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.

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