Essays on Financial Intermediaries and Market Frictions

Abstract

Even the largest, most sophisticated intermediaries face limitations due to market frictions. In my dissertation, I study the impact of these frictions in a variety of settings, ranging from the U.S. bond market to the insurance market. In the bond market, I find that when intermediaries hit risk limits on their balance sheets, the market compensates them for bearing additional risk with higher expected long-run returns. In the insurance market, when companies face political frictions, I find that they are less likely to adjust prices and more likely to reduce supply of insurance in the future. Finally, in Treasury auctions, I find that due to dealers' limited capacity to absorb inventory, the supply of Treasuries sold at auction creates a repeated, intraday price pressure effect. Because intermediaries connect financial markets to consumers, the study of their constraints unveils important market dynamics that impact regulators, consumers, as well as practitioners.