Working Papers

Text-Based Linkages and Local Risk Spillovers in the Equity Market (Job Market Paper)[link]

This paper uses extensive text data to construct firms’ links via which local shocks transmit. Using the novel text-based linkages, I estimate a heterogeneous spatial-temporal model that accommodates the contemporaneous and dynamic spillover effects at the same time. I document a considerable degree of local risk spillovers in the market plus sector hierarchical factor model residuals of S&P 500 stocks. The method is found to outperform various previously studied methods in terms of out-of-sample fit. Network analysis of the spatial-temporal model identifies the major systemic risk contributors and receivers, which are of particular interest to micro-prudential policies. From a macro-prudential perspective, a rolling-window analysis reveals that the strength of local risk spillovers increases during periods of crisis, when, on the other hand, the market factor loses its importance.

A Revisit to Sovereign Risk Contagion in Eurozone with Mutual Exciting Regime-Switching Model[link]

This paper proposes a new mutual exciting regime-switching model where crises can spread contagiously across countries. Each country has its own hidden stochastic process that determines whether the country is in a normal or crisis regime. Contagion is defined as a rise in the transition probability to the crisis regime when other countries are in crisis in the past state. Using this new approach, I revisit the sovereign risk contagion in the euro area. I find that there are striking shifts in market pricing functions for the sovereign bond spreads. Multi-country contagion plays a dominant role in driving such shifts, while common risk factors and country-specific fundamentals are much less important.

A Dynamic Network of Arbitrage Characteristics (with Shaoran Li and Oliver Linton)[link] Revise and Resubmit,Journal of Business & Economic Statistics

We propose an asset pricing factor model constructed with semi-parametric characteristics-based mispricing and factor loading functions. This model captures common movements of stock excess returns and includes a two-layer network of arbitrage returns interconnected by security-specific characteristics. We approximate the unknown functions by B-splines where the number of B-splines coefficients is diverging. We estimate this model and test the existence of the mispricing function by a power enhanced hypothesis test. The enhanced test solves the low power problem caused by diverging B-spline coefficients. Meanwhile, the strengthened power approaches to one asymptotically. And the dynamic networks are explored through Hierarchical K-Means Clusterings from detected mispricing functions. We apply our methodology to CRSP monthly data for the US stock market with one-year rolling windows during 1967-2017. This empirical study shows the presence of mispricing functions in certain time blocks and a dynamic network structure of arbitrage returns through groups of some characteristics.

Work in Progress

Augment Large Covariance Matrix Estimation with Auxiliary Information (with Shaoran Li and Weiguang Liu)

Spatial Threshold Model: with an Application to Euro Area Credit Risk Contagion (with Yimeng Xie)

Generalized EGARCH Model: Factor-EGARCH (with Shaoran Li and Weiguang Liu)