Competing Mechanism is Common Value Environment: Risk Aversion and Liquidity Supply to Traders

Professor Xiangkang Yin and Dr Suren Basov

Market makers bear enormous uncertainty of the values of their portfolios and their attitude toward risk should not be completely ignored. In series of papers we analyse a quote-driven market of a risky financial asset, where both market makers and traders are risk averse. We find that risk aversion of the market maker is likely to increase the non-participation range of traders and the bid-ask spread. We extend analysis to the cases when the trades' degree of risk aversion is unknown to the market maker and characterise the optimal trading mechanisms.

Dividends, Overconfidence and Pricing

Professor Balasingham Balachandran, Dr Suren Basov, with Professor Michael Theobald, Mifranthe Associates

We analyse the direct impacts of managerial overconfidence upon the dividend decision and demonstrate that the dividend levels and speeds of adjustment to target levels can increase when managers exhibit overconfidence. However, we demonstrate that the directional impact upon dividend levels will depend upon the nature of the managerial overconfidence. Differing degrees of investor bias can lead to reversals of this situation with the result that the empirical results will be influenced by the relative impacts of manager and investor related cognitive biases.

Worker Heterogeneity, the Job-Finding Rate, and Technological Change

Dr Suren Basov, with Professor Ian King and Dr Lawrence Uren from University of Melbourne

We examine the implications of changes in the skill distribution on the equilibrium matching process and the job finding rate, using a directed search model. Worker abilities are selected from a distribution, and the firms direct their job offers to workers. For large markets we derive a simple closed form expression for the equilibrium matching function. This function has constant returns to scale and depends on the underlying distribution of worker productivities. We define a convenient measure of heterogeneity in this context, which we denote by κ. The equilibrium unemployment rate is increasing in κ and, under certain conditions, is increasing in the proportion of, and productivity of, highly skilled workers.