Ye Li, 2012-2017 Columbia PhD, joined OSU in 2017

with Patrick Bolton, Neng Wang, and Jinqiang Yang, Updated, Jul. 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 for non-financial firms. As a key source of leverage, deposits create value for well-capitalized banks. However, unlike productive capital of nonfinancial firms that typically has a positive marginal q, the deposit marginal q can turn negative for undercapitalized banks. Demand deposit accounts commit banks to allow holders to withdraw or deposit funds at will, so banks cannot perfectly control leverage. Therefore, for banks with insufficient equity capital to buffer risk, deposit inflows and the associated uncertainty in future leverage can destroy value. Our model predictions on bank valuation and dynamic asset-liability management are broadly consistent with the evidence. Moreover, our model lends itself to a re-evaluation of the costs and benefits of leverage regulation and offers new perspectives on the challenges that banks face in a low interest rate environment.  

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Selected presentations: BI-SSE Annual Conference on Asset Pricing & Financial Econometrics, Cambridge Corporate Finance Theory Symposium, CICF, CICM, CESifo Macro Money & International Finance, European Finance Association (EFA), IADI Biennial Research Conference, NBER Summer Institute, Midwest Finance Association, OSU Finance, Short-Term Funding Markets, Society for Economic Dynamics (SED), Washington University in St. Louis Annual Corporate Finance Conference.

with Simon Mayer, NEW, Jun. 2021

Abstract:  We develop a dynamic model of stablecoins and crypto shadow banking, where the stablecoin issuer transforms risky assets, including cryptocurrencies, into digital tokens of stable values. Both the stablecoin issuer's reserve assets and users' collateral back the stablecoin. However, even under over-collateralization, a pledge of one-to-one convertibility to a reference currency can be fragile. The distribution of states is bimodal: A fixed exchange rate may persist, but once the stablecoin breaks the buck, the recovery is slow. When negative shocks drain the issuer's reserves, debasement allows the issuer to share risk with users, but it triggers a vicious cycle of depressed stablecoin demand, lower transaction volume and transaction fees, slow rebuild of reserves, and a persistent need for debasement. Stablecoin management requires the optimal combination of strategies commonly observed in practice, such as open market operations, dynamic requirement of users' collateral, transaction fees or subsidies, re-pegging, and issuances of ``secondary units'' that function as the stablecoin issuer's equity. Our model lends itself to an evaluation of regulatory proposals (e.g., capital requirement) and sheds light on the complex incentives behind the stablecoin initiatives led by the network companies (e.g., Facebook).

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with Wenhao Li, NEW, Jun. 2021

Abstract:  Central banks and fiscal authorities around the world lent directly to nonfinancial firms on an unprecedented scale during the Covid-19 crisis. Credit support is subject to mispricing due to the potential lack of information on individual borrowers' credit worthiness or the political constraints on discriminatory credit pricing. In a dynamic model, we demonstrate that the mispricing of credit support generates a downward bias in the firm quality distribution that is self-perpetuating. As a result, intervention in the current crisis necessitates future interventions of greater scales, which in turn cause more distortions in firm quality dynamics. Such effects are amplified by firms' forward-looking investment decisions in normal times. Low-quality firms over-invest as they expect underpriced credit support in crises, while, on a relative basis, high-quality firms under-invest. The slippery slope of intervention is a necessary evil, as we show that when carefully designed, credit support still improves welfare.

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Selected Presentations: IMF, SFS Cavalcade North America

Conditional Accept at the American Economic Review, revised version, 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.

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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)

R&R at the Journal of Finance, new draft coming soon
Selected presentations of earlier version: Becker Friedman Institute (U Chicago), CEPR Credit Cycle, Chicago Booth, Finance Theory Group, ECB, Georgetown McDonough, Imperial College, Johns Hopkins Carey, LSE, Northwestern Kellogg, NY Fed, OSU Fisher, Oxford Financial Intermediation Theory, USC Marshall, Wharton; award: Macro Financial Modeling Group Dissertation Fellowship, Columbia Business School job market candidate award

with Lin Will Cong, Neng Wang, May 2021Accept at the Journal of Financial Economics
  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.
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Selected presentations: AFA 2020, CEPR/ABFER/CUHK Financial Economics Symposium, CEPR ESSFM Gerzensee, Cleveland Fed/OFR Conf., Erasmus Liquidity Conference, Chicago Financial Institutions Conference, Macro Finance Society (at USC), Rome Junior Finance Conference

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.

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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)

 with 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.  

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Youtube video: network evolution in our sample

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

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. 

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Selected presentations: European Finance Association 2020, Stanford SITE 2020

with Chen Wang
Abstract: The ratio of long- to short-term dividend prices, "price ratio" (pr), predicts one-year stock market return with an out-of-sample R2 of 19%. It subsumes the predictive power of price-to-dividend ratio (pd). The residual from regressing pd on pr predicts one-year dividend with an out-of-sample R2 of 30%. Our results hold outside the U.S. In an exponential-affine model, we show the key to understand these findings is the (lack of) persistence of expected dividend growth. We also characterize the risk of time-varying expected return: (1) the expected return is countercyclical; (2) the response of expected return (rather than expected dividend growth) accounts for the impact of monetary policy on stock price; (3) shocks to pr are priced in the cross-section, which serves as an ICAPM test of pr as an adequate proxy for the expected return.

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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.

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Selected presentations:  ASU Sonoran Winter Conference, CEPR ESSFM Gerzensee, CUHK, European Winter Finance Summit, INSEAD, Stanford SITE, U Zurich

with Yi Huang, Hongzhe Shan, under revision, new draft coming soon

Selected presentations: AFA 2019, Finance, Organizations, and Markets (FOM) 2018, Bank of Canada, FDIC Annual Bank Research Conference 2018, OSU Fisher; media: Dartmouth College Tuck Forum on PE & VC