provide conditions under which bilateral bargaining over contingent contracts is efficient for a network of market participants. Examples include seniority assignment, close-out netting and collateral rights, secured debt liens, and leverage-based covenants. Given the ability to use covenants and other contingent contract terms, central market participants efficiently internalize the costs and benefits of their counterparties through the pricing of contracts. We provide counterexamples to efficiency for less contingent forms of bargaining coordination.