- Leverage Dynamics without Commitment, with Peter DeMarzo, 09/2016.
Firms who 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. Equity and debt valuations and endogeous debt issuance polices are derived in closed-form for the log-normal cash-flow process.
- Intermediary Asset Pricing: New Evidence from Many Asset Classes, with Bryan Kelly and Asaf Manela, 08/2016.
The market equity capital ratio factor of NY Fed's primary dealers not only prices equity portfolios but also other more sophisticated asset classes like fixed income, detivatives, commodities, and currencies.
Download data from here
- A Model of Safe Asset Determination, with Arvind Krishnarthy and Konstantin Milbradt, 02/2016.
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.")
- A Macroeconomic Framework for Quantifying Systemic Risk, with Arvind Krishnamurthy, 06/2014. Presentation Slides, Matlab 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. 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, 08/2016.
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, default probabilities, and bid-ask spreads across business cycles and 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 10%~24% of observed credit spreads.
- Optimal Long-term Contracting with Learning, with Bin Wei, Jianfeng Yu, and Feng Gao, 07/2016. 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.
- Financial Markets and Macroeconomics
- What Makes US Government Bonds Safe Assets?, with Arvind Krishnamurthy and Konstatin Milbradt, 01/2016, forthcoming in American Economic Review P&P 104, pp. 519-523. Presenation Slides.
The large size of US government bonds helps.
- Inefficient Investment Waves, with Peter Kondor, 2016. Econometrica 84, pp 735-780. Presenation Slides, Online Appendix, Additional Material.
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.
- Dynamic Debt Maturity, with Konstantin Milbradt, 2016, Review of Financial Studies 29, pp. 2677-2736. Presenation 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.
- 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, 2016, Management Science 62, pp. 303-325. 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 and Executive Compenstation
- 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.