Recent Advances in Empirical Analysis of Financial Markets: Industrial Organization Meets Finance

In this article I provide a selective review of recent empirical work in the intersection of finance and industrial organization. I describe an estimation method, which can be applied quite widely in financial and other markets where a researcher needs to recover agents' beliefs. Using four applications I illustrate how combining this method with data from auctions and with a theoretical model can be used to answer various economic questions of interest. I start with the primary market for sovereign debt, focusing on treasury bill auctions of the USA and Canada. I show how auction data together with standard tools from Industrial Organization can be used to shed light on issues involving market structure, market power and front-running. I continue by looking at the Main Refinancing Operations of the European Central Bank, the main channel of monetary policy implementation in the Eurozone, and illustrate how auction data can be used to learn about typically opaque over-the-counter lending markets. I also discuss how to use these data indirectly to learn about dynamics of banks' financial health and of their balance sheets. I then turn to the discussion of recent progress on estimation of systemic risk. I finish with thoughts on how to estimate a whole demand system for financial assets.