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Manchester Grand Hyatt, Mission Beach AB
Association of Financial Economists
Finance, Money and Banking in India
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Omesh Kini, Georgia State University and Indian School of Business
Man Versus Machine: Liquidity Provision and Market Fragility
AbstractWe empirically investigate the participation and transactional liquidity provided by algorithmic vs. human traders during “abnormally” stressful periods, relative to what they do in “normal” periods, and the resultant implications for the quality and fragility of markets. We find strong evidence that, in periods of abnormal stress, algorithmic traders significantly reduce their participation and liquidity provision in trades; significantly reduce the extent to which they post new liquidity-supplying limit orders; significantly reduce the aggressiveness of these limit orders, and sharply increase the price at which they are willing to supply liquidity. We define abnormal stress based on persistently extreme levels of volatility, order-imbalances, and bid-offer spreads; and measures that proxy for “ambiguity” or complexity. This significantly greater withdrawal of algorithmic (relative to human) traders is directly associated with the disappearance of information advantages of algorithmic traders. We find that this has a significant propensity to generate feedback loops, and induce “contagion” through withdrawals in liquidity provision in related stocks, potentially making markets more “fragile”. Our results suggest that, in contrast to manual traders who adapt in (higher latency) real time, algorithmic trade execution appears less conducive to low impact adjustment of ambiguous information asymmetries or flows. Overall, our results reinforce regulatory concerns about the potential for systemic fragility in markets dominated by machine-based liquidity provision.
Cash and the Economy: Evidence from India's Demonetization
AbstractWe analyze a unique episode in the history of monetary economics, the 2016 Indian “demonetization.” This policy made 86% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: a data set containing the geographic distribution of demonetized and new notes for causal inference; nightlights data and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses accumulate to a contraction in employment and nightlights-based output due to demonetization of 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, eﬀects which dissipate over the next few months. We use our model to show these cumulated eﬀects are a lower bound for the aggregate eﬀects of demonetization. We conclude that unlike in the cashless limit of new-Keynesian models, in modern India cash serves an essential role in facilitating economic activity.
Banking the Unbanked: What Do 255 Million New Bank Accounts Reveal about Financial Access?
AbstractUsing administrative account level data, we study the largest financial inclusion program in India that led to 255 million new bank account openings. About 77% of these accounts maintain a positive balance. While the initial usage remains quite infrequent, it gradually converges to that of banked households without direct government intervention with similar demographics. Exploiting regional variation in ex-ante financial access, we find that regions more exposed to the program saw an increase in lending and defaults on new loans. These results are consistent with banks catering to the new demand for formal credit by previously unbanked households. We also find some evidence of increased borrowing and spending for health-related reasons in regions more exposed to the program.
Southern Methodist University
Washington University-St. Louis
- G2 - Financial Institutions and Services
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit