In recent years, with the rapid expansion of commercial banks' non-standardized business, the systematic correlation between shadow banking and commercial banks in China has been gradually enhanced, which enables the partial liquidity crisis of shadow banking to spread rapidly to commercial banks, leading to the increased vulnerability of China's financial system. Based on this, we built shadow banking indexes of trusts, securities, private lending and investment, introduced the dynamic correlation coefficient calculated by the dynamic conditional correlation multivariate GARCH model into the improved CoVaR model, and used the DCC-BEKK-MVGARCH-Time-Varying CoVaR Model to measure the risk overflow contribution of shadow banking in China. We find that shadow banking and commercial banks have an inherent relationship. Due to their own risks, different types of shadow banking contribute to the risk spillover to commercial banks in different degrees. The risk correlation between shadow banking and commercial banks fluctuates.

We examine the effects of controlling shareholder stock pledge on corporate acquisition decisions and associated performance. Consistent with our aggravated expropriation hypothesis, we find that pledging firms in China initiate more takeovers, but these acquisitions conducted by pledging firms experience lower announcement returns. We adopt the difference in differences and the instrumental variable approaches to establish causality. Channel tests further reveal that pledging acquirers overpay for the deals and are more likely to be involved in related party transactions. Cross-sectionally, we find that the relations between the share pledge and corporate acquisitiveness and returns are more pronounced for non-SOEs and firms with high-level excess cash. Lastly, we document that pledging acquirers underperform in the long-run in terms of lower ROAs and a greater likelihood of goodwill impairment. Overall, our findings indicate that controlling shareholders increasingly expropriate minority shareholders through self-serving corporate takeovers after the stock pledge.

Ghysels, Horan, and Moench (2017) show that extracting principal component (PC) factors from real time as opposed to revised macro variables substantially reduces their power in forecasting bond excess returns. In this paper, we propose a predictive principal component (PPC) approach to extract factors from information pertaining to expected bond excess returns contained in real time macro variables. In so doing, the new PPC factors remove common noises in real time data and exhibit significant bond return predictability. The inand out-of-sample R2s improve by more than 50% relative to the PC factors. Moreover, the forecasted bond excess returns are countercyclical, consistent with standard asset pricing models.

We propose a model of trading in the over-the-counter corporate bond market where investors can buy and sell bonds through a dealer and can short bonds by borrowing them in the securities lending market. The model predicts that higher dealer inventory costs are associated with lower short interest for bonds, particularly for high-credit-quality bonds. We construct bond-level proxies for inventory costs and provide empirical evidence in support of the model's prediction. We find that much of the dramatic decline in short interest observed since the Great Financial Crisis (GFC) can be explained by an increase in proxies for inventory costs. We document that the short-sale constraints imposed by higher dealer inventory costs have had a negative impact on price efficiency. Our findings suggest that tighter post-GFC regulation may have had unintended consequences for bond market quality.

Studies of the dynamics of bond risk premia that do not account for the corresponding dynamics of bond risk are hard to interpret. We propose a new approach to modeling bond risk and risk premia. For each of the US and China, we reduce the government bond market to its first two principal-component bond-factor portfolios. For each bond-factor portfolio, we estimate the joint dynamics of its volatility and Sharpe ratio as functions of yield curve variables, and of VIX in the US. We have three main findings.(1) There is an important second factor in bond risk premia. (2) Time variation in bond return volatility is as important as time variation in bond Sharpe ratios. (3) Bond risk premia are solely compensation for bond risk, as no-arbitrage theory predicts. Our approach also allows us to document interesting cyclical and secular time-variation in the term structure of bond risk premia in both the US and China.

Although big data technologies such as digital contact tracing and health certification apps have been widely used to combat the COVID-19 pandemic, little empirical evidence regarding their effectiveness is available. This paper studies the economic and public health effects of the "Health Code" app in China. By exploiting the staggered implementation of this technology across 322 Chinese cities, I find that this big data technology significantly reduced virus transmission and facilitated economic recovery during the pandemic. A macroeconomic Susceptible-Infectious-Recovered (SIR) model calibrated to the micro-level estimates shows that the technology reduced the economic loss by 0.5% of GDP and saved more than 200,000 lives by alleviating informational frictions during the COVID-19 outbreak.

Convertible bonds were first introduced in China in 1998. Their popularity has risen in the past decades through various domestic regulatory reforms, as more and more companies came to recognize their advantages over conventional bond or equity issuances as ways to raise capital. In this paper, we study the role of convertible bonds in Chinese A-share listed companies’ decision to refinance, using data from 1999 to 2018. First, we find that firms with high information asymmetry tend to issue more convertible bonds than equities to mitigate financing cost, especially under the “Regulation of Restraining Non-public Issuance of Shares (NPIS)” launched in 2017, a regulation that retrains listed companies to issue shares non-publicly. Second, the introduction of “Breaking Rigid Redemption” policy, which breaks the custom of using rigid redemption clauses when financial institutes issue corporate bonds and asset management products, effectively promoted interest rate marketization in China and as a result, companies with a strong tendency to shift risks began to issue convertible bonds to reduce issuing cost after 2017. Third, regulatory requirements on the qualifications for companies played important roles in their refinancing choices. Lastly, we also find that SOEs in China are overall less sensitive to risk-shifting and information asymmetry, given their ample loan resources compared with non-SOEs. Our findings delineate the behaviors of Chinese A-share listed companies in their refinancing and explain the sudden surge in convertible bonds issuance since 2017.

China's local government debt financing grows rapidly featuring surging chengtou bond issuance and risk exposure since the global financial crisis in 2008. The accumulation of local government debt poses systemic risks to China's fiscal and financial systems. Using weekly data from 2009 to 2014, this paper studies the joint dynamics and risk transmission mechanism between chengtou bond spreads and treasury yields under the framework of the extended no-arbitrage Nelson-Seigel term structure model, which guarantees the no-arbitrage relationship between treasury yields of different maturities. The results show that the chengtou bonds indeed exhibit considerable local risks and can lead to systemic risk of the treasury bonds, such that the treasury yields have significant component of risk premium due to chengtou risk. On the other hand, as the safest asset in China at present, the treasury yields with short-to-medium maturities decrease as a result of the “fly-to-safety" effect when the chengtou risk increases. Meanwhile, the dynamics of chengtou bond spreads reflect the market-oriented risk pricing by investors on credit and liquidity risks under limitations of the government implicit guarantee. Under this condition, it is the right timing to reasonably standardize and institutionalize the local government bond market with transparent market mechanism.

This paper studies the presence of informed trading in Taiwan stock index options (TXO) and analyzes the informational role of foreign institutions in incorporating information into Taiwan stock index futures (TX). We have found that only the option-induced part (OOI) of the total TX order imbalance can predict future TX prices, and the OOI calculated from open-buy TXO, defined by Ni et al. (2008), provides incremental predictability. This finding shows that the price predictability stems from the information flow resulting from option transactions rather than from liquidity pressure. We conclude further that option transactions from foreign institutions provide the most significant predictability, out-of-the-money option transactions in particular. These empirical results show that option transactions conducted by foreign institutions have played the primary role in conveying the information inherent in the TXO market to the TX market, foreign institutions being delta-informed traders. Retail investors, the major players in both the TXO and TX markets, have done almost nothing of significance with regard to TXO information transmission into the TX market, with the exception of some near-the-money and out-of-the-money options.

We examine a unique one day lockup constraint in stock markets in China and contribute to the understanding of impact of non-marketability on asset prices. Buyers of Chinese stocks are subject to a one day lockup and cannot sell their shares until the next day, but warrant traders are free of such restrictions. We demonstrate that the lockup creates a price discount relative to stock value implied by warrants. We show that the discount decreases throughout the trading day and that investors tend to purchase stocks when the lockup becomes less binding. The paper provides implications to value illiquid assets.