Asset Pricing, and its Connections with Corporate Finance; Financial Constraints; Credit Risk; Liquidity Risk; Risk Management
Hui ChenMIT Sloan School of Management
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Cambridge, MA 02139
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Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets, with Zhuo Chen, Zhiguo He, Jinyu Liu, and Rengming Xie, September 2018
We provide causal evidence of the impact of changes in pledgeability on the price of an asset. Our empirical strategy utilizes a unique feature of the Chinese corporate bond markets, where bonds with identical fundamentals are simultaneously traded on two parallel but segmented markets, the exchange market and the interbank market, which have different rules for repo transactions. We utilize a policy shock on December 8, 2014, which made a class of AA+ and AA bonds ineligible for repo on the exchange, yet their haircuts were little affected on the interbank market. By examining how bond prices changed across markets and rating classes around this event, we estimate that an increase in haircut from 0 to 100% on this market would result in an increase in bond yields by 30 to 80 bps.
Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty, with Michael Michaux and Nick Roussanov, updated August 2018
Mortgage refinancing activity associated with extraction of home equity contains a strongly counter-cyclical component consistent with household demand for liquidity. We estimate a structural model of liquidity management featuring counter-cyclical idiosyncratic labor income uncertainty, both long-term and short-term mortgages, and realistic borrowing constraints. We then empirically evaluate its predictions for the households' choices of leverage, liquid assets, and mortgage refinancing using micro-level data. Taking the observed historical paths of house prices, aggregate income, and interest rates as given, the model quantitatively accounts for many salient features in the evolution of balance sheets and consumption in the cross section of households over the 2001-2012 period.
The Dark Side of Circuit Breakers, with Anton Petukov and Jiang Wang, June 2018
As part of overall market architecture, market-wide trading halts, also called circuit breakers, have been proposed and widely adopted as a measure to stabilize the stock market when experiencing large price movements. We develop an intertemporal equilibrium model to examine how circuit breakers impact the market when investors trade to share risk. We show that a downside circuit breaker tends to lower the stock price and increase its volatility, both conditional and realized. Due to this increase in volatility, the circuit breaker's own presence actually raises the likelihood of reaching the triggering price. In addition, the circuit breaker also increases the probability of hitting the triggering price as the stock price approaches it -- the so-called ``magnet effect.'' Surprisingly, the volatility amplification effect becomes stronger when the wealth share of the relatively pessimistic agent is small.
We propose a new quantitative measure of model fragility, based on the tendency of a model to over-fit the data in sample. Structural economic models are fragile when the cross-equation restrictions they impose on the baseline model appear excessively informative about model parameters that are otherwise difficult to estimate. Our measure is analytically tractable and helps identify main sources of model fragility. As an application, we diagnose fragility in asset pricing models with rare disasters and long-run consumption risk.
Debt, Taxes, and Liquidity, with Patrick Bolton and Neng Wang, updated November 2014
Can Information Costs Explain the Equity Premium and Stock Market Participation Puzzles? November 2006
We propose a new measure of financial intermediary constraints based on how the intermediaries manage their tail risk exposures. Using a dataset for the trading activities in the market of deep out-of-the-money S&P 500 put options, we identify periods when the variations in the net amount of trading between financial intermediaries and public investors are likely to be mainly driven by shocks to intermediary constraints. We then infer tightness of intermediary constraints from the quantities of option trading during such periods. We show that a tightening of intermediary constraint according to our measure is associated with increasing option expensiveness, higher risk premia for a wide range of financial assets, deterioration in funding liquidity, and deleveraging of broker-dealers.
Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle, with Rui Cui, Zhiguo He, and Konstantin Milbradt
Review of Financial Studies, 2018, 31(3): 852-897.
Full Text Internet Appendix
Macroeconomic Risk and Debt Overhang, with Gustavo Manso
Review of Corporate Finance Studies, 2017, 6(1): 1-38.
Comment on "Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe" by Ang and Longstaff
Journal of Monetary Economics, 2013, 60(5): 511-516.
Market Timing, Investment, and Risk Management, with Patrick Bolton and Neng Wang
Journal of Financial Economics, 2013, 109(1): 40-62.
Affine Disagreement and Asset Pricing, with Scott Joslin and Ngoc-Khanh Tran
American Economic Review: Papers and Proceedings, 2010, 100(2): 522-26.