Ye Li, Assistant Professor, William W. Alberts Endowed Professor, University of Washington, Columbia PhD 2012-2017
with Yi Li, Huijun Sun, Nov. 2022, SSRN
Abstract: The money view of banking emphasizes deposits as part of money supply that central banks can manage to influence the macroeconomy (Friedman and Schwartz, 1963). The credit view focuses instead on the asset side of bank balance sheets and proposes a bank lending channel (Bernanke, 1983). In this paper, we show that the monetary role of deposits is in fact key to the credit channel as it connects monetary base and bank lending. As deposits circulate as means of payment, settlement reshuffles liquidity (reserves) among banks. The network topology of such reserve flows determines banks' exposure to liquidity risk and their willingness to invest in illiquid loans. We develop a model to capture this mechanism. Our structural estimation explores transaction-level data and characterizes a money multiplier that emerges from the liquidity percolation in payment system. Payment network generates liquidity externalities of banks' lending decisions and amplifies the volatility of credit supply. A small set of banks are critically positioned in the network and contribute disproportionately to the credit cycle.
Selected presentations: Advances in Macro-Finance Tepper-LAEF Conference, Boston College (Carroll), BSE (Barcelona School of Economics) Summer Forum, CESifo, European Banking Center Network Conference at Tilburg, ECB research seminar, European Finance Association, Frankfurt School of Finance & Management, Imperial College London finance seminar, NYU Econ/Stern macro seminar, Stanford University finance seminar, UCLA Anderson finance seminar, UNC Junior Roundtable, University of Zurich research seminar
Conditional accept at the American Economic Review, Nov. 2022,
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 Macro Workshop, Temple U Fox, U Calgary Haskayne, WFA
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, 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: 2023: AFA;
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
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
Lin Will Cong, Neng Wang, Review of Financial Studies,
Volume 34, Issue 3, Mar. 2021 (Editor's Choice), RFS,
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 Yi Li, 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, FDIC, 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 Simon Mayer, Dec. 2021,
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 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 Conf., CEPR ESSFM Gerzensee, CUHK, European Winter Finance Summit, INSEAD, Stanford SITE, U Zurich