Working Papers

Abstract: We identify a novel and common exogenous demand shock caused by passive funds in the corporate bond market. Specifically, passive fund demand for corporate bonds displays discontinuity around the maturity cutoffs separating long-term, intermediate-term, and short-term bonds. Passive funds' demand increases significantly upon a bond's crossing of 10-, 5-, and 3-year time-to-maturity cutoffs. We develop a novel identification strategy to study the impact of passive fund demand in the corporate bond market. First, we find that these non-fundamental demand shifts lead to a significant and lasting decrease in yield spreads, as well as persistent liquidity improvements. Second, passive fund demand shocks spill over to the primary market, causing lower issuing yield spreads, active new bond issuance, and higher total bond outstanding. Furthermore, firms reduce bank debt after the positive passive fund demand shock, suggesting that borrowers substitute cheap bond financing for bank debt in response to the elevated passive fund demand in the bond market.

Presentations: NBER Long-Term Asset Management (2024), FIRS Conference (2024), Young Scholars Finance Consortium (2024), European Winter Finance Summit (2024), MFA Annual Meeting (2024), Annual Hedge Fund Conference (2024), EFA Annual Meeting (2024), AFA Annual Meeting (2024),  SWFA Annual Meeting (2024), CEPR Paris Symposium (2023), Chicago Booth Asset Pricing Conference (2023), CEPR Asset Pricing Meeting Gerzensee (2023), University of Hong Kong (2023), HK Fixed Income and Institutions Research Symposium (2023), Nanyang Technological University (2023), National University of Singapore (2023), SFI Research Days (2023), Chicago Fed Workshop on Non-Bank Financial Institutions (2023), MFA Annual Meeting (2023),LBS Trans-Atlantic Doctoral Conference (2023),  Sydney Banking and Financial Stability Conference (2023), USC Finance PhD Miniconference (2022)

Abstract: We document a statistically and economically significant earnings announcement premium—the tendency of individual stocks to earn higher returns during the announcement weeks—for the largest U.S. stocks over the 2004-2022 period. To examine the systematic risk explanation behind the premium, we propose a link between the premium magnitude and the market-wide spillovers from earnings announcements. We leverage the S&P500 index futures data and use narrow intraday and overnight windows to isolate such spillovers. We find that earnings announcements of individual large firms represent an economically significant source of market-wide news, on par with macroeconomic releases. The ability to generate a spillover is a persistent stock characteristic that is associated with the firm’s size and industry. Firms that generate the highest market-wide spillovers earn the highest announcement premiums. Combined, our findings provide direct evidence supporting the systematic risk explanation for the earnings announcement premium.

Presentations: Chicago Booth (2023), USC Accounting Brownbag (2023), Hong Kong University of Science and Technology (2023), CUHK Accounting Conference (2023), USC Finance Brownbag (2023), FARS Midyear Meeting (2023), Rotman Accounting Conference (2022), Baruch College Seminar (2022), Derivative Markets Conference (2022), Yale SOM Accounting Conference (2021)

[3] Non-Fundamental Demand Driven Loan renegotiation (March 2024)

with AJ Chen, Matthew Phillips, and Regina Wittenberg-Moerman

Abstract: An important innovation in the private lending market is the increasing participation of nonbank institutional lenders. Compared to traditional banks, nonbank lenders have a higher demand for secondary market liquidity due to their fragile funding source. An important question is how the demand for liquidity by nonbank lenders affects borrowers' cost of capital. In this paper, we exploit a novel setting of Morningstar LSTA US Leverage Loan 100 Index weekly rebalances as an exogenous liquidity shock to examine how secondary market liquidity affects private lending. Consistent with nonbanks having a higher demand for liquidity, we show a significant and persistent increase in secondary market price and CLO trading volume following the exogenous liquidity improvement. Importantly, we observe a notable surge in interest rate-reducing loan renegotiations closely aligned with the timing of index inclusion, with an average reduction of 21 bps. The effect of interest rate reduction is more pronounced when the aggregate credit supply by nonbanks is higher. Our findings highlight the substantial and timely passthrough of nonbank demand to the financing cost for private loan borrowers through renegotiation. Our exploration into the mechanism suggests that borrowers with greater bargaining power tend to receive more borrowing costs reduction. Moreover, renegotiation frictions negatively impact the efficacy of borrowing cost reduction. Overall, our paper provides novel causal evidence that nonbank lenders' demand for liquidity is a salient non-fundamental determinant of loan renegotiation and financing cost.

Presentations: USC Finance Brownbag (2023)

Work in Progress

[4] Monetary Policy Global Spillover and Sovereign Debt Rollover Risk

with Alexandre Jeanneret and Zhao Zhang

[5] Global Uncertainty and Variance Risk Premiums

with Geert Bekaert, and Nancy Xu