Liheng Lei - Research

Publication

Modeling and Backtesting Systemic Risk Measures: The Case of CoES

With Xuhui Wang, Zaichao Du, and Xin Zhou. Econometric Reviews, Accepted.

Abstract: Systemic risk has drawn the attention of many researchers and financial institutions since the 2008 financial crisis. Popular systemic risk measures include CoVaR, CoES, MES, SRISK, and others. However, there are only a few models available to compute these measures, and even fewer papers on evaluating (backtesting) these models. In this paper we first propose an easy-to-implement and robust multivariate filtered historical simulation (M-FHS) approach to model systemic risk measures. We then develop a rigorous backtesting procedure for CoES and establish the asymptotic properties of the backtests. Monte Carlo simulations confirm our asymptotic theories and verify the robustness of our M-FHS method. In an empirical application to large U.S. financial firms, we find that: compared with competing methods, our M-FHS method is most responsive to the extreme events during the financial crisis, and also most robust to model risk. CoES is more responsive to extreme events than CoVaR.

Working Papers

The Information Content of Equity Total Return Swap Trades (Job Market Paper)

Abstract: Leveraging a novel dataset of publicly disseminated equity swap transactions under Regulation SBSR, this paper analyzes the information content of equity total return swap (TRS) trades, offering new insights into this historically opaque market. Despite the dominance of large institutional investors and a market size of over $3 trillion, equity swap trading does not convey information about most stocks, except for micro-cap stocks. Trades for which dissemination is delayed contain more information, consistent with strategic delay of dissemination of trades that contain value-relevant information. These findings challenge the conventional view that large institutional trades convey significant price-sensitive information.

Unveiling the Equity Swap Market: Market Landscape and Trading Patterns

Abstract: This paper provides the first comprehensive empirical analysis of the historically opaque U.S. equity swap market, using a novel dataset of publicly disclosed transaction data under Regulation SBSR. With a market size nearing $4 trillion and over 3 million active contracts, U.S. equity swaps show substantial global activity, primarily focused on East Asian, European, and North American equities. Analyzing 13,646,055 transactions across 7,109 U.S. equities from February 14, 2022, to December 31, 2023, the study reveals an average of 28,770 daily trades, with spikes during index rebalancing, geopolitical events, and oil price surges. While trading volume correlates with market capitalization, mid-cap equities account for a larger share of overall transactions. Health Care, Industrials, and Information Technology sectors lead in swap trading volume. Trading surges in individual equities often coincide with company announcements, industry developments, and regulatory changes. These findings underscore the versatile role of equity swaps in risk management and investment strategies.

Selected Work in Progress

Deciphering the Loan Spread: A Perspective from the Derivatives Market

With Neil D. Pearson.

Abstract: Recent studies show that bank loan spreads seem to be large compared to capital market pricing of credit risk. This paper aims at providing new estimates of the capital market pricing of credit risk using granular loan total return swap (LTRS) data. In an LTRS agreement, a bank transfers the credit risk of a loan to the capital market by paying the loan's total return while receiving a financing rate from the counterparty. Analyzing 13,639 unique LTRS trades from February 14, 2022, to August 14, 2023, this paper finds that the capital market prices credit risk at approximately two-thirds of the full loan spread. While borrower and loan characteristics explain the capital market’s credit risk pricing, the remaining spread, referred to as the “bank premium,” is consistent and likely reflects the cost of providing banking services.

Chinese Publications

Public-Private Partnership and Public Goods: An Incomplete Contract Approach

With Qiang Gong and Yilin Zhang, Economic Research Journal (经济研究), 2019, 4, 133-148.

Trust Crisis, Regulation Burden and Food Safety

With Qiang Gong and Yilin Zhang, World Economic Papers (世界经济文汇), 2017, 6, 56-72.

Policy Burden, Regulation Capture and Food Safety

With Qiang Gong and Yan Yuan, Economic Research Journal (经济研究), 2015, 8, 4-15.

Professional Service

Referee for Economic Research Journal (经济研究)