Ye Li, 2012-2017 Columbia PhD, joined OSU in 2017
Liquidity and Macroeconomy
Conditional accept at the American Economic Review, Jul. 2020,
SSRN
Abstract: Intangible-intensive firms in the U.S. hold an enormous amount of liquid assets that are in fact short-term debts issued by financial intermediaries. This paper builds a macro-finance model that captures this structure. A self-perpetuating savings glut emerges in equilibrium. As intangibles become increasingly important for production, firms hoard more liquidity to finance investments in intangibles with limited pledgeability. The resulting low interest rates induce intermediaries to increase leverage and bid up asset prices, which in turn encourages firms to invest more and hoard even more liquidity to fund expansion. Along these secular trends, endogenous risk accumulates in the financial system.
Selected presentations: CEPR ESSFM Gerzensee, Cornell Johnson, CUHK, EFA (European Finance Association), European Winter Finance Summit (Best Paper Award), HKUST Annual Macro Workshop,
SUFE, Temple U Fox, U Calgary Haskayne, WFA
with
Patrick Bolton, Neng Wang, and Jinqiang Yang, Sep. 2021,
R&R at the Journal of Finance, NBER, SSRN
Abstract: We propose a dynamic theory of banking where the role of deposits is akin to that of productive capital in the classical q-theory of investment. As a cheap source of leverage, deposits typically create value for banks, but the marginal q of deposits can be negative. Deposit accounts commit banks to accept any inflows and outflows, so that banks cannot perfectly control leverage. Such uncertainty destroys value when banks have insufficient equity capital to buffer shocks. Our model lends itself to a re-evaluation of leverage regulations and offers new perspectives on banking in a low interest-rate environment.
Selected presentations: 2022: European Winter Finance Summit, Financial Intermediation Research Society (FIRS) Conference; 2021: Cambridge Corporate Finance Theory, CICF, CICM, EFA (European Finance Association), Federal Reserve Board, International Association of Deposit Insurers (IADI) Conference, NBER Summer Institute, MFA, NFA, Short-Term Funding Markets, SED (Society for Economic Dynamics), Rochester, U Washington; 2020: BI-SSE Conference on Asset Pricing & Financial Econometrics, CESifo Macro Money & International Finance, Fudan U, OSU Fisher, Washington University in St. Louis (WUSTL) Corporate Finance Conference
with Wenhao Li, Updated, Nov. 2021, R&R at the Review of Economic Studies SSRN
Abstract: In crises, low-quality firms face greater financial shortfalls and invest less than high-quality firms. Public liquidity support preserves the overall production capacity but dampens the cleansing effects of crises on firm quality. The trade-off between quantity and quality determines the optimal size of intervention. Policy distortions are self-perpetuating: A downward bias in quality necessitates interventions of greater scales in future crises. Distortions are amplified by low-quality firms’ expectations of liquidity support and overinvestment pre-crisis. Finally, the optimal intervention is larger and distortionary effects stronger in a low interest rate environment where low yields on precautionary savings discourage firms from self-insurance.
Selected Presentations: 2022: BSE (Barcelona School of Economics) Summer Forum, HEC-McGill Winter Finance Workshop, MFA; 2021: Colorado Finance Summit, FTG (Finance Theory Group), IMF, Liquidity in Macroeconomics Workshop, Paris December Finance Meeting, SAIF, SFS Cavalcade North America, USC Marshall
With Sheila Jiang, Douglas Xu, Nov. 2021, SSRN
Abstract: Our paper provides the first cross-country
evidence on the distinct dynamics of tangible and intangible investments during
and after the global financial crisis. The pre-crisis rise of
intangible-to-tangible capital ratio was reversed outside the U.S. due to a
greater decline of intangible investment and a much slower recovery. Tangible
capital can be externally financed, and its post-crisis recovery benefits from
the restoration of credit supply. In contrast, Intangible investment relies on
firms' liquidity holdings that were drawn down in the crisis and can only be
rebuilt gradually through retained profits. We provide a unified account of the
findings through a dynamic model of corporate investment and liquidity
management. Consistent with our model predictions, the divergence between
tangible and intangible investments is more prominent in countries with weaker
intellectual property protection (less external financing options for
intangibles) and riskier government bonds (less robust corporate liquidity
holdings).
SSRN
Abstract: Financial
intermediaries issue the majority of liquid securities, and nonfinancial firms
have become net savers, holding intermediaries' debt as cash. This paper shows
that intermediaries' liquidity creation stimulates growth -- firms hold their
debt for unhedgeable investment needs -- but also breeds instability through
procyclical intermediary leverage. Introducing government debt as a competing
source of liquidity is a double-edged sword: firms hold more liquidity in every
state of the world, but by squeezing intermediaries' profits and amplifying
their leverage cycle, public liquidity increases the frequency and duration of
intermediation crises, raising the likelihood of states with less liquidity
supplied by intermediaries. The latter force dominates and the overall impact
of public liquidity is negative, when public liquidity cannot satiate firms'
liquidity demand and intermediaries are still needed as the marginal liquidity
suppliers.
Selected presentations: EFA (European Finance Association), Stanford SITE 2020, NFA (Northern Finance Association)
Payment, Network, and Digital Currency
with
Edward Denbee, Christian Julliard, Kathy Yuan, Journal of Financial Economics, Volume 141, Issue 3, Sep. 2021 (Lead Article), JFE, SSRN
Abstract: Using
a structural model, we estimate the liquidity multiplier of an interbank
network and banks’ contributions to systemic risk. To provide payment services,
banks hold reserves. Their equilibrium holdings can be strategic complements or
substitutes. The former arises when payment velocity is high and payments
begets payments. The latter prevails when the opportunity cost of liquidity is
large, incentivizing banks to borrow neighbors’ reserves instead of holding
their own. Consequently, the network can amplify or dampen individual shocks.
Empirically, network topology explains cross-sectional heterogeneity in banks’
contribution to systemic risks while changes in the equilibrium type drive the
time-series variation.
Selected presentations:
Bank of Canada, Bank of England,
Fed/OFR Financial Stability Conference, MFS (Macro Finance Society), LSE, NBER Summer Institute, OSU Fisher, Short-Term Funding Markets,
Stockholm School of Economics, WFA; Grant: Foundation Banque de France Research Grant
with
Lin Will Cong, Neng Wang, Review of Financial Studies,
Volume 34, Issue 3, Mar. 2021 (Editor's Choice), RFS,
SSRN, NBER
Abstract: We develop a dynamic asset-pricing model of cryptocurrencies/tokens that allow users to conduct peer-to-peer transactions on digital platforms. The equilibrium value of tokens is determined by aggregating heterogeneous users' transactional demand rather than discounting cashflows as in standard valuation models. Endogenous platform adoption builds upon user network externality and exhibits an $S$-curve - it starts slow, becomes volatile, and eventually tapers off. Introducing tokens lowers users' transaction costs on the platform by allowing users to capitalize on platform growth. The resulting intertemporal feedback between user adoption and token price accelerates adoption and dampens user-base volatility.
Selected presentations:
Ant Financial (Alibaba Group),
Atlanta Fed,
CEPR ESSFM Gerzensee, Chicago Booth,
CKGSB,
Finance UC Chile, FTG (Finance Theory Group),
Georgetown McDonough,
RCFS/RAPS Conf. at Baha Mar,
SEC,
Stanford SITE, UT Dallas Fall Finance Conf.,
Tsinghua,
U Washington Foster, U Zurich/ETH; Awards: AAM-CAMRI-CFA Institute Prize in Asset Management, CME Best Paper Award (Emerging Trends in Entrepreneurial Finance)
with Simon Mayer, Updated, Apr. 2022,
SSRN
Abstract: Stablecoins are at the center of debate
surrounding decentralized finance. We develop a dynamic model to analyze the
instability mechanism of stablecoins, the complex incentives of stablecoin
issuers, and regulatory proposals. The model rationalizes a variety of
stablecoin management strategies commonly observed in practice and
characterizes an instability trap: Stability lasts for long time, but once
debasement happens, price volatility persists. Capital requirement improves
price stability but fails to eliminate debasement. Restricting the riskiness of
reserve assets can surprisingly destabilize price. Finally, data privacy
regulation has an unintended benefit of reducing the price volatility of
stablecoins issued by data-driven platforms.
Selected presentations: 2022: ABFER, AFA, GSU-RFS Fintech Conferecen, MFA, Purdue Fintech Conference, Utah Winter; 2021: Bank of Finland/BIS Economics of Payments, CESifo Macro Money & International Finance, CICF, Duke Fuqua, ECB Money Market Conf., Econometric Society, Hogeg Blockchain Institute Conf., Purdue Fintech Conference, Stanford SITE, U Amsterdam
with Yi Li,
New, Dec. 2021, SSRN
Abstract: Deposits finance bank
lending and serve as means of payment for bank customers. Under uncertain
payment flows, deposits are debts with random maturities. Payment outflows
drain reserves, and the risk is most prominent when funding markets are under
stress and banks are unable to smooth out payment shocks. We provide the first
evidence on the negative impact of payment risk on bank lending, bridging the
literatures on payment systems and credit supply. An interquartile increase in
payment risk is associated with a decline in loan growth rate that is 10% of
standard deviation. Our findings are stronger in times of funding stress and
robust across banks of different sizes and loans of long and short maturities.
Banks with higher payment risk raise deposit rates to expand customer base and
internalize payment flows. Finally, we show that payment risk dampens the bank
lending channel of monetary policy transmission.
Selected presentations:
2022: Adam Smith Workshop at INSEAD,
BSE (Barcelona School of Economics) Summer Forum, Chicago Fed, Federal Reserve Board, Northeastern University Finance Conference, Northeastern University Finance Conference, OCC Symposium on Systemic Risk and Stress Testing, SFS Cavalcade North America, University of Illinois at Urbana-Champaign (UIUC) finance seminar
with Yi Li, Huijun Sun, New, Dec. 2021 (updated, Feb. 2022), SSRN
Abstract: This paper documents a strong connection between payment system and credit supply. The dual role of deposits as financing instruments for banks and means of payment for the rest of the economy implies liquidity spillover effects of bank lending. After loans are financed by new deposits, the deposit holders' payments cause reserves and deposits to flow from the lending bank to the payees' banks. We model a linear-quadratic game of bank lending on a random graph of payment flows. Network topology determines the money multiplier that connects the liquidity in the banking system (i.e., reserves) and the creation of credit and deposits. We quantify the liquidity percolation in payment system using transaction-level data and structurally estimate the network effects. Network externalities distort the money-multiplier mechanism, reducing the level of aggregate credit supply by 9% on average and amplifying the volatility by 20%. A small subset of banks are critically positioned in the network and are systemically important as their shocks have a disproportionately large influence on aggregate credit supply.
Selected presentations:
2022: Advances in Macro-Finance Tepper-LAEF Conference, Boston College (Carroll), European Banking Center Network Conference at Tilburg, European Central Bank research seminar, Imperial College London finance seminar, NYU Econ/Stern macro seminar, Ohio State University (Fisher) brownbag, UCLA Anderson finance seminar, UNC Junior Roundtable, University of Zurich research seminar
Asset Pricing
with Chen Wang,
SSRN
Abstract: Delegation bears an intrinsic form of uncertainty. Investors hire managers for their superior models of asset markets, but delegation outcome is uncertain precisely because managers' model is unknown to investors. We model investors' delegation decision as a trade-off between asset return uncertainty and delegation uncertainty. Our theory explains several puzzles on fund performances. It also delivers asset pricing implications supported by our empirical analysis: (1) because investors partially delegate and hedge against delegation uncertainty, CAPM alpha arises; (2) the cross-section dispersion of alpha increases in uncertainty; (3) managers bet on alpha, engaging in factor timing, but factors' alpha is immune to the rise of their arbitrage capital - when investors delegate more, delegation hedging becomes stronger. Finally, we offer a novel approach to extract model uncertainty from asset returns, delegation, and survey expectations.
Selected presentations:
ASU Sonoran Winter Conf.,
CEPR ESSFM Gerzensee,
CUHK,
European Winter Finance Summit,
INSEAD,
Stanford SITE, U Zurich