Ye Li

with Yi Li, Huijun Sun, updated, May. 2024, SSRN
Abstract: Deposits finance bank lending and function as means of payment for the rest of the economy. While loans are generally illiquid and often held until maturity, deposits circulate among banks as depositors transact with one another. Except for rare instances where payment inflows and outflows perfectly balance, payment introduces liquidity risks and constrains the "money multiplier"---the ratio of loans financed by deposits to banks' liquid assets that buffer potential deposit outflows. We develop a model of bank lending and payment system where this multiplier depends on the network topology of interbank payment flows that churn liquidity among banks. We estimate the model using Fedwire payment data and identify banks that have a large impact on the equilibrium multiplier due to their systemic importance in the payment network.

with Wenhao Li, updated Jul. 2024, R&R at the Review of Economic Studies SSRN

Abstract: A salient trend in crisis intervention has emerged in recent decades: Government and central banks offered funding directly to nonfinancial firms, bypassing banks and other credit intermediaries. We analyze the long-term consequences of such policies by focusing on firm quality dynamics. In a laissez-faire economy, firms with high productivity are more likely to survive crises than those with low productivity. The government provides funding support to save more firms but cannot customize it based on firm productivity, dampening the cleansing effect of crises. The policy distortion is self-perpetuating: A downward bias in firm quality distribution necessitates interventions of greater scale in future crises. Our mechanism is quantitatively important: We show that if policy makers ignore the distortionary effects on firm quality dynamics, the resultant credit intervention would almost double the optimal amount.

with Yi Li, updated ,Jun. 2024, SSRN
Abstract: Bundling credit provision and payment services creates liquidity mismatch for banks. While investing in illiquid loans, banks support payment activities by allowing depositors to freely transfer funds into and out of their accounts. Using payment data from Fedwire, we show that banks face sizeable liquidity risk due to depositors' payments. Payment liquidity risk is a form of funding risk inherent in the monetary role of deposits, yet it compromises the role of banks as lenders. An increase in payment risk is associated with a significant decline in lending. The effect is stronger for undercapitalized banks and when reserves are scarce.

with Chen Wang, updated, Jun. 2024, SSRN
Abstract: Slicing an asset by payout horizons unseals information about its future returns and cash flows. As an example, we slice an equity market index into granular pieces (dividend strips) and show that valuation ratios of its strips span the underlying state variables of the index. Strip valuation ratios form a term structure. The level and slope strongly predict the index dividends. The slope alone is sufficient for forecasting the index return. The steepening and flattening of valuation term structure reflect discount-rate variations rather than information on the cash-flow trajectory, because market participants have very limited information about long-term cash flows.

with Patrick Bolton, Neng Wang, Jinqiang Yang, updated Oct. 2023, accepted at the Journal of Finance, NBER, SSRN
Abstract: We propose a theory of banking in which banks cannot perfectly control deposit flows. Facing uninsurable loan and deposit shocks, banks dynamically manage lending, wholesale funding, deposits, and equity. Deposits create value by lowering funding costs. However, when the bank is undercapitalized and at risk of breaching leverage requirements, the marginal value of deposits can turn negative as deposit inflows, by raising leverage, increase the likelihood of costly equity issuance. Banks' inability to fully control leverage distinguishes them from non-depository intermediaries. Our model suggests a re-evaluation of leverage regulations and offers new perspectives on banking in a low interest-rate environment.

Accepted at the American Economic Review, Dec. 2022, SSRN
Abstract: The transition towards an intangible-intensive economy reshapes financial system by creating a self-perpetuating savings glut in the production sector. As intangibles become increasingly important, firms hoard liquidity to finance investment in intangibles of limited pledgeability. Firms' savings feed cheap leverage to financial intermediaries and allow intermediaries to bid up asset prices, which in turn encourages firms to save more for asset creation. This paper develops a macro-finance model that offers a coherent account of the rising corporate savings, debt-fueled growth of intermediaries, declining interest rates, and rising asset valuation. Along these secular trends, endogenous financial risk accumulates.

R&R at the Journal of Finance, Nov. 2022, SSRN
Abstract: Under financial constraints, firms hold liquid assets in anticipation of investment needs. Financial intermediaries supply liquid securities in the form their short-term debts. Endogenous liquidity creation stimulates investment and economic growth but generates intermediary leverage cycle that destabilizes the economy. Introducing government debt as an alternative source of liquidity is a double-edged sword. On the one hand, firms hold more liquidity in every state of the economy. On the other hand, by crowding out intermediaries' profits from liquidity provision, government debt induces intermediaries to reach for yield via procyclical risk-taking. As a result, the stationary (long-run) probability distribution tilts towards crisis states where intermediaries are undercapitalized and supply less liquidity. The latter force dominates, when public liquidity cannot satiate firms' liquidity demand and intermediaries are still the marginal liquidity suppliers. Contrary to the literature, this paper demonstrates an overall negative impact of public liquidity on both long-run growth and financial stability.

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.

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.

with Lin W. Cong, Neng Wang, Journal of Financial Economics, Volume 144, Issue 3, Jun. 2022, JFE, SSRN, NBER
Abstract: We develop a dynamic model of platform economy where tokens serve as a means of payments among platform users and are issued to finance investment in platform productivity. Tokens are optimally issued to reward platform owners when the productivity-normalized token supply is low and burnt to boost the franchise value when the productivity-normalized normalized supply is high. Although token price is determined in a liquid market, the platform's financial constraint generates an endogenous token issuance cost, causing underinvestment through the conflict of interest between insiders (platform owners) and outsiders (users). Blockchain technology mitigates underinvestment by addressing the platform's time-inconsistency problem.

with Simon Mayer, Dec. 2021, 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.