Do Interest Rate Liberalization and Fintech Mix? Impact on Shadow Deposits in China (with Yang Ji)
In this paper we attempt to characterize the stability of shadow deposits in China with interest rate liberalization and fintech developments. We emphasize that shadow banks provide higher but riskier returns and such characteristics affect the stability of shadow deposits. In our setting, the stability of shadow deposits is influenced by two offsetting effects, namely: the patience effect, which makes investors more willing to wait because of the potentially higher returns; and the uncertainty effect, which makes investors more likely to withdraw as a result of higher risk. Under liberalized interest rates, the patience effect will erode and the uncertainty effect will be heightened because the post‐liberalization higher return of traditional banks undermines the importance of the extra return of shadow deposits to depositors, while preserving the importance of the risk aspect. Fintech development is modeled as a reduction in the withdrawal cost that facilitates runs. This affects the stability of shadow deposits because of their wider fintech reliance. Regulators should be cautious in pushing interest rate liberalization and fintech application alongside building a safety net for shadow banking.
A Generalization of the Beauty-Contest Model to Multiple Heterogeneously-Informed Groups
This paper generalizes the beauty contest model to finitely many groups that differ in precisions of private information. When the signals are normally distributed, it is possible to obtain analytical solutions to optimal actions of each agent. I present a general solution to the high dimensional system of equations resulting from this information structure. I present extensions that examine both targeted and endogenous public signals, and derive closed form solutions to restricted versions of these extensions. I show that several popular models in the literature are subsumed into this model. Sufficient conditions for welfare improvement are presented here .
The Social Value of Public Information when Not Everyone is Privately Informed
When there is strategic complementarity and all agents have access to public information, but only a subset of them has access to private information, strategic complementarity within the subset of privately-informed agents enhances the focal power of public information. This results to an expected social welfare function that is convex in the precision of both private and public information. The welfare gain from increasing the precision of the public information always exceeds the welfare loss from the underutilization of private information by a subset of agents. The results support the use of public information campaigns to change agent behavior regarding risky health behavior, public health crises and social injustices. The findings are robust to several extensions such as biased perceptions about public signals and costly acquisition of private information.
A Simple Model of Bureaucratic Delay (with Guilherme Oliveira)
We formalize rules of thumb that guide bureaucrats’ decisions to act quickly or defer their action to a later period. This rule emerges from a parsimonious model that has as inputs the probability of correct decisions, expected costs of litigation, and penalties for deferral. When faced with an imminent deadline, the bureaucrat will act now as long as the expected utility from acting is not less than the penalty for deferring the action. Without a deadline, the bureaucrat may benefit from deferring his action as the probability of correctness improves over time, but at the cost of a penalty for deferral and discounted future benefits. We find a time-varying threshold discount factor that determines whether the bureaucrat acts now or defers relative to his own discount factor. The penalty from deferral is a substantial component of the threshold discount factor and may hasten the decision of any bureaucrat. However, since the threshold discount rate always increases with the passage of time, a bureaucrat will eventually make a decision in finite time.
We provide mathematical expositions and historical context that are suitable for students taking a first course in finance of two oft-cited, but ill-explained (coupon) bond pricing principles. The first principle we explore is how the price of a bond relative to its face value reveals the relationship between the coupon rate, yield to maturity and current yield. The second principle we explore is how prices of premium and discount bonds converge to their face value as maturity approaches. We show these relationships mathematically using only high school algebra and definitions found within introductory bond pricing lectures, and trace their presence in textbooks in finance, accounting, and actuarial sciences.
Fintech, Interest Rate Liberalization, and Runs on Shadow Deposits (with Yang Ji)
When Co-Funded Firms Abscond and the Impact on Financial Stability (with Shusen Qi)
Credit Layering in the Urban Setting
Regulatory Forbearance, CoCos, and Bank Risk-Shifting (with Sweder van Wijnbergen)
CoCo Design, Risk Shifting Incentives, and Capital Regulation (with Sweder van Wijnbergen)
CoCos, Contagion, and Systemic Risk (with Sweder van Wijnbergen)
09/30/2016: We were cited by Breugel.org in an article about not letting taxpayers shoulder the riskiness of CoCos.
05/05/2016: I was interviewed by Alex Ritson of the BBC on the potential dangers of CoCos. Listen to it here.
05/xx/2016: We were cited in a briefing for the European Parliament. Read it here.
11/11/2016: We were picked up by the Elsevier periodical (in Dutch). Read it here.
04/xx/2015: We were cited by Investments and Pensions Europe. Read it here.
02/10/2015: We were vaguely referred to in this article by Bloomberg.
09/28/2014: We were (briefly) picked up by Bloomberg but the original link has disappeared. Luckily, it was archived by Die Welt (but translated into German). You can see it here.