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Academic Programs

Using the municipal bond market as a natural experiment, I study the interaction of multi-market and single-market investors in partially segmented markets. I document novel empirical evidence of larger price response in the high multi-market investor fraction markets in response to aggregate flow shocks. Then I develop an illustrative model showing that limited borrowing is sufficient to generate the empirical pattern. The model also suggests flight to liquidity when investors are closer to budget constraint, and investor elasticity increasing in wealth/flow. I then develop a new three-layer demand system. Importantly, while the original demand system has only one layer with constant elasticity, I added layers of liquidation order, and return chasing behavior, both of which had been proven important in the empirical literature, and also allow for elasticity to depend on flow. The new demand system generates asset price dynamics consistent with empirical results, with larger price movement in high multi-market investor fraction markets. The demand system also generates fire sale (flight to liquidity) dynamics not present in traditional demand systems. The liquidation order and return chasing behavior are crucial to asset price movements at the time of fire sale, generating over 30% and 70% price amplification respectively.