Research Interests: Financial Economics, Contract Theory, Financial Crisis, OTC Derivatives, Counterparty Risk
"Counterparty Risk in the Over-the-Counter Derivatives Market: Heterogeneous Insurers with Non-commitment"
Abstract: I study risk-taking and optimal contracting in the over-the-counter (OTC) derivatives market. Hedgers in derivative markets can see their counterparty risk increase because of subsequent trades by their counterparties. Foreseeing this, the hedgers would contract with insurers in a way that accounts for such subsequent insurer trading. In equilibrium, the hedgers' optimal trades feature endogenous counterparty default risk management. The risk management involves trade size and counterparty selection. The hedgers' optimal trades may or may not entail counterparty risk. Central clearing can improve the hedgers' welfare through loss-sharing.
"Leverage, Bubbles, and Options"
Abstract: I generalize Simsek's (2013) collateral equilibrium model and provide sufficient conditions for bubbles to exist in equilibrium. The model can generate rational bubbles with the bubble component reflecting the collateral value of an asset. In collateral equilibrium, agents hold assets that resemble options. Thus, I also examine option pricing implications. I find that options are underpriced and implied volatility smirks. There are two drivers of the implied volatility smirk: the increasing bargaining power of the call option buyer and the decreasing bubble component of the asset.
"Exposure to Chinese Banks through ADRs"
Abstract: I empirically test the limits to arbitrage for ADRs and underlying stocks of Chinese banks. I report violations of the law of one price between ADRs and the underlying stocks. Owners of ADRs receive less dividends than owners of the underlying stocks since they must pay a fee to the depository bank. Nevertheless, the prices of ADRs do not differ significantly from the prices of the underlying assets. I also find ex-post cum dividend returns do not differ between ADRs and the underlying stocks. This suggests that investors' ex-ante purchases of ADRs are for capital gains rather than for dividends.
"Attack on the Bubble: One Large Arbitrageur vs Desynchronized Small Arbitrageurs"
Abstract: This paper extends Abreu and Brunnermeier (2003) and models the interaction between large and small traders in the presence of financial bubbles. I find that the presence of a large trader makes small traders more aggressive in attacking the bubble. Moreover, the aggressiveness of small traders increases with the wealth of the large trader but decreases with the information of the large trader. This result is contrary to the results in the currency crisis literature.
"Empirical Analysis on the Effect of Jumps on Realized Beta"
Abstract: This paper constructs jump-robust estimators for beta in the Capital Asset Pricing Model (CAPM) to test the robustness of realized beta to large jumps in stock prices. Using high frequency data, I decompose realized beta for stocks in the S&P 100 index into jump and diffusive components. I find that the jump component is significantly lower than the diffusive components. Thus, realized betas are systematically underestimating the exposure of stocks to diffusive movements of the market factor. I also document differential effects of jumps on realized betas across different industries.