Research

    Abstract: I develop a two-tier asset demand system that incorporates endogenous aggregate allocation and short sales, and propose a two-step estimation procedure with a novel instrument for aggregate estimation, which allows me to exploit both cross-sectional and time-series variation in institutional holdings. The estimated system provides a framework to answer questions related to demand-side effects of financial intermediaries and short sales in both aggregate and individual stock markets. I find institutional demand accounts for a large proportion, if not all, of observed return premiums in size, value and investment. The short leg, while increasingly important, cannot explain observed anomaly returns and the formation of the dot-com bubble. However, short sales do have significant yet disparate pricing impact on stocks with different characteristics. In the aggregate stock market, unobserved aggregate preference and beliefs rather than risk-return balance is the main driver of the return predictability of dividend-price ratio.

    - Presented at: Wharton Macro Seminar, Penn Economics Seminar, Texas A&M, HKUST

    Abstract: We develop an endogenous growth model with heterogeneous firms facing financial frictions, in which misallocation emerges explicitly as a crucial state variable. The model demonstrates that macroeconomic shocks that affect misallocation can generate persistent effects on aggregate growth. In equilibrium, the slow-moving misallocation endogenously generates long-run uncertainty about economic growth by distorting innovation decisions. When agents have recursive preferences, the misallocation-driven low-frequency growth fluctuations lead to significant welfare losses and risk premia in capital markets. Using an empirical misallocation measure motivated by the model, we provide evidence that misallocation captures low-frequency fluctuations in both aggregate growth and stock returns.

    Find the Online Appendix and A Note on Additional Materials here.

    - Presented at: NFA (Winner of Best Paper Award on Asset Pricing), MFA, AFA, SFS Cavalcade North America, FIRS, CICM, CICF, AsianFA, EFA, SAFE Asset Pricing Workshop, SWUFE International Macro-Finance Conference, CUHK Greater Bay Area Finance Conference, The Macroeconomy and Finance in China Conference, PKU/PHBS Sargent Institute Workshops, Shanghai Macroeconomics Workshop, HKUST-JINAN Workshop in Macroeconomics, Stanford SITE (New Frontier in Asset Pricing), Tsinghua SEM Alumni Conference, 9th HK Joint Finance Research Workshop, Singapore Management University, Shanghai University of Finance and Economics, Peking University (Guanghua), HKUST, Purdue University, Wharton Finance Seminar, Penn Economics Seminar

    Abstract: More assumptions lead to more precision, bearing the risks of less credibility. To balance information and validity, I propose a moment selection criterion for GEL estimation in moment-based models, facing possibly mis-specified moments and/or many moments. The criterion, generalized focused information criterion (GFIC), trades off bias and variance in the limit as in finite samples, rather than allow validity to dominate. In the setting of a growing number of moments, GEL generally has preferable performance, as shown in the simulation study.

    - Presented at: Penn Economics Seminars

Transaction Cost and Investment Inertia in Asset Demand: How Active Should Institutions Be?

Competition in Government Procurement: Why Inefficient Firms Win Contracts? , with Winston Dou and Yan Ji