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I am an Assistant Professor of Finance
at the Robert H. Smith School of Business at the University of Maryland in
College Park. I received my PhD in Finance from Washington University in
St. Louis in 2011. And I received a Master of Science in financial
mathematics from National University of Singapore and a Bachelor of Science
in mathematics from Nankai University.
Research
Interests
Theoretical and
empirical asset pricing and market microstructure
My research includes both theoretical and empirical
work. My recent work focuses on understanding the effects of market
frictions such as margin requirements, information asymmetry, transaction
costs, and imperfect competition on asset prices, market volatility, market
illiquidity, and social welfare.
Publications
¡°Increases
in Risk Aversion and the Distribution of Portfolio Payoffs ¡± joint with
Philip H. Dybvig, Journal of
Economic Theory 147 (2012), 1222-1246
Working
Papers
¡°Over-the-Counter
Markets: Market Making with Asymmetric Information, Inventory Risk and
Imperfect Competition¡± joint with Hong Liu
Presented at the
Duke/UNC Asset Pricing Conference, March 2010, and the American
Finance Association Annual Meeting, 2011
We develop an equilibrium market making model to study
how information asymmetry, inventory risk, and imperfect competition among
market makers jointly affect bid and ask prices, market liquidity, and
trading volume in over-the-counter markets. We solve the equilibrium bid
and ask prices, bid and ask depths, trading volume, and inventory levels in
closed-form. We also develop a new measure of information asymmetry. Our
model can help explain some empirical puzzles such as why bid-ask spreads
can be lower with asymmetric information. Moreover, we find that
information asymmetry may reduce the welfare loss from market power.
¡°Why
Can Margin Requirements Increase Volatility and Benefit Margin Constrained
Investors? ¡±
Margin requirements have long been implemented in
almost all financial markets and are often used as an important regulatory
tool for improving market conditions. However, their economic impact beyond
affecting default risk is still largely unknown. We propose a tractable
equilibrium model to examine how margin requirements affect asset prices,
market volatility, market liquidity and market participants' welfare. We
show that margin requirements can have opposite effects on volatility when
they constrain different investors and thus can help explain why empirical
results have been mixed. Contrary to one of the main regulatory goals, we
find that even though margin requirements restrict borrowing and shorting,
they can significantly increase market volatility. In addition, margin requirements can
reduce market liquidity (as measured by price impact) and lead to a greater
return reversal. Moreover, margin requirements can make margin constrained
investors better off. Our analysis also provides new empirically testable
implications.
¡°Market
Closure and the Liquidity Premium Puzzle¡± joint with Min Dai, Peifan Li, and Hong Liu
In contrast to empirical evidence, standard theories
conclude that transaction costs only have a second order effect on
liquidity premia. In
this paper, we show that if one incorporates the well-established fact that
market volatility during trading periods is significantly higher than
during nontrading
periods, then transaction costs have a first order effect that is much
greater than that found by the existing literature and largely comparable
to empirical findings. Surprisingly, the higher liquidity premium is Not
from higher trading frequency, but mainly from the substantially
¡°suboptimal¡± trading strategy. Extensive empirical analysis strongly
supports our unique prediction that stocks with greater return variance
variations across trading and nontrading periods require higher liquidity premia.
¡°A
Theory of Demand Driven Liquidity Commonality¡± joint with Hong
Liu
Many empirical studies
suggest that correlated demand is important in driving liquidity
commonality among stocks. However, there are still no theoretical studies
on how demand-side factors cause and affect liquidity and return
commonality. We propose a tractable equilibrium model with asymmetric
information and imperfect competition among market makers to study the
effect of correlated demand on the commonality in liquidity, in liquidity
risks and in returns. We solve the equilibrium bid and ask prices, bid and
ask depths, trading volume, and inventory levels in closed-form. Our model
can help explain why liquidity crashes can be caused by non-fundamental
news and why market liquidity can be worse and liquidity commonality can be
greater in significantly declined markets and in more volatile markets. Our
model also generates some new empirically testable implications.
"Smooth Trading with Overconfidence
and Market Power" joint with
Pete Kyle and Anna Obizhaeva
This paper presents a
continuous time model of oligopolistic trading among symmetric traders who
agree to disagree concerning the precision of continuous flows of private
information. Although traders do not share a common prior, they apply Bayes
law consistently. If there is enough disagreement among traders,
equilibrium exists in which prices reveal the average of all traders'
signals immediately, but traders continue to trade on information after it
is revealed in prices. Each trader believes that the price is a linear
function of the trader's inventory, the derivative of the trader's
inventory, and an average of other traders' private information. The speed
with which traders adjust inventories results from a trade-off between
incentives to slow down trading to reduce market impact costs in an
imperfectly resilient market and incentives to speed up trading to profit
from perishable information with limited half-life. Price spikes, similar
to the flash crash of 2010, would result from trading modest quantities much
faster than consistent with equilibrium strategies.
¡°Short-sale
Constraints, Bid-Ask Spreads, and Information Acquisition¡± joint with Hong Liu
Short-sale constraints are prevalent in many
financial markets and have been actively
adjusted by regulators to tackle problems in markets.
However, how short-sale constraints
affect market liquidity and information acquisition
is still an open question. In this paper, we develop an equilibrium model
to study this question in the presence of information asymmetry, inventory
risk, and imperfect competition among market makers. In contrast to Diamond
and Verrecchia (1987) and consistent with
empirical findings, we show that the equilibrium bid (ask) price with
short-sale constraints is lower (higher) than the bid (ask) price without
short-sale constraints, which implies that short-sale constraints not only
increase bid-ask spreads but also decrease both bid and ask depths. In
addition, short-sale constraints increase liquidity risk measured by the
volatility of bid-ask spreads. The presence of asymmetry information can
further magnify the adverse impact of short-sale
constraints on market liquidity. Furthermore,
short-sale constraints make all non-market maker
investors worse off while they may benefit market makers in equilibrium
when there is significant competition. Interestingly, the presence of
short-sale constraints may increase investors¡¯ incentive to produce
more precise information and thus improve aggregate information quality.
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