- Dynamic Debt Maturity, with Konstantin Milbradt, 05/2015.
We study a dynamic setting in which a firm chooses its debt maturity structure endogenously
over time without commitment. The shortening equilibrium may be Pareto dominated by the lengthening equilibrium.
- Leverage Dynamics without Commitment, with Peter DeMarzo, 12/2014, coming soon.
Firms who cannot commit to their future leverages issue debt at any point of time. With finite maturity debt which naturally retires, the firm's debt multiple follows an endogenous mean-reverting process.
- Inefficient Investment Waves, with Peter Kondor, 09/2014. Presenation Slides. R&R Econometrica.
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 make too much investment in booms and too little investment in recessions, relative to the constrained efficient economy.
- A Macroeconomic Framework for Quantifying Systemic Risk, with Arvind Krishnamurthy, 06/2014. Presentation Slides, Matlab code. R&R American Economic Review.
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. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis.
- Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle, with Hui Chen, Rui Cui, and Konstantin Milbradt, 08/2014. Presentation Slides.
We generate both non-default and default components of corporate bonds by introducing over-the-counter search frictions into a structural model with time varying macroeconomic conditions. We match the credit spreads and default probabilities, as well as Bond-CDS spreads and bid-ask spreads, across different rating classes. Through a novel model-based decomposition scheme that captures the interaction between default and liquidity, we find the interaction terms account for about 25%~40% of observed credit spreads.
- Optimal Long-term Contracting with Learning, with Bin Wei, Jianfeng Yu, and Feng Gao, 10/2014. Presentation Slides.
With uncertain profitablity 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.
- Agency Frictions in Financial Markets and Macroeconomics
- Information Acquisition in Rumor-based Bank Runs, with Asaf Manela, 01/2014, forthcoming in Journal of Finance. 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. The difference is market leverage versus book leverage. This short note presents empirical evidence consistent with our model. It also explains the empirical deleveraging pattern that other models have focused on.
- Endogenous Liquidity and Defaultable Bonds, with Konstantin Milbradt, 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 and Creative Destruction: Why Could Subsidizing Corporate
Debt Be Optimal? with Matvos Gregor, 2014, forthcoming in Management Science. Presentation Slides.
Subsidizing corporate debt allieviates 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
Controling 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.
- Debt Financing in Asset Markets, with Wei Xiong, 2012, American Economic Review, P&P 102, pp. 88-94. Online Appendix. (previously titled "Equilibrium Debt Financing")
- Rollover Risk and Credit Risk, with 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
- 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 evidience 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 Structure, 2011, 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.