Search Results
Working Paper
Screen More, Sell Later: Screening and Dynamic Signaling in the Mortgage Market
In dynamic models of asset markets with asymmetric information and endogenous screening, the anticipation of signaling through delayed sales incentivizes originators to exert greater effort ex ante. A central prediction in those models is a positive relationship between screening effort and the delay of sale. We test this theoretical prediction using the mortgage market as a laboratory, with processing time serving as a measure of screening effort. In line with the theory, mortgage processing time and the delay of sale after origination are strongly positively related in the data. Both ...
Working Paper
Financial Intermediation Chains in an OTC Market
This paper analyzes financial intermediation chains in a search model with an endogenous intermediary sector. We show that the chain length and price dispersion among interdealer trades are decreasing in search cost, search speed, and market size but increasing in investors' trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as search speed approaches infinity, the search equilibrium does not always converge to the centralized-market equilibrium: prices and allocation converge, but the trading volume might not. ...
Working Paper
Ambiguity Aversion and Variance Premium
This paper offers an ambiguity-based interpretation of variance premium?the difference between risk-neutral and objective expectations of market return variance?as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our approach endogenously generates variance premium without imposing exogenous stochastic volatility or jumps in consumption process. Such a framework can reasonably match the mean variance premium as well as the mean equity premium, equity volatility, and the mean risk-free rate in the data. We find that about 96 ...
Working Paper
The Two-Pillar Policy for the RMB
We document stylized facts about China's recent exchange rate policy for its currency, the renminbi (RMB). Our empirical findings suggest that a "two-pillar policy" is in place, aiming to balance RMB index stability and exchange rate flexibility. We then develop a tractable no-arbitrage model of the RMB under the two-pillar policy. Using derivatives data on the RMB and the U.S. dollar index, we estimate the model to assess financial markets' views about the fundamental exchange rate and sustainability of the policy. Our model is able to predict the modification of the two-pillar policy in ...
Journal Article
How Credible Is Hong Kong's Currency Peg? Insights from Financial Market Prices
This article presents a structural asset-pricing model that quantifies financial market perceptions of the credibility of Hong Kong's Linked Exchange Rate System (LERS). Using data from the foreign exchange market, the authors estimate the probability that the Hong Kong dollar (HKD) remains pegged to the US dollar (USD) and the value the HKD would take if the peg were to break. The analysis reveals multiple episodes when market confidence in the peg declined, with particularly sharp stress in late 2022 and mid-2025. In these periods, capital flows, interest rate differentials, and liquidity ...
Journal Article
Analyzing the Efficacy of the Fed's Secondary Market Corporate Credit Facility
This article analyzes the effectiveness of the Secondary Market Corporate Credit Facility (SMCCF) in stabilizing the US corporate bond market during the COVID-19 pandemic. The SMCCF announcements in March and April 2020 significantly reduced credit spreads across different bond maturities, restoring a more typical upward-sloping yield curve. The Federal Reserve's bond purchases, though relatively small in scale, notably decreased credit spreads for eligible bonds compared to ineligible ones. The study's model suggests that market dynamics, including a rush to sell short-term safe bonds and ...
Working Paper
Exchange rate policy and sovereign bond spreads in developing countries
This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of ...
Working Paper
Racial Disparities in Mortgage Lending: New Evidence Based on Processing Time
This paper examines racial disparities in mortgage processing time prior to the global financial crisis. We find that Black borrowers are underrepresented and experience a longer processing time than White borrowers among the mortgages securitized by government-sponsored enterprises. At the same time, Black borrowers are overrepresented and face a similar processing time among privately securitized mortgages. Additionally, Black borrowers are strongly associated with the faster segments of mortgage markets, faster lenders within each segment, and the types of loan products that are processed ...