Publications
with Jun Pan
Journal of Finance, 79: 3041–3103, 2024.
Studying China's credit market using a structural default model that integrates
credit risk, liquidity, and bailout, we document improved price discovery and a
deepening divide between state-owned enterprises (SOEs) and non-SOEs. Amidst
liquidity deterioration, the presence of government bailout helps alleviate the
heightened liquidity-driven default, making SOE bonds more valuable and widening
the SOE premium. Meanwhile, the increased importance of government support makes
SOEs more sensitive to bailout, while the heightened default risk increases
non-SOEs' sensitivity to credit quality. Examining the real impact, we find
severe performance deteriorations of non-SOEs relative to SOEs, reversing
the long-standing trend of non-SOEs outperforming SOEs.
🏆 2021 CICF Best Paper Award. The 2025 Aoki Masahiko Nomination Award.
Presented at: NBER Capital Markets and the Economy 2021, FMA 2021,
NFA 2021, CICF 2021, CICM 2021, CFRC 2021, CMES 2021, Sixth Annual Bank of
Canada–Tsinghua PBCSF–University of Toronto Conference on the Chinese Economy,
GISF 2022, SAIF, MIT Finance Student Workshop, CUHK Shenzhen, Peking HSBC,
Tsinghua SEM, Johns Hopkins Carey Business School, Renmin University of China,
UNSW Sydney.
Working Papers
R&R, Management Science, 2025.
In recent decades, over 40% of dollar-denominated corporate bonds have been issued
by non-US firms. Strikingly, these foreign issuers face an extra discount of 20 bps
compared to their US counterparts. A similar foreign discount also exists in the
euro-denominated corporate bonds. While standard risks, including credit, liquidity,
and currency risks, collectively account for one-third of the discount, the Economic
Policy Uncertainty index from Baker, Bloom, and Davis (2016) can explain half of
this discount. Moreover, such foreign discount (USA effect) dominates the dollar
safety premium (USD effect). A Leland-type model augmented with model uncertainty
can rationalize these empirical findings. My paper highlights the foreign discount
effect in international corporate bonds, particularly amidst escalating global
economic instability and geopolitical uncertainty.
Presented at: ABFER 2024, CICM 2022, CFRC 2022, SAIF,
Tsinghua PBCSF, Fudan SOM, Fudan FiSF, Nanjing University, SUFE SOF, SUSTech, BI Norwegian Business School,
Tongji SEM, USTC.
with Ziqi Liu and Jun Pan
R&R, Journal of Financial Economics, 2025.
Examining China's decade-long policies aimed at mitigating local government debt
risk, we identify a government-led credit cycle in Local Government Financing
Vehicle (LGFV) bonds, reflected in the evolving credit spread gap between high-and
low-risk cities. After three waves of cross-regional divergence between 2014 and
2022, the 2023 "Debt Resolution" policy triggered a sharp convergence. We show
this cycle is driven primarily by shifting market perceptions of central government
bailout probability, rather than by regional economic fundamentals or bond market
liquidity. Studying the real effects, we find the "Debt Resolution" policy has a
dual impact on local commercial banks. It benefits those in high-risk cities by
narrowing subordinated bond spreads via LGFV pricing spillovers, but also hurts
them by depressing profitability, reducing market share, and increasing
consolidation risk.
Presented at: CICF 2026, The 12th Hong Kong Economic Association Biennial Conference, 2026 CES China Annual Conference, The 2026 HKUST Finance Symposium, The 2026 Masahiko Aoki Scholars Forum.
with Jun Pan
Working Paper, 2026.
Using a structural model of default with stochastic interest rates and liquidity
shocks, we construct three common risk factors – credit, duration, and liquidity –
from cross-section corporate bond returns. This model-based three-factor model
can explain the risk premiums of portfolios within the credit market and beyond,
including U.S. equity. Our estimation is unique in that the three latent factors
are extracted not from bond characteristics but from the model-implied factor
loadings, offering a clean identification of the risk of credit, duration, and
liquidity. As such, our model-based factors can be used to evaluate the empirically
motivated portfolios in the literature, identifying the economic driver of their
outperformance. Our model-based factors also offer a rich set of applications.
The duration factor can help extract the safety premium from U.S. Treasuries,
differentiating flight-to-safety from dash-for-cash. Decomposing credit spreads
into credit and liquidity components, we find that the negative credit-spread
and interest-rate correlation is driven by liquidity not credit. Finally, we
find that increasing interest rate leads to subsequent deterioration in credit
and liquidity, while credit deterioration leads to worsening liquidity risk.
🏆 2026 CFRC Asset Pricing Best Paper Award.
Presented at: AFA 2027*, CICF 2026, CFRC 2026, 2026 SAIF Annual Research Conference.
with Tan Wang
Working Paper, 2020.
We develop a model to study the cross-sectional properties of asset returns in the
presence of ambiguity in the distribution of asset returns. In our model, the
cross-sectional expected returns can be described by a three-factor model,
capturing risk, mean ambiguity and variance-covariance ambiguity, respectively.
Expected returns include a mean ambiguity premium, a variance-covariance ambiguity
premium, as well as the standard risk premium. The expected returns exhibit
cross-sectional characteristics consistent with the empirical fact that the overall
beta-return relation and IVOL-return relation are both negative, but the beta-return
relation is negative and stronger among over-priced stocks while positive and
weaker among under-priced stocks, and the IVOL-return relation is negative and
stronger among over-priced stocks but positive and weaker among under-priced stocks.
Presented at: WFA 2019, AFA Ph.D. Poster 2019, SERC 2019, CICF 2018.
* Scheduled presentation.
