Assistant Professor of Finance
INSEAD Europe Campus
Boulevard de Constance 77300 Fontainebleau, France
Intervention with Screening in Panic-Based Runs (with Junyuan Zou), Journal of Finance 79.1 (2024): 357-412.
Bank Heterogeneity and Financial Stability (with Itay Goldstein, Alexandr Kopytov and Haotian Xiang), Journal of Financial Economics 162 (2024): 103934.
Covered in Think Advisor. Earlier versions of the paper circulated under the title “Synchronicity and Fragility.”
Policy Portfolio for Banks: Deposit Insurance and Liquidity Injection (with Chong Huang and Junyuan Zou)
Banking crises pose significant threats to our economy, leading to the implementation of policy measures such as deposit insurance and liquidity injection to strengthen financial stability and optimize resource allocation efficiency. This paper investigates the dynamic interplay between deposit insurance and liquidity injection. Facing uncertainty regarding bank health and depositor liquidity shocks, policymakers decide on liquidity injection based on withdrawals. While higher deposit insurance coverage can mitigate panic runs, it may undermine the effectiveness of liquidity injections. We demonstrate that liquidity injection overshadows deposit insurance. Consequently, the optimal policy portfolio entails zero deposit insurance, enhancing resource allocation efficiency but leading to more panic runs.
Capital Flows in the Financial System and Supply of Credit, R&R at Journal of Finance
Runner-up for the Best Theory Paper on the Academic Job market in Finance 2019
This paper develops a model to study how capital flows in the financial system affect banks’ coordination problem in the credit supply process. The economy is susceptible to self-fulfilling credit freezes: banks abstain from lending when they fear that other banks will withhold lending, and the resultant credit contraction impedes economic growth. Capital flows across banks can alleviate the problem by enabling optimistic banks to borrow from pessimistic banks and extend more credit to the real economy. However, the equilibrium interest rate reveals public information about economic fundamentals and banks’ aggregate willingness to lend, increasing the fragility of the credit market. As a result, the economy can get stuck in an equilibrium where both interbank capital flows and the real credit supply freeze and they reinforce each other through a vicious feedback loop. Regulations addressing counterparty risks can help to maintain active capital flows in the financial system and stabilize the real credit market.
On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices (with Itay Goldstein, Alexandr Kopytov and Haotian Xiang), R&R at Journal of Finance
Academic blog: Principles for Responsible Investment (PRI)
We study how environmental, social and governance (ESG) investing reshapes information aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG risks but have different preferences over them. Because of the preference heterogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about financial payoff and raise the cost of capital.
Corruption and Competition (with Franklin Allen and Jun “QJ” Qian)
This paper investigates how a central government can effectively curtail the corruption of local government officials. An interesting aspect of corruption is that its damaging effects on economic performance differ significantly across countries. We show that if a central government collects sufficient taxes, it can fight corruption by rewarding local government officials based on performance. Without sufficient budget, the central government can reduce corruption alternatively by encouraging competition among local government officials. We also provide empirical evidence that differences in taxing ability and the magnitude of competition among government officials can help explain the heterogeneous effects of corruption across countries.
Optimal Regulations in Two Lemon Markets: An Application in Cross-Border Listing
This paper studies regulatory competition in securities markets and its impact on firms’ financing decisions. In the era of globalization, when firms have the option to obtain financing abroad, foreign regulations become relevant for domestic firms’ financing decisions. I build a model with two open economies, each having a stock market with adverse selection problems. The regulators of the two economies strategically set regulations to compete for good firms in both economies. I show that weak economic fundamentals tie the hands of a regulator in the regulatory competition because domestic firms cannot afford high regulatory burden. As a result, consistent with empirical observations of cross-border listing, there exists an equilibrium in which the strong economy has stricter regulations than the weak economy, and the good firms in the weak economy flow to the strong economy to signal for good quality.