Athanasios Geromichalos

Directed search and optimal production

I consider a model of directed search where strategic sellers advertise general trading mechanisms. A mechanism determines the number of buyers that will get served and the side payments, as a function of ex-post realized demand. Buyers observe these advertisements and visit one seller without being able to coordinate their visiting strategies. Despite the oligopolistic nature of the model, all symmetric equilibria are constrained-efficient. In small markets, multiple equilibria exist that are not payoff equivalent. This indeterminacy vanishes as the market grows large. I provide closed form solutions for equilibrium prices, profits, and the matching function under any parameter values.

A Search-Theoretic Model of the Term Premium

A consistent empirical feature of bond yields is that term premia are, on average, positive. That is, investors in long term bonds receive higher returns than investors in similar (i.e.\ same default risk) shorter maturity bonds over the same holding period. The majority of theoretical explanations for this observation have viewed the term premia through the lens of the consumption based capital asset pricing model. In contrast, we harken to an older empirical literature which attributes the term premium to the idea that short maturity bonds are inherently more liquid. The goal of this paper is to provide a theoretical justification of this concept. To that end, we employ a model in the tradition of modern monetary theory extended to include assets of different maturities. Short term assets always mature in time to take advantage of random consumption opportunities. Long term assets do not, but agents may liquidate them in a secondary asset market, characterized by search-and-bargaining frictions a la Duffie, Garleanu, and Pedersen (2005). In equilibrium, long term assets have higher rates of return to compensate agents for their relative lack of liquidity. Consistent with empirical findings, our model predicts a steeper yield curve for assets that trade in less liquid secondary markets.

Asset liquidity and international portfolio choice

We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.

AN OVER-THE-COUNTER APPROACH TO THE FOREX MARKET: OVER-THE-COUNTER FOREX MARKET

The FOREX market is an over-the-counter market (in fact, the largest in the world) characterized by bilateral trade, intermediation, and significant bid-ask spreads. The existing international macroeconomics literature has failed to account for these stylized facts largely due to the fact that it models the FOREX as a standard Walrasian market, therefore overlooking some important institutional details of this market. In this paper, we build on recent developments in monetary theory and finance to construct a dynamic general equilibrium model of intermediation in the FOREX market. A key concept in our approach is that immediate trade between ultimate buyers and sellers of foreign currencies is obstructed by search frictions (e.g., due to geographic dispersion). We use our framework to compute standard measures of FOREX market liquidity, such as bid-ask spreads and trade volume, and to study how these measures are affected both by macroeconomic fundamentals and the FOREX market microstructure. We also show that the FOREX market microstructure critically affects the volume of international trade and, consequently, welfare. Hence, our paper highlights that modeling the FOREX as a frictionless Walrasian market is not without loss of generality.