The asset ownership structure in financial markets worldwide has changed significantly in recent years – what will be the next development?
Several recent papers have analyzed the (perhaps unintended) consequences of recent changes in asset ownership structure. The effect of the growth of the passive sector on prices is still a subject of debate, but some papers point to increased co-movement in prices, while others (including ours) looks at the effects on price informativeness. One of the results of the latter set is that the trend cannot continue unabated. The larger the passive sector, the more opportunities there are for active investors to profitably collect information and use it.
Last year, you won the ‘Best Paper by a Young Researcher’ award at the Plato MI3 Conference – what have you been working on since then and what will you be presenting at MI3 2018, later this week?
My research is focused in two main strands. The first is a purely theoretical set of papers that deal with the dynamic implications of information collection – essentially, how you learn today impacts your beliefs tomorrow, which, in turn, impacts how you learn tomorrow. The second is a set of applied theory and empirical papers that is concerned with how institutional players impact price informativeness. The paper I presented last year is a part of this latter set.
What are your impressions of the market post-MiFID II?
My coauthors and I have been paying close attention to the effects of MiFID II on financial markets. We are particularly interested in how the changes in the pricing of information will affect its production, and we see this as a key factor in changing levels of price informativeness.
Last year, you said that large asset managers’ performance can suffer from diseconomies of scale – is this still the case?
The paper I presented focuses on one particular diseconomy of scale, which is price impact. Larger players must be more mindful of their price impact and find creative solutions to mitigate it when they place trades. This will always be a consideration for a manager as his or her AUM increase.
What role do you think academia can play in the development of global market structure?
My advisor once said that academics are not particularly good at telling practitioners what todo, but can provide very good advice on what not to do. This is part and parcel of having a good understanding of incentive structures based in economic theory. As a theorist by training, I believe that academic modeling provides useful information to practitioners looking to understand different sets of incentives among market participants.