Weiting Hu


Date of Award

Spring 5-15-2023

Author's School

Graduate School of Arts and Sciences

Author's Department


Degree Name

Doctor of Philosophy (PhD)

Degree Type



This dissertation is comprised of two chapters on financial markets, asset pricing and market microstructure. The primary objective is to examine the influence of financial market participants' actions in non-standard environments on asset prices, market stability, and the distributions of gains and losses. Chapter 1 shows how trade frictions faced by intermediaries affects their role in providing liquidity in over-the-counter markets. Chapter 2 investigates how retail investors participating in social media discussions affects security markets.

In Chapter 1, we explore the role of financial intermediaries in liquidity provision in over-the-counter markets, such as the market for corporate bonds. In over-the-counter bond markets, financial intermediaries, also known as “broker-dealers”, have dual capacity in serving customers. When a customer wants to trade, the broker-dealer can either trade out of inventory or match the trade with a counterparty. Allowing the broker-dealer to hold positive inventory improves market liquidity and customer well-being. Compared to a pure broker who does not hold any inventory in account, a dealer clears customer orders across time internally at better prices. As a response, customers trade higher volume and gain higher welfare in a dealership market. Post-crisis regulations restricting banks’ balance sheet capacity incurs a cost of holding inventory that reduces liquidity for customers. With endogeneous central dealers in an inter-dealer market where trades can be rebalanced, the broker-dealer maintains little inventory and offsets trades at the inter-dealer market when customer arrivals are infrequent or costs of holding inventory are high. This allows a monopolist central dealer to charge a larger spread in the equilibrium without sacrificing much inter-dealer trading volume. In an extended Hotelling model with multiple central dealers, increasing competition among central dealers first increases and then decreases the spread. The increase comes from increased focus on entrenched broker-dealers, while the decrease comes from competition for even the entrenched broker-dealers.

In Chapter 2, we study the role of retail investors in stock markets who exhibit behavioral biases as a result of following social media. When retail investors engage in discussions on social media, they could be emotionally controlled and exhibit over-confidence on their investment decisions, as illustrated in the GameStop event in early 2021. The distinctive feature of the retail investors from social media is that despite their enthusiasm, they often lose interest or face financial constraints that force them to withdraw from the market after a certain point, especially if they have incurred significant losses. To explore the reaction of institutional investors to fanatic retail investors on social media, we build a theoretical model characterizing three types of investors: the fanatic retail investors, rational long-term investors and strategic hedge funds. In a frictionless world with fanatic retail investors flocking in to invest in “meme” stocks, we find that a risk-neutral hedge fund with market power offsets all demand from the fanatics, plus a tilt that bets on the expected changes in the fanatics’ demand. When there are market frictions associated with shorting the asset or holding inventory, the hedge fund’s demand is attenuated. In equilibrium, mispricing is proportional to the size of the fanatics’ demand as well as its directional change. The fanatics as a group lose money on average in the economy. In particular, “diamond hands” who buy the asset high and never sell, have a negative present value of investing because they pay too much for the cash flows they receive. The expected losses of the fanatics are divided up equally by the rational long-term investors who trade on mispricing and the hedge fund who front-runs the fanatics.


English (en)

Chair and Committee

Philip Dybvig

Committee Members

Ana Babus, Nicolae Garleanu, Brittany Lewis, Jonathan Weinstein,

Available for download on Monday, May 10, 2027