Research

WORKING PAPERS

Valuation of Long-term Property Rights under Political Uncertainty, 08/2020, with Maggie Hu, Zhenping Wang, and Vincent Yao. New. Write-Up in ProMarket.
Identify the effect of political uncertainty rooted in the “One Country, Two Systems” principle by exploiting a unique variation around land lease extension protection beyond 2047 in Hong Kong’s housing market. 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.

Treasury Inconvenience Yields during the COVID-19 Crisis, 06/2020, with Stefan Nagel and Zhaogang Song. New.
Document large shifts in Treasury ownership, rising spreads between Treasuries and OIS rates, as well as rising spreads between dealers’ reverse repo and triparty repo rates during the COVID-19 crisis. Build a model with balance sheet constraints of dealers, which also explains the opposite signs of repo spreads and Treasury convenience yields during the 2007-09 financial crisis.

Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress, 08/2020, with Paymon Khorrami and Zhaogang Song.
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. A simple margin-based asset pricing model accounts for the documented explanatory power and delivers further implications with strong empirical support.

Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets, 01/2020, with Hui Chen, Zhuo Chen, Jinyu Liu, and Rengming Xie.
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 pledgeability effect using IV approach based on a policy shock.

Leverage-Induced Fire Sales and Stock Market Crashes, 09/2018, with Jiangze Bian, Kelly Shue, and Hao Zhou. Presentation Slides. Poets&Quants profile.
First Prize in Chinese Finance Annual Meeting, 2017
Study account-level trading data of a large sample of margin accounts, including both regulated brokerage-margin and unregulated shadow-margin, during the Chinese stock market crash in 2015. Document direct evidence for leverage-induced fire sales.

Forthcoming Papers

Leverage Dynamics without Commitment, 06/2020, forthcoming at Journal of Finance, with Peter DeMarzo.

Decentralized Mining in Centralized Pools, 12/2019, forthcoming at Review of Financial Studies, with Will Cong and Jiasun Li.

​PUBLICATIONS

Impact of COVID-19 in China

Post-Lockdown Economic Recovery in China: April and May with Qin Chen, Chang-Tai Hsieh, and Zheng (Michael) Song. Forthcoming. Chapter for The Impact of Covid19 on Asian Economies and Policy Responses. An earlier draft may be found here.

Dealing with a Liquidity Crisis: Economic and Financial Policies in China during the Coronavirus Outbreak with Bibo Liu. Forthcoming. Chapter for The Impact of Covid19 on Asian Economies and Policy Responses. An earlier draft may be found here.

Post-Lockdown Economic Recovery in China with Qin Chen, Chang-Tai Hsieh, and Zheng (Michael) Song. Forthcoming. Chapter for The Impact of Covid19 on Asian Economies and Policy Responses. An earlier draft may be found here.

Preliminary Estimates of Economic Effect of Lockdown in China with Chang-Tai Hsieh and Zheng (Michael) Song. Forthcoming. Chapter for The Impact of Covid19 on Asian Economies and Policy Responses. An earlier draft may be found here.

Chinese Economy and Financial Market

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.
Winner of CFRC Best Paper Award, 2017
​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). 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

Decentralized Mining in Centralized Pools, 12/2019, forthcoming at Review of Financial Studies, with Will Cong and Jiasun Li. 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

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:
http://apps.olin.wustl.edu/faculty/manela/hkm/intermediarycapitalrisk/He_Kelly_Manela_Factors.zip

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, 06/2020, forthcoming at Journal of Finance, with Peter DeMarzo.
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

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.