ICEF Associate Professor Vincent Fardeau on "Asymmetric Thin Markets," Publishing in the Journal of Financial Economics, and Building a Research Career at ICEF

Vincent Fardeau, ICEF Associate Professor, has published his paper "Asymmetric Thin Markets" in the Journal of Financial Economics (JFE); the printed version appeared this month. This milestone coincides with another significant development: Vincent has successfully completed his major academic review and received tenure. In this interview, Vincent discusses the story behind the paper, the meaning of "asymmetric thin markets," the long road from his first breakthrough insight to final acceptance, and his advice for young scholars aiming for the top-tier journals.

Vincent Fardeau, ICEF Associate Professor

© ICEF

- Vincent, congratulations on the publication of your paper "Asymmetric Thin Markets" in the Journal of Financial Economics, one of the top journals in the field. What inspired this research? What was the core question you wanted to answer?

Generally, in my research I try to understand the properties of imperfectly competitive markets. In this particular case, an empirical puzzle played a big role in writing the paper: on a daily basis in financial markets, Treasuries and other securities are issued or re-issued, indices are reconstituted, ETFs adjust their portfolios to comply with their investment mandates, etc. All these events are largely uninformative, well-anticipated by market participants, and yet trigger V-shaped price reactions and complex trading strategies. These price reactions are costly to issuers and other market players and are difficult to explain within the standard paradigm of frictionless markets. For instance, it is hard to explain why some investors buy these securities today, while they understand that the price will be lower tomorrow on average. The idea of this paper is to provide an explanation for these phenomena based on the market structure. In a nutshell, I argue that these V-shaped price reactions are bound to arise when the market is dominated by large financial institutions taking their price impact into account. The only key condition is that institutions differ in their price impact, which is natural.

- The title "Asymmetric Thin Markets" is very intriguing. Could you explain what you mean by a "thin market" and what makes it "asymmetric" in the context of your model?

It is related to the previous condition. Market thinness refers to the fact that traders cannot trade large quantities without moving prices. This is one of the key dimensions of illiquidity. In the real world, institutions differ in their size and price impact. Similarly, in my model, traders differ in their risk aversion and in their price impact. As a result, the market is asymmetrically thin.

- The Journal of Financial Economics is highly selective. What has this journey been like for you, from the initial idea to the final acceptance?

It’s a long process. I would highlight two “Eureka moments” and a challenging time. The first “Eureka moment” is when I introduced an anticipated supply shock in my model and it replicated the V-shaped price pattern observed empirically. The second milestone is when I received the "revise and resubmit" decision from the Journal of Financial Economics. The referee suggested a modification of the model which seemed natural but required a non-trivial amount of work. This was a challenging time. Finally, the second “Eureka moment” came about a year ago. I had solved the modified setup suggested by the referee using the standard approach in the literature, but the results were not easy to interpret. Then I realized that I can reformulate the equilibrium using a decomposition of the main state variable and suddenly economic interpretation became much easier. At this stage, I grew more confident in my chances of success because this new equilibrium representation was interesting in itself and was strengthening the overall contribution of the paper.

- You are one of only a few researchers in Russia to have published in a top-three finance journal. To what extent has the research environment and support at ICEF HSE contributed to your success?

We are privileged to have excellent researchers in the department, with several colleagues interested in financial economics and in theory. For instance, throughout the project I had very useful conversations with Professor Alexei Bulatov and with our regular guest Professor Sergey Tsyplakov. ICEF also supports our research trips, which are very important to disseminate research and receive feedback.

Vincent Fardeau (right) during an interview for the student podcast "ICEF Talks"

ICEF

- What does this publication mean to you personally and professionally?

It’s a good recognition of my work and I hope it will boost the impact of the paper.

- You teach courses at ICEF. Do your teaching activities inspire or influence your research? Can you give an example?

I would rather say that the interaction takes place in the context of thesis supervision. Students have a variety of interests and this forces me to keep an eye on strands of the literature that are a bit beyond my own research interests. For instance, this year I had a student working on retail investors' trading and another one on perpetual futures in crypto markets. Yet another student was working on classical empirical asset pricing.

In my lectures, I mention research papers to highlight how the literature has built on standard material and to outline remaining open questions. Occasionally, this leads to research work. For instance, a few years ago, I mentioned a research question during my elective on "Risk Management". One of the students decided to work on it in his MSc thesis and this eventually led to a publication in the Journal of Credit Risk.

- You work with both bachelor’s and master’s students. How is teaching bachelor’s different from teaching master’s? What do you want each group to take away from your classes?

Bachelor’s students usually need more guidance and monitoring. They need to spend more time “learning how to learn”. For both MSc and BSc, I try to emphasize the value of core notions, even if the standard material is not always very realistic (I teach several fundamental courses). And, perhaps because of my background in philosophy, I try to make sure students develop a healthy critical mind. I think it is essential, even more so in the time of AI.

- What advice would you give to young academics and PhD students who aspire to publish their research in top-tier journals like the Journal of Financial Economics?

They should not underestimate the value of presenting their work at brownbags, seminars, conferences, etc. Feedback and constructive criticism are essential in our profession.