Jonathan Wallen

PhD Student, Finance
PhD Program Office Graduate School of Business Stanford University 655 Knight Way Stanford, CA 94305

Jonathan Wallen

Research Statement

I am a Ph.D candidate in Finance at the Stanford University Graduate School of Business. My research centers on financial intermediation and its intersection with asset pricing, currency markets, industrial organization, and banking regulation. My job market paper is titled, “Markups to Financial Intermediation in Foreign Exchange Markets.”
I am on the market this year and available for interviews at the 2020 ASSA/AFA Meetings in San Diego.

Job Market Paper

In large, liquid asset markets, financial intermediaries have market power. To identify the effects of market power on asset prices, I study foreign exchange market arbitrage returns: covered interest rate parity violations. Previous literature equates these arbitrages to the price of a balance sheet constraint on foreign exchange dealer banks. My work identifies cross-sectional variation in arbitrage returns, which is inconsistent with the standard balance sheet constraint channel. Due to a difference in regulation, FX dealer bank competition decreases near quarter-end. Using a simple Cournot model, I estimate markups and counterfactuals. Low cost suppliers earn large quarter-end markups for 1-week contracts: on average 120 bps or 3-times marginal cost. More generally, these findings imply that markups to financial intermediation exist in other risky assets.

Working Papers

Intermediary Funding Cost and Short-Term Risk Premia (with Wenhao Li)

We build a theory of short-term risk premia dynamics based on funding costs. The theory builds on a framework of intermediary asset pricing in a market microstructure setting. Financial intermediaries facilitate trading by market making. To fund these trading activities, intermediaries earn a risk premium. This risk premium increases in intermediary leverage and asset idiosyncratic risks. We test our theory across multiple asset classes, including equities, bonds, and currencies. Conditional on a large price shock, high intermediary leverage and asset idiosyncratic risk raise short term risk premia by about 100 to 170 basis points. We also find evidence of risk sharing and capacity constraints among intermediaries. Intermediary leverage and asset idiosyncratic volatility are important factors in explaining the time series of risk premia in equities, bonds, and currencies.

Work in Progress

Intermediary Asset Pricing and Imperfect Competition

During periods of financial crisis, imperfect competition is an important friction to intermediary asset pricing. Due to heterogeneity in intermediary leverage, negative shocks decrease the aggregate supply and increase the concentration of intermediary capital. Building on He, Kelly, and Manela (2017), I estimate a negative price of risk for shocks to the concentration of intermediary capital across a broad class of assets (corporate and government bond portfolios, derivatives, commodities, and currencies). Assets that payoff when intermediary concentration is high are more valuable, implying that financial intermediaries imperfectly compete. These findings suggest that the effect of capital scarcity on risk premia is over-estimated. Market power contributes to the large risk premia during financial crises.