Jessica Shi Li

I am a Finance PhD student at the University of Chicago Booth School of Business. My research agenda is organized around three directions. First, I am interested in firms' debt structures and debt contracting. I am currently focused on the dynamic interplay between bank debt and market debt, interactions among different classes of creditors, and debt covenants. I also dabble in topics on restructuring and bankruptcy. Second, I am interested in market structure and its impact on liquidity and asset prices. I study over-the-counter markets such as the corporate bond market, the role of intermediaries (for example, dealers) in these markets, and the impact of trading frictions and intermediation on market and real outcomes as well as financial stability. Third, I am interested in the implication of intermediation and financial frictions for markets and the macroeconomy. I conduct theoretical and empirical research in these topics. 

RESEARCH

Papers under Review/Revision

1. Bond Market Illiquidity: Is Portfolio Trading the Solution? (with Maureen O'Hara, Andreas C. Rapp and Xing (Alex) Zhou)

Revise and Resubmit, Journal of Finance

Note: This paper subsumes my previous solo-authored working paper, "Frictional Intermediation, Inventory Hedging, and the Rise of Portfolio Trading in the Corporate Bond Market" 

Abstract: We examine portfolio trading and its impact on corporate bond liquidity. Our theoretical framework identifies how portfolio trades provide dealers with benefits through a diversification channel and with costs through a balance sheet channel. We then test empirically multiple hypotheses on the countervailing effects of these two channels and find that portfolio trading is generally beneficial to bond market liquidity, particularly so for riskier and illiquid bonds. However, we also show that these positive benefits do not always arise, and that it becomes a costly solution for liquidity provision when markets falter.

Working Papers

2. Complementarity of Bank and Market Debt in Dynamic Debt Structure

Conferences: AEA 2026 (Philadelphia), FMA 2025 (Vancouver), NFA 2025 (Calgary), Chicago-Harvard-Wharton Insolvency & Restructuring Conference (Chicago), Vienna Festival of Finance Theory (Vienna), Summer Workshop on Money, Banking, Payments and Finance 2025 (Ottawa), 5th Corporate Policies and Asset Prices Conference (Luxembourg), Yiran Fan Memorial Conference (Chicago), 26th Macro Finance Society Workshop PhD Poster Session (Chicago), 25th Macro Finance Society Workshop PhD Poster Session (Los Angeles) 

Abstract: I develop a dynamic model of firm debt structure with both renegotiable bank debt and arm’s-length market debt. Bank debt is periodically renegotiated to maximize the joint value of the bank lender and equity holders, while market debt is traded competitively through issuance or repurchase. The firm strategically trades market debt to influence its equity holders’ payoff from potential bank debt renegotiation, while anticipating the effect of renegotiation on current market debt price. The firm may both issue and repurchase market debt, depending on the trade-off between issuance proceeds and its effect on equity holders’ renegotiation payoff. A novel prediction is dynamic complementarity of bank and market debt: higher bank debt leads to greater market debt issuance, by lowering the issuance’s adverse impact on equity holders’ renegotiation payoff. The dynamic complementarity is robust to bargaining power allocation, but assigning more bargaining power to the firm weakens the dynamic complementarity and reduces firm value. Conceptually, bank debt and market debt are complementary in the sense that bank debt renegotiations reduce distress costs, while market debt trading mitigates renegotiation externalities on non-bargaining market debt investors thereby improving the efficiency of renegotiation outcome.

3. Demand Elasticity in Dynamic Asset Pricing (with Zhiguo He and Péter Kondor)

Conferences: 33rd FTG Meeting (Austin), ESSFM 2025 (Gerzensee), 19th Annual Conference on General Equilibrium and its Applications (New Haven), International Risk Management Conference (Milan)

Abstract: We show that the standard econometric approach relying on exogenous residual supply shocks systematically underestimates the slope of investors’ asset demand curves in dynamic settings. We develop a multi-asset, multi-agent continuous-time model featuring long-lived investors and short-lived hedgers whose demand shifts create exogenous supply changes. Our key finding is that these supply shifts alter the very demand slope that econometricians seek to measure through general equilibrium effects. Namely, supply shifts affect endogenous risk (return volatility and covariance) and change the comovement of returns with future investment opportunities. We compare the “observed slope” measured by econometricians against its conceptual counterpart, the “dynamic slope” derived from investors’ first-order condition. Using calibrations based on mutual fund demand shifts and index inclusion events, we find that the dynamic slope is two to seven times larger than the observed measures. The effect through endogenous risk dominates this mismeasurement, while the magnitude depends critically on shock persistence, size, and investor risk aversion.

4. Price and Liquidity in Frictional Markets with Strategic Bargaining

Previously circulated under title "Strategic Bargaining and Portfolio Choice in Intermediated Markets"

Conferences: SFA 2024 (Palm Beach), ESSFM 2024 (Gerzensee), WFA 2024 (Honolulu), 7th Dauphine Finance PhD Workshop (Paris), MFA 2024 (Chicago), CAFM 2023 (Seoul), West Coast Search and Matching Workshop 2023 (Claremont), Venice Finance Workshop 2023 (Venice), 2nd Annual Holden Conference in Finance and Real Estate (Bloomington), NFA 2023 (Toronto), Summer Workshop on Money, Banking, Payments and Finance 2023 (Gerzensee), Finance Theory Group Summer School 2023 (Seattle), AFA 2024 - Poster Session (San Antonio), Yiran Fan Memorial Conference 2023 - Poster Session (Chicago)

Awards: The Brattle Group Ph.D. Candidate Award for Outstanding Research, Finance Theory Group Summer School Best Paper Award, Yiran Fan Memorial Fellowship for Best 3rd Year Paper

Abstract: Many assets are traded in decentralized markets intermediated by dealers. In these markets, search frictions lead to trading illiquidity. Moreover, terms of trade are negotiated between investors and dealers pursuant to strategic bargaining. Investors' intrinsic types affect both their outside options and their bargaining powers. This paper proposes a search-based theory with strategic bargaining to study investors' dynamic portfolio choice and equilibrium asset prices in intermediated markets. The model rationalizes well-documented empirical patterns, and generates additional predictions novel to the literature. A key prediction is that the relationship between asset prices and liquidity is non-monotonic. In the cross-section, the price-liquidity relationship is positive for sufficiently liquid assets but negative for highly illiquid assets. The average price-liquidity relation turns negative during severe crises. The model also predicts that transaction costs are higher for investor-sell trades than for investor-buy trades. The model predictions are supported by empirical evidence using corporate bond data.

5. Frictional Intermediation, Inventory Hedging, and the Rise of Portfolio Trading in the Corporate Bond Market 

Note: This paper is subsumed by "Bond Market Illiquidity: Is Portfolio Trading the Solution?" (with Maureen O'Hara, Andreas C. Rapp and Xing (Alex) Zhou)

Conferences: SFA 2022 (Key West), AFA 2023 (New Orleans), MFA 2023 (Chicago)

Awards: SFA 2022 Best Paper Award (Doctoral Students), CRSP Research Grant for 1st Year Summer Paper

Abstract: The rapid rise of corporate bond portfolio trading since the end of 2017 has attracted attention from practitioners and regulators alike. I show that inventory hedging explains the recent meteoric rise of corporate bond portfolio trading, likely aided by the recent proliferation of credit index derivatives. To formally study inventory hedging and its implications for dealer liquidity provision and price formation, I build a simple dynamic search model with frictional intermediation and inventory hedging. The model predicts that inventory hedging improves liquidity and transaction costs, and the liquidity benefit is more pronounced when dealers face higher inventory frictions or constraints. Given that portfolio trading is driven by inventory hedging, I show that consistent with model predictions, portfolio trading is associated with lower transaction costs, and is more beneficial for bonds with higher ex-ante inventory frictions and when the dealer sector is constrained. I also document that portfolio trading reduces transaction costs of similar voice trades, and attribute the cross venue effect to search and information spillover between trading protocols.

6. The Causal Effect of the Fed's Corporate Credit Facilities on Eligible Issuer Bonds (with Rayhan Momin)

Abstract: We study the effects of the Federal Reserve's Corporate Credit Facilities (CCFs) that were launched in early 2020 amid significant volatility in the U.S. corporate bond market. We find that the initial announcement of the CCFs on March 23, 2020 benefited issuers eligible for direct primary and secondary support from the CCFs more than ineligible issuers. In contrast, we find that ineligible issuer bond spreads tightened more in the subsequent announcement of the CCF expansion on April 9, 2020. Inconsistent with the CCF eligibility criteria, most research has used issue ratings, rather than issuer ratings, to identify eligible bonds; we document that this results in a sizeable bias when estimating the April 9 effect and trace the source of this bias. We also provide an estimate of the potential (counterfactual) improvement in bond spreads ineligible issuers would have experienced, had they been eligible for the CCFs. Analysis of the channels through which the CCFs operated suggests that the liquidity channel was more important than the default risk channel. We also find that the start of the CCF's purchases of ETFs on May 12, 2020 and bonds on June 16, 2020 had a smaller effect on bond spreads, though the latter was more impactful.

Work in Progress

7. Price Multiplier in Dynamic Asset Pricing (with Zhiguo He and Péter Kondor)

8. Dealer Inventory and Market Frictions (with Jonathan Chiu, Mohammad Davoodalhosseini and Janet Jiang)

Conferences: Workshop on Money, Banking, Payments and Finance 2025 (Ottawa), SEM 2025 (Athens)

Presentations 

(* presentation by coauthor,  † accepted but unable to present)

• 2026

Conferences: AEA (scheduled)

• 2025

Conferences:  FMA (scheduled), 33rd FTG Meeting*, NFA, Chicago-Harvard-Wharton Insolvency & Restructuring Conference (scheduled), EEA†, Vienna Festival of Finance Theory, Summer Workshop on Money, Banking, Payments and Finance, 5th Corporate Policies and Asset Prices Conference, ESSFM*, SEM*, Yiran Fan Memorial Conference, 19th Annual Conference on General Equilibrium and its Applications*, 26th Macro Finance Society Workshop - PhD Poster Session, 25th Macro Finance Society Workshop - PhD Poster Session

Seminars: Stanford GSB, Finance Theory Webinar*, Northwestern Kellogg*, NYU*, University of Chicago

• 2024

Conferences: SFA, MFR Summer Session for Young Scholars*, ESSFM, WFA, International Risk Management Conference*, MFA, Dauphine Finance PhD Workshop, AFA - Poster Session

Seminars: LSE*, Stanford GSB*, SF Fed*, Inter-Finance PhD Seminar, University of Chicago

• 2023

Conferences: AFA, MFA, NFA, DGF†, CAFM, Finance Theory Group Summer School,  Summer Workshop on Money, Banking, Payments and Finance, Holden Conference in Finance and Real Estate, Venice Finance Workshop, West Coast Search and Matching Workshop, Yiran Fan Memorial Conference - Poster Session

Seminars:  FINRA , University of Chicago

• 2022

Conferences: SFA

Seminars: University of Chicago

Discussions

• SFA Annual Meeting (November 2024)

"Price Discovery in the S&P 500: Leaders and Followers" by M. Fabricio Perez

• 18th Conference on Asia-Pacific Financial Markets (December 2023)

"Production, Trade, and Cross-Border Data Flows" by Qing Chang, Lin William Cong, Liyong Wang and Longtian Zhang

• SFA Annual Meeting (November 2022)

"Covenant Prices of US Corporate Bonds" by Patrick Weiss, Rainer Jankowitsch and Lukas Handler

• Financial Stability Board Conference on Non-Bank Financial Intermediation (June 2022)

"Understanding the Role of Dealer-Client Relationships in Bond Trading" by Simon Jurkatis, Andreas Schrimpf, Karamfil Todorov and Nicholas Vause

Refereeing

Theoretical Economics 

Past Projects

• Rising from the Ashes: Fallen Angel Corporate Bond Price Recovery Post-Downgrade and Dealer Inventory Dynamics (with Brian Liston-Clark and Rayhan Momin)

Abstract: In this paper, we investigate fire sales induced by fallen-angel (FA) downgrades of corporate bonds and corresponding dealer inventory build-ups around downgrades. Regulatory restrictions of insurance companies and pension funds, investment charter constraints of mutual funds and investment professional specialization lead to sharp increase in supply of bonds that are recently downgraded. We find that immediately after FA downgrades, bonds experience significant price decline while dealers absorb excess supply leading to large inventory build-up. Subsequently, as dealers gradually unload the bonds to new investors, bond prices experience an extended reversal over a 6-7 month period.

Other Research Experience

• RA for Professor Wenxin Du and Professor Ralph Koijen (Summer & Autumn 2022)

• RA for Professor Yueran Ma (Spring & Summer 2021)

Honors and Awards

• 2025: NFA PhD Travel Grant

• 2025: Macro-Finance Society (MFS) PhD Travel Grant

• 2024: The Brattle Group Ph.D. Candidate Award for Outstanding Research for  "Strategic Bargaining and Portfolio Choice in Intermediated Markets" (solo-authored)

• 2024: AFA PhD Travel Grant

• 2023: Yiran Fan Memorial Fellowship (Best 3rd Year Paper), Chicago Booth

• 2023: NFA PhD Travel Grant 

• 2023: Finance Theory Group Summer School Best Paper Award for "Strategic Bargaining and Portfolio Choice in Intermediated Markets" (solo-authored)

• 2023: Bradley Fellowship

• 2023: AFA PhD Travel Grant 

• 2022: Liew Fama-Miller Fellowship (Best 2nd Year Paper), Chicago Booth

• 2022: CRSP Research Grant for 1st Year Summer Paper, Chicago Booth

• 2022: SFA Best Paper Award (Doctoral Students) for "Frictional Intermediation, Inventory Hedging, and the Rise of Portfolio Trading in the Corporate Bond Market" (solo-authored)

TEACHING

TA Positions

• Corporate Finance III (PhD), Professor Douglas Diamond and Professor Raghuram Rajan, Spring 2024 (University of Chicago Booth School of Business)

• Debt, Distress, and Restructuring (MBA), Professor Amir Sufi, Winter 2024 & Spring 2025 (University of Chicago Booth School of Business)

• Money, Banking, and the Financial Crisis (EMBA), Professor Randall Kroszner, Summer 2023 (University of Chicago Booth School of Business)

• Financial Markets and Institutions (MBA), Professor Douglas Diamond, Spring 2022 & Spring 2023 (University of Chicago Booth School of Business)

• Price Theory I (PhD), Professor Kevin Murphy, Autumn 2021 (University of Chicago Department of Economics)

• Competitive Strategy (MBA), Professor Eric Budish, Winter 2021 & Winter 2022 (University of Chicago Booth School of Business)