Ye Li, 2012-2017 Columbia PhD, joined OSU in 2017
Ye Li, 2012-2017 Columbia PhD, joined OSU in 2017
with Wenhao Li, Updated, Oct. 2021
Abstract: Crises have cleansing effects: Low-quality firms face greater financial shortfalls and invest less than high-quality firms. Public liquidity support preserves the overall production capacity. However, by dampening the cleansing effects, it distorts the quality distribution and reduces the total productivity. The trade-off between quantity and quality determines the optimal size of intervention. The distortionary effects on quality are self-perpetuating: A downward bias in quality necessitates interventions of greater scales in future crises, implying further distortions. The distortions are also amplified by the expectations of liquidity support that motivate low-quality firms to overinvest pre-crisis. Finally, the size of optimal intervention is larger and the distortionary effects stronger in a low interest rate environment where the low yield on savings discourage firms from self-insurance against crises through internal liquidity accumulation.
Selected Presentations: China Macro-Finance Study Group, Finance Theory Group 2021 Fall, IMF, SFS Cavalcade North America 2021, Shanghai Advanced Institute of Finance (SAIF)
with Patrick Bolton, Neng Wang, and Jinqiang Yang, Updated, Sep. 2021
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: BI-SSE Conference on Asset Pricing and Financial Econometrics, Cambridge Corporate Finance Theory Symposium, CESifo Macro Money and International Finance, China International Conference in Finance (CICF), China International Conference in Macroeconomics (CICM), China Macro Finance Study Group, European Finance Association (EFA), Fudan University, International Association of Deposit Insurers (IADI) Research Conference,
NBER Summer Institute, Midwest Finance Association, Northern Finance Association, Short-Term Funding Markets, Stanford SITE, Society for Economic Dynamics, University of Rochester, Washington University in St. Louis Annual Corporate Finance Conference
with Simon Mayer, Updated, Aug. 2021
Abstract: Stablecoins rise to meet the demand for safe assets in decentralized finance. Stablecoin issuers transform risky reserve assets into tokens of stable values, deploying a variety of tactics. To address the questions on the viability of stablecoins, regulations, and the initiatives led by large platforms, we develop a dynamic model of optimal stablecoin management and characterize an instability trap. The system is bimodal: stability can last for a long time, but once stablecoins break the buck following negative shocks, volatility persists. Debasement triggers a vicious cycle but is unavoidable as it allows efficient risk sharing between the issuer and stablecoin users.
Selected presentations: American Finance Association (AFA) 2022, BIS Economics of Payments, CESifo Macro Money \& International Finance, China International Conference in Finance (CICF), Dublin DeFi and Digital Finance Workshop, ECB Money Market Conference, Econometric Society, Stanford SITE
Conditional Accept at the American Economic Review, Jul. 2020
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,European Finance Association (EFA), European Winter Finance Summit (Best Paper Award), HKUST Annual Macro Workshop,
SUFE, Temple Fox, U Calgary (Haskayne), Western Finance Association (WFA)
with Lin Will Cong, Neng Wang, Review of Financial Studies, Volume 34, Issue 3, Mar. 2021 (Editor's Choice)
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: CKGSB, RCFS/RAPS Conference at Baha Mar, Stanford SITE, UT Dallas Fall Finance Conference, U Zurich/ETH; by coauthors: Ant Financial (Alibaba Group), ASSA/AFE 2019, Atlanta Fed, CEPR ESSFM Gerzensee, Chicago Booth, Finance UC Chile, Georgetown McDonough, Finance Theory Group, SEC, Tsinghua, U Washington Foster; awards: AAM-CAMRI-CFA Institute Prize in Asset Management, CME Best Paper Award (Emerging Trends in Entrepreneurial Finance)
Edward Denbee, Christian Julliard, Kathy Yuan, Journal of Financial Economics, Volume 141, Issue 3, Sep. 2021 (Lead Article)
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, incentivising 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: Short-Term Funding Markets, Bank of Canada/Payments Canada, Macro Finance Society (Boston College), NBER Summer Institute, OSU Fisher; by coauthors: Bank of England, Fed/OFR Financial Stability Conference, LSE, SSE, WFA; grant: Foundation Banque de France Research Grant
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
Selected presentations: European Finance Association 2020, Stanford SITE 2020
Selected presentations: HKUST Finance Symposium, Paris December Meeting (Best Paper Award); by coauthors: RCFS/RAPS Conference at Baha Mar, UT Dallas Fall Finance Conference, Econometric Society (North America), Northern Finance Association (NFA), Orebro Workshop on Predicting Asset Returns
with Chen Wang
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 Conference, CEPR ESSFM Gerzensee, CUHK, European Winter Finance Summit, INSEAD, Stanford SITE, U Zurich