- The CDS-Bond Basis, Financial Management, forthcoming
The limit-of-arbitrage story for the difference between CDS and cash-bond implied credit spread.
- Common Risk Factors in the Cross-Section of Corporate Bond Returns, Journal of Financial Economics, 2018
We investigate the cross-sectional determinants of corporate bonds and find that downside risk is the strongest predictor of future bond returns. We also introduce common risk factors based on the prevalent risk characteristics of corporate bonds -- downside risk, credit risk, and liquidity risk -- and find that these novel bond market factors have economically and statistically significant risk premia, which cannot be explained by the long-established stock and bond market factors. We further show that these newly proposed risk factors outperform all other models considered in the literature in explaining the returns of the industry-sorted and size/maturity-sorted portfolios of corporate bonds.
- The Leverage Effect and the Basket-Index Put Spread, Journal of Financial Economics, 2018
A model specifies asset dynamics instead of equity dynamics alone can explain the large spread in prices between put options written on individual banks and options written on the bank index during the financial crisis, even without the government bail-out story. It's important to look at equity and debt together!
- Measuring Liquidity Mismatch in the Banking Sector, Journal of Finance, 2018, 73(1), 51-93.
We propose a novel measure, "Liquidity Mismatch Index (LMI)," to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities for the banking sector. LMI can be used for macro-prudential liquidity stress test, and for predicting cross-sectional bank risk. The outperformance of LMI than Basel III's LCR, NSFR results from the time-varying liquidity sensitivity weights which are driven by market prices.
- Have Financial Markets Become More Informative? Journal of Financial Economics, 2016, 122(3), 625-654.
The finance industry has grown, financial markets have become more liquid, information technology has been revolutionized. But have financial market prices become more informative?
- Anchoring Corporate Credit Spreads to Firm Fundamentals, Journal of Financial & Quantitative Analysis, 2016, 51(5), 1521-1543.
This paper examines the capability of firm fundamentals in explaining the cross-sectional variation of CDS spreads.
- On Bounding Credit Event Risk Premia, Review of Financial Studies, 2015, 28(9), 2608-2642.
Reduced form models of default that attribute a large fraction of credit spreads as compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced, namely, a ``contagious" response of the market portfolio during the credit event.
- Property Rights Gaps and CDS Spreads: When Is There a Strong Transfer Risk from the Sovereigns to the Corporates? Quarterly Journal of Finance, 2017, 7(4), 1750013.
Strong property rights institutions tend to weaken the sovereign transfer risk, whereas contracting institutions (protection of creditor rights or minority shareholder rights) do not matter.
- State Space Models and MIDAS Regressions, Econometric Reviews, 2013, 32(7), 779-813.
We examine the relationship between MIDAS and Kalman filter state space models applied to mixed frequency data.
- Safe Asset Shortages: Evidence from the European Government Bond Lending Market, (with Reena Aggarwal, and Luc Laeven)
- What Bond Lending Reveals? The Role of Informed Demand in Predicting Credit Spread Changes, August 2018
based informed demand only have predictive power in corporate bonds, but not in its derivative contract CDS. Therefore, the informed demand help explain the CDS-Bond basis, especially in normal times when limits-to-arbitrage constraints unbind.
- Do Distributional Characteristics of Corporate Bonds Predict Their Future Returns? (with Turan Bali and Quan Wen)
- The Microstructure of Chinese Government Bond Market, (with Michael Fleming, and Casidhe Horan)
- `Going Global': Markups and Product Quality in the Chinese Art Market, (with Benjamin Mandel and Jia Guo)
We analyze two reasons for export prices to be different across markets, namely quality differentiation and variable markups, and attempt to parse their relative importance and some of their underlying drivers. To overcome the substantial measurement issues in this task, we consider a particular industry as a special case: Chinese fine art. The simplicity of the supply-side of art vis-a-vis marginal cost and the wealth of data on its quality characteristics makes it possible to separately identify the markup and quality components of international relative prices for Chinese artworks. Through this lens, we trace the process of internationalization of Chinese art since the year 2000 and uncover a rich set of facts. We find strong support for quality sorting into international markets at both the level of artist and artwork, as well as substantial markup differences across destinations. Using a structural model of endogenous quality choice by Feenstra and Romalis (2012), we argue that much of the international quality premium is driven by specific distribution costs (whether physical or informational) rather than destination-specific preferences for quality.
- The New Bank Resolution Regimes and "Too Big To Fail", (with Christian Cabanilla, and Menno Middeldorp, both from the Federal Reserve Bank of New York), Liberty Street Economics, October 2012.
- The Effects of Entering and Exiting a Credit Default Swap Index (with Or Sharchar, Federal Reserve Bank of New York), Liberty Street Economics, 2015