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Conference Paper
Liquidity, runs, and security design: lessons from the collapse of the auction rate municipal bond market
In this paper, we use the recent collapse of the ARS market as a case study on important issues regarding fragility of financial innovations and systemic risks. We find strong evidence of investor runs for liquidity, partly caused by a self-fulfilling panic. In addition, coordination failures triggered by an unexpected first mover led all major broker-dealers to simultaneously withdraw their liquidity support. We also find that the likelihood of auction failures and ARS reset rates depend significantly on both the rule and the level of maximum auction rates; that, as predicted by auction theories, there is also strong evidence for underpricing after dealers with-drew their liquidity supports; and that inter-auction secondary market liquidity may encourage aggressive bidding that increases the reset rates.
AUTHORS: Li, Dan; Han, Song
DATE: 2009-01
Working Paper
On the Economics of Discrimination in Credit Markets
This paper develops a general equilibrium model of both taste-based and statistical discrimination in credit markets. We find that both types of discrimination have similar predictions for intergroup differences in loan terms. The commonly held view has been that if there exists taste-based discrimination, loans approved to minority borrowers would have higher expected profitability than to majorities with comparable credit background. We show that the validity of this profitability view depends crucially on how expected loan profitability is measured. We also show that there must exist taste-based discrimination if loans to minority borrowers have higher expected rate of return or lower expected rate of default loss than to majorities with the same exogenous characteristics at the time of loan origination. Empirical evidence on expected rate of default loss cannot reject the null hypothesis of non-existence of taste-based discrimination.
AUTHORS: Han, Song
DATE: 2001-10
Working Paper
On the economics of discrimination in credit markets
This paper develops a general equilibrium model of both taste-based and statistical discrimination in credit markets. We find that both types of discrimination have similar predictions for intergroup differences in loan terms. The commonly held view has been that if there exists taste-based discrimination, loans approved to minority borrowers would have higher expected profitability than to majorities with comparable credit background. We show that the validity of this profitability view depends crucially on how expected loan profitability is measured. We also show that there must exist taste-based discrimination if loans to minority borrowers have higher expected rate of return or lower expected rate of default loss than to majorities with the same exogenous characteristics at the time of loan origination. Empirical evidence on expected rate of default loss cannot reject the null hypothesis of non-existence of taste-based discrimination.
AUTHORS: Han, Song
DATE: 2002
Working Paper
Inflation and the Size of Government
It is commonly supposed in public and academic discourse that inflation and big government are related. We show that economic theory delivers such a prediction only in special cases. As an empirical matter, inflation is significantly positively related to the size of government mainly when periods of war and peace are compared. We find a weak positive peacetime time series correlation between inflation and the size of government and a negative cross-country correlation of inflation with non-defense spending.
AUTHORS: Han, Song; Mulligan, Casey B.
DATE: 2001-11
Working Paper
Institutional herding in the corporate bond market
We find substantial herding in U.S. corporate bonds among bond fund managers, much higher than that previously documented for the equity market. Herding is generally stronger among illiquid bonds, and buy herding and sell herding are driven by different factors. In particular, sell herding increases on negative news about bond ratings and corporate earnings. Interestingly, increases in ex-post transparency in corporate bond trading through Trade Reporting and Compliance Engine (TRACE) led to higher buy herding but not to higher sell herding. Finally, we find significant return reversals in the post-herding quarters, especially for sell herding and for junk bonds. Price reversal is most prominent when funds herd to sell illiquid bonds, which suggests that temporary price pressure is the reason behind price reversal.
AUTHORS: Cai, Fang; Han, Song; Li, Dan
DATE: 2012
Working Paper
Information, Contract Design, and Unsecured Credit Supply: Evidence from Credit Card Mailings
How do lenders of unsecured credit use screening and contract design to mitigate the risks of information asymmetry and limited commitment in the absence of collateral? To address this question, we take advantage of a unique dataset of over 200,000 credit card mail solicitations to a representative sample of households over the recent credit cycle--a period that includes the implementation of the CARD Act. We find that while lenders use credit scores as a prominent screening device, they also take into account a wide array of other information on borrowers' credit histories and financial and demographic characteristics. For instance, the likelihood of receiving an offer is sensitive to the exact timing of a prior bankruptcy filing. We also find that credit market conditions affect the marginal information used in lenders' offer decisions, as lenders sharply reduced credit supplied to subprime borrowers during the crisis and in response to the CARD Act. Finally, we document that lenders extend multiple distinct offers to the same consumers over a relatively short period, likely designed such that consumers reveal private information in their choice of contract.
AUTHORS: Li, Geng; Han, Song; Keys, Benjamin J.
DATE: 2015-11-16
Working Paper
Institutional Herding and Its Price Impact : Evidence from the Corporate Bond Market
Among growing concerns about potential financial stability risks posed by the asset management industry, herding has been considered as an important risk amplification channel. In this paper, we examine the extent to which institutional investors herd in their trading of U.S. corporate bonds and quantify the price impact of such herding behavior. We find that, relative to what is documented for the equity market, the level of institutional herding is much higher in the corporate bond market, particularly among speculative-grade bonds. In addition, mutual funds have become increasingly likely to herd when they sell, a trend not observed among insurance companies and pension funds. We also show that bond investors herd not only within a quarter, but also over adjacent quarters. Such persistence in trading is largely driven by funds imitating the trading behavior of other funds in the previous quarter. Finally, we find that there is an asymmetry in the price impact of herding. While buy herding is associated with a permanent price impact that is consistent with price discovery, sell herding results in transitory yet significant price distortions. The price destabilizing effect of sell herding is particularly strong for high-yield bonds, small bonds, and illiquid bonds and during the recent global financial crisis.
AUTHORS: Cai, Fang; Han, Song; Li, Dan; Li, Yi
DATE: 2016-10
Journal Article
The Runnables
Runs are an inherent vulnerability of the markets for short-term funding. Financial crises since the advent of banking have often exhibited systemic bank runs. The resulting disruptions to financial markets generally have had significant adverse impacts on the real economy.
AUTHORS: Bao, Jack; David, Josh; Han, Song
DATE: 2015-09-03
Working Paper
Effects of liquidity on the nondefault component of corporate yield spreads: evidence from intraday transactions data
We estimate the nondefault component of corporate bond yield spreads and examine its relationship with bond liquidity. We measure bond liquidity using intraday transactions data and estimate the default component using the term structure of credit default swaps spreads. With swap rate as the risk free rate, the estimated nondefault component is generally moderate but statistically significant for AA-, A-, and BBB-rated bonds and increasing in this order. With Treasury rate as the risk free rate, the estimated nondefault component is the largest in basis points for BBB-rated bonds but, as a fraction of yield spreads, it is the largest for AAA-rated bonds. We find a positive and significant relationship between the nondefault component and illiquidity for investment-grade bonds but no significant relationship for speculative-grade bonds. In addition, the nondefault component comoves with macroeconomic conditions--negatively with the Treasury term structure and positively with the stock market implied volatility.
AUTHORS: Han, Song; Zhou, Hao
DATE: 2008
Working Paper
An empirical analysis of bond recovery rates: exploring a structural view of default
A frictionless, structural view of default has the unrealistic implication that recovery rates on bonds, measured at default, should be close to 100 percent. This suggests that standard "frictions" such as default delays, corporate-valuation jumps, and bankruptcy costs may be important drivers of recovery rates. A structural view also suggests the existence of nonlinearities in the empirical relationship between recovery rates and their determinants. We explore these implications empirically and find direct evidence of jumps, and also evidence of the predicted nonlinearities. In particular, recovery rates increase as economic conditions improve from low levels, but decrease as economic conditions become robust. This suggests that improving economic conditions tend to boost firm values, but firms may tend to default during particularly robust times only when they have experienced large, negative shocks.
AUTHORS: Han, Song; Covitz, Daniel M.
DATE: 2004