The Stock Connect to China, 01/2023, with Xiaoquan Zhu and Yuehan Wang. Prepared for AEA Papers and Proceedings.
The Stock Connect bridges Chinese mainland and international financial markets. Cross-border flows respond to macro-related shocks. Important to profile heterogeneous cross-border participants over market integration.

Sovereign Debt Ratchets and Welfare Destruction, 12/2022, with Peter DeMarzo and Fabrice Tourre, forthcoming at Journal of Political Economy. Online appendix.
An impatient and risk-neutral government cannot commit to any financing and default strategies. In the equilibrium that we fully characterize, debt adjusts slowly towards a target debt-to-income level , and gains from trade end up entirely dissipated. Citizens who are more patient than government are harmed by unrestricted borrowing.


Homemade Foreign Trading, 12/2022, with Xiaoquan Zhu and Yuehan Wang.
Provide evidence that Chinese mainland insiders evade the see-through surveillance by round-tripping via the Stock Connect program, based on custodian holding data. After the 2018 Northbound Investor Identification reform, the correlation between insider trading and northbound flows decays, and so does the return predictability of northbound flows.

Investing in Lending Technology: IT Spending in Banking, 08/2022, with Sheila Jiang, Douglas Xu, and Xiao Yin.
Link banks’ IT spending in various categories to different lending technologies. Communication IT is associated more with improving banks’ ability of soft information production and transmission, while software IT helps enhance banks’ hard information processing capacity. Large banks respond more in IT spending to Fintech entry.

Industrial Land Discount in China: A Public Finance Perspective, 09/2022, with Scott Nelson, Yang Su, Anthony Zhang, and Fudong Zhang.
Explain the large industrial land discount, i.e., the price wedge between industrial and residential lands in China, by the different time profiles of tax revenues for governments. Study the role of local governments’ financial constraints and theirs tax revenue sharing. 

Agency MBS as Safe Assets, 11/2022, with Zhaogang Song.
The convenience premium of agency MBS averages 47 bps, about half of Treasury’s. Via prepayment-driven demand channel, MBS convenience premium depends on mortgage rate negatively, which contrasts with the positive dependence of MBS-repo convenience premium on interest rates implied by the “opportunity cost of money” hypothesis.

What Gets Measured Gets Managed: Investment and the Cost of Capital, 08/2022, with Guanmin Liao and Baolian Wang.
Study the impact of government-led incentive systems by examining a staggered EVA reform in the performance evaluation policy for Chinese SOEs. This EVA policy adopts a one-size-fits-all approach by stipulating a fixed cost of capital, to which SOEs did respond. Provide causal evidence that incentive schemes affect real investment and sheds new light on challenges faced by economic reforms in China.

Share Pledging in China: Funding Listed Firms or Funding Entrepreneurship?  01/2022, with Bibo Liu and Feifei Zhu.
Challenge the common wisdom that share pledging funds in China circle back to the listed firms: a majority of the largest shareholders (67.3%) use pledging funds outside the listed firms. Connect share pledging and entrepreneurial activities, with an identification strategy based on the launch of the exchange market in 2013 that favors natural person shareholders against that by legal entity shareholders.

An Economic Model of Consensus on Distributed Ledgers, 11/2021, with Hanna Halaburda and Jiasun Li.
Develop economic framework to analyze Byzantine fault tolerance (BFT) problem by assuming that rational non-Byzantine nodes are ambiguity averse (Knightian uncertain) about Byzantine actions, with decisions/inferences are all based on local information.

Intermediation via Credit Chains, 12/2021, with Jian Li.
Build a dynamic model of credit chains where one institution’s asset is another institution’s liability, delivering a new insight on the benefit of intermediation via layers: Credit chains insulate interim negative fundamental shocks and protect the underlying real project from being liquidated in bad times.

Valuation of Long-Term Property Rights under Political Uncertainty, 08/2021, with Maggie Hu, Zhenping Wang, and Vincent Yao. Presentation slides. ProMarket Publication. R&R at American Economic Review.
Identify the effect of political uncertainty rooted in the “One Country, Two Systems” principle by exploiting the variation around land lease extension protection beyond 2047 in Hong Kong. Relative to properties that have been promised an extension protection, those without are sold at a discount of 8%, and leases issued during the colonial era suffer an additional discount of 8% due to their reneging risk.

Margin Trading and Leverage Management, 03/2021, with Jiangze Bian, Zhi Da, Dong Lou, Kelly Shue, and Hao Zhou. R&R at Journal of Finance.
Study and establish new facts based on account-level trading data of margin accounts, including both regulated brokerage-margin and unregulated shadow-margin, during the Chinese stock market crash in 2015.
This paper subsumes the earlier paper Leverage-Induced Fire Sales and Stock Market Crashes, NBER WP25040, 09/2018. Presentation Slides. Poets&Quants profile.
First Prize in Chinese Finance Annual Meeting, 2017


Chinese Economy and Financial Market

Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets, 06/22, with Hui Chen, Zhuo Chen, Jinyu Liu, and Rengming Xie. Journal of Finance, forthcoming.
Arthur Warga Award, SFS Cavalcade North America, 2019
Provide causal evidence of the effect of pledgeability on asset pricing, in the context of dual-listed bonds in Chinese bond markets. Quantify the value of pledgeability using IV approach based on a policy shock.

The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes, with Zhuo Chen and Chun Liu, 01/2020, Journal of Financial Economics 137 (2020) 42–71. Presentation slides, article in Vox China, data, online appendix.
Nominee of Masahiko Aoki Award (青木仓彦经济学论文提名奖), 2021
Winner of CFRC Best Paper Award, 2017
PwC 3535 Finance Forum Best Paper Award, 2020
​China’s four-trillion stimulus package fueled by bank loans in 2009 led to the upsurge of shadow banking several years later, evidenced by the composition shift of the local government liabilities. The development of financial market in China’s post-stimulus period is similar to that of the U.S. history in its National Banking Era (1864-1912).

We follow China Securities Index (中证指数) to use “Municipal Corporate Bonds” as the translation of “Cheng Tou Zhai” (城投债), or “Chengtou Bonds” in some other papers. These bonds are issued by the Local Government Financing Vehicles (政府融资平台), hence legally they are Corporate Bonds; but they have explicit or implicit guarantees from the corresponding local governments, hence enjoy the extra safety of Municipal Bonds.

Chinese Bond Market and Interbank Market, 11/2019, with Marlene Amstad. Chapter for the Handbook of “China’s Financial System.”
The most updated overview of the rapid development of Chinese bond markets in the past two decades.

Economics in FinTech

Open Banking: Credit Market Competition When Borrowers Own the Data, 2023, with Jing Huang, and Jidong Zhou, Journal of Financial Economics 147, pp. 449–474. Online Appendix.
European Finance Association Best Conference Paper Prize, 2021
Study lending market competition when voluntarily sharing banks’ customer data enables better borrower screening. Open banking could make the entire financial industry better off yet leave all borrowers worse off, even if borrowers could choose whether to share their data.

Decentralized Mining in Centralized Pools, 2021, with Will Cong and Jiasun Li, Review of Financial Studies, 34(3), pp. 1191–1235. Presentation Slides.
Dispersed cryptocurrency miners form pools for risk-sharing benefits, but it will not lead to centralization in a decentralized environment as miners can diversify themselves by joining multiple pools.  Rather, it exacerbates arms race competition in mining. In equilibrium, larger pools charge higher fees, hence disproportionally less miners joining and a slower pool size growth. Supporting empirical evidence is presented.
Blockchain Disruption and Smart Contracts, 2019, with Will Cong, Review of Financial Studies 32 pp. 1754-1797. 区块链革新与智能合约的经济影响 (Chinese version), 2020 Comparative Studies, 2 24-63. Presentation slides, VoxEU article, Caixin article.
The single “truth” on Blockchain is a decentralized consensus that is achieved via distributing information. We highlight the fundamental tension between decentralized consensus and distributed information, as Blockchain facilitates entry which is pro-competitiveness but may foster collusion among incumbents which is anti-competitiveness.

Financial Markets and Macroeconomics

Treasury Inconvenience Yields during the COVID-19 Crisis, with Stefan Nagel & Zhaogang Song, 2022, Journal of Financial Economics 143, pp. 57-79.
Policy/Practitioner Coverage: Report of U.S. Government Accountability Office
Document large shifts during the COVID-19 crisis in Treasury ownership, rising spreads between 1) Treasuries and OIS rates, and 2) dealers’ reverse repo and triparty repo rates. Build a model with balance sheet constraints of dealers, which also explains the opposite signs of Treasury convenience yields during the 2007-09 financial crisis.

Are US Treasury Bonds Still a Safe Haven? with Arvind Krishnamurthy, NBER Reporter No.3, October 2020.

A Macroeconomic Framework for Quantifying Systemic Risk, with Arvind Krishnamurthy, 05/2019, American Economic Journal: Macroeconomics, 11(4), pp. 1-37.​ Presentation slidesMatlab code.
Winner of Swiss Finance Institute Outstanding Paper Award 2012
Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. Model is calibrated to match the systemic risk apparent during the 2007/2008 financial crisis.

A Model of Safe Asset Determination, with Arvind Krishnamurthy and Konstantin Milbradt, 2019, American Economic Review 109, pp. 1230-1262​.
The safe asset tends to be the bonds issued by a relatively strong country. Large debt size helps the safety status given a high global demand for safe asset (previously circulated under the title of “A model of reserve asset.”)

Intermediary Asset Pricing and the Financial Crisis, 02/2018, with Arvind Krishnamurthy. Annual Review of Financial Economics  10, 173-197.
A simple model illustrating the theory behind intermediary asset pricing; how intermediary asset pricing differs from other approaches to asset pricing; selective empirical evidence in favor of intermediary asset pricing.

Intermediary Asset Pricing: New Evidence from Many Asset Classes, with Bryan Kelly and Asaf Manela, 2017, Journal of Financial Economics 126, pp. 1-35. Lead article. Presentation Slides.
The market equity capital ratio factor of NY Fed’s primary dealers not only prices equity but also other more sophisticated asset classes like fixed income, derivatives, commodities, and currencies. Primary dealers’ leverage is strongly counter-cyclical. Download data from here:

What Makes US Government Bonds Safe Assets?, with Arvind Krishnamurthy and Konstatin Milbradt, 01/2016, American Economic Review P&P 104, pp. 519-523. Presentation Slides. 
The large size of US government bonds helps.

Inefficient Investment Waves, with Peter Kondor, 2016. Econometrica 84, pp 735-780. Presentation slides, online appendix, additional material, NBER WP version (with simplified 2-period model). 
We study individual firms’ optimal liquidity management problem in a general equilibrium setting. Missing markets for idiosyncratic investment opportunities lead to pecuniary externality and two-sided inefficiency: Firms invest too much during booms and too little during recessions, relative to the constrained efficient economy.

Information Acquisition in Rumor-based Bank Runs, with Asaf Manela, 2016, Journal of Finance 71, pp. 1113-1158. Presentation slides.
Rumors (information without discernible origin) about bank liquidity trigger bank runs with endogenous gradual withdrawal. Information acquisition and the “fear-of-bad-signal-agents” effect can subject solvent-but-illiquid banks, that are free from runs otherwise, to bank runs.

Intermediary Asset Pricing, 2013, with Arvind Krishnamurthy, American Economic Review 103(2), pp. 732-770. Presentation slides, Matlab code.

A Model of Capital and Crises, 2012, with Arvind Krishnamurthy, Review of Economic Studies 79(2): pp. 735-777. Presentation slides.

Financial Sector Leverage Data: Both Restud and AER papers predict that leverage of the financial sector in general equilibrium rises during crises, rather than falls as would be consistent with a deleveraging model. This short note presents empirical evidence consistent with our model; for more direct evidence, see Intermediary Asset Pricing: New Evidence from Many Asset Classes. The notes also explains the empirical deleveraging pattern that other models have focused on.

Balance Sheet Adjustment in the 2008 Crisis, with In Gu Khang and Arvind Krishnamurthy, 2010, IMF Economic Review 1, pp. 118-156.

The Sale of Multiple Assets with Private Information. 2009, Review of Financial Studies 22, pp. 4787-4820.

Dynamic Capital Structure and Debt Maturity

Leverage Dynamics without Commitment, 01/2021, Journal of Finance 76, 1195-1250, with Peter DeMarzo.
Winner of Brattle Group First Prize, 2021
Winner of XiYue Best Paper Award in CICF, 2017
Firms that cannot commit to their future debt policies will issue debt but never repurchase at any point of time, and the firm’s leverage follows an endogenous mean-reverting process in response to asset growth shocks. In the unique Markov perfect equilibrium, equity and debt valuations and endogenous debt issuance polices are derived in closed-form for the log-normal cash-flow process.

Dynamic Debt Maturity, with Konstantin Milbradt, 2016, Review of Financial Studies 29, pp. 2677-2736. Presentation slides.
A firm chooses its debt maturity structure and default timing endogenously default without commitment. Debt maturity shortening occurs when firm fundamentals are deteriorating. The shortening equilibrium may be Pareto dominated by the lengthening equilibrium.

Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal? with Matvos Gregor, 2016, Management Science 62, pp. 303-325. Presentation slides.
Subsidizing corporate debt alleviates the negative externality between firms’ delayed exit decisions in declining industries. The duration of industry distress is important in assessing the welfare implication of corporate debt subsidies.

A Theory of Debt Maturity: The Long and Short of Debt Overhang, with Douglas Diamond, Journal of Finance 69, pp. 719-762. Presentation slides.
Winner of Brattle Group First Prize, 2014
Controlling leverage, short-term debt may lead to stronger overhang than long-term debt does, when there are 1) future investment opportunities, 2) conditional volatility, and/or 3) endogenous default.

Corporate Bonds and Market Liquidity

Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress, 2022, with Paymon Khorrami & Zhaogang Song. Review of Financial Studies 35, pp. 4630-4673. Presentation slides.
Two intermediary-based factors—an intermediary financial distress measure and a dealer corporate bond inventory measure—explain about 50% of the puzzling common variations of credit spread changes beyond canonical structural factors.

Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle, with Hui Chen, Rui Cui, and Konstantin Milbradt, 2018, Review of Financial Studies 31, pp. 852-897.
Embed OTC search frictions into a structural corporate bond model with time varying macroeconomic conditions. Match the credit spreads, default probabilities, and bid-ask spreads across business cycles and different rating classes. Propose a model-based decomposition capturing default-liquidity interaction.

Endogenous Liquidity and Defaultable Bonds, with Konstantin Milbradt, 2014, Econometrica  82, pp. 1443–1508. Presentation slides.
Best Paper Award for Utah Winter Finance Conference 2013
Over-the-counter search friction in corporate bonds market affects the firm’s default decision via the rollover channel, leading to a positive spiral between bond illiquidity and default risk.

Debt Financing in Asset Marketswith Wei Xiong, 2012, American Economic Review, P&P 102, pp. 88-94. Online appendix.     (previously titled “Equilibrium Debt Financing”)

Rollover Risk and Credit Riskwith Wei Xiong, 2012, Journal of Finance 67, pp. 391-429. Lead article. Presentation slides.
Winner of Smith-Breeden First Prize, 2012

Dynamic Debt Runs, with Wei Xiong, 2012, Review of Financial Studies 25, pp. 1799-1843. Presentation slides.

Optimal Contracting and Executive Compensation

Optimal Long-term Contracting with Learningwith Bin Wei, Jianfeng Yu, and Feng Gao, 2017, Review of Financial Studies 30, pp. 2006-2065. Presentation slides, online appendix.
With uncertain profitability in dynamic agency relationship, the agent has incentive to shirk to manipulate the principal’s future belief, giving rise to a long-lasting hidden information problem. The optimal contract implements time-decreasing effort, and has a feature of “stock options” in that incentive goes up after good performance.

Uncertainty, Risk, and Incentives: Theory and Evidence, 2014, with Si Li, Bin Wei, and Jianfeng Yu. Management Science 60, pp. 206-226.
Winner of The Chinese Financial Association 2012 Best Paper Award
In contast to a negative risk-incentive relation predicted by standard agency theory, the learning-by-doing effect may lead to a positive uncertainty-incentive relation. We present empirical evidence that is consistent with this prediction.

Delegated Asset Management, Investment Mandates, and Capital Immobility, 2013, with Wei Xiong, Journal of Financial Economics 107, pp. 239-258. Lead article.
(previously titled “Multi-market Delegated Asset Management”)

Dynamic Compensation Contracts with Private Savings, 2012, Review of Financial Studies 25: pp. 1494-1549. Presentation slides.

A Model of Dynamic Compensation and Capital Structure2011, Journal of Financial Economics 100, pp. 351-366. working paper version.

Dynamic Agency and q Theory of Investment, 2012, with Peter DeMarzo, Michael Fishman, and Neng Wang, Journal of Finance 67, pp. 2295-2340.

Optimal Executive Compensation when Firm Size Follows Geometric Brownian Motion, 2009, Review of Financial Studies 22, pp. 859-892.