The AH Premium: A Natural Experiment (with Tongbin Zhang)
The high, persistent and volatile AH premium, which is the price differences of dual-listed AH shares in the connected Chinese stock markets, provides a natural experiment to test asset pricing models. We show that various Bayesian/RE asset pricing models can't explain AH premium. We find that an internal rationality learning model can rationalize the AH premium and show the importance of subjective stock price expectations in equity pricing. Convergence traders to bet the convergence of the two shares are highly likely to suffer a big loss in this situation.
2017 Macro winter workshop in Bellaterra, 2017 Barcelona GSE Jamboree, 8th Shanghai Macroeconomics Workshop, 14th China Finance Annual Meeting, 2018 CES North American Meeting, Bilbao Adaptive Learning Workshop, 2018 conference in Expectations in Dynamic Macroeconomic Models and seminars at UPF, UAB, Stockholm, SUFE Finance, Shanghai Jiaotong University, CUHK(Shenzhen), Peking University and CUFE CEMA.
New Tests of Expectation Formation with Applications to Asset Pricing Models (with Pei Kuang and Tongbin Zhang)
The paper develops new tests of expectation formation which are generally applicable in financial and macroeconomic models. The tests utilize cointegration restrictions among forecasts of model variables. Survey data suggests forecasts of stock prices are not cointegrated with forecasts of consumption and rejects this aspect of the formation of stock price expectations in a wide range of asset pricing models, including rational expectations and various learning or sentiment-based models. Potential resolutions are discussed for reconciling equity pricing models with the new survey evidence.
2019 Barcelona GSE Jamboree, SED conference (St. Louis), 2019 CCER Summer Institute workshop, 2019 Macroeconomics workshop in Shandong University, Behavioral Macroeconomics Workshop (Bamberg), Econometric Society China Meeting (Guangzhou), North American Summer Meeting (Seattle), 10th Shanghai Macroeconomics Workshop, SNDE conference (Dallas Fed), FMA Asian/Pacific conference (Ho Chi Minh City), International Symposium on Econometric Theory and Applications (Osaka University) and seminars at UAB, SUFE, HKUST and Peking University.
The New Classical Optimal Monetary Policy Revisited
We show that there are issues with the long-standing insight that the optimal flexible nominal price (inflation) completes the market. The nominal price desired implementing the complete market social planner allocations turns out to be negative for some states of the economy. We formulate the recursive contract approach by imposing a positive price constraint and find that the near-random walk behavior of the public debt and the tax rate featuring incomplete market emerge, and the Friedman rule still holds. The specific incomplete market may converge to the complete market supported by time-varying inflation eventually by accumulating either a large amount of the public debt or public asset. The government should also issue inflation-indexed government bond, and proper management of the nominal and inflation-indexed debt is able to decentralize the complete market social planner allocations.
2018 Barcelona GSE Jamboree, Bellaterra macro club, UAB, ENTER Jamboree (Toulouse)
Inflation Stablization Policy with Heterogeneous Beliefs (with Donghai Zhang)
Many Central banks have adopted inflation targeting policy. While some target the headline inflation, others choose to stabilize the core inflation. The dominating view in the academic literature supports the core inflation targeting as inflation of the flexible price sector is perceived to be costless in terms of welfare. We challenge this conventional wisdom by introducing information frictions and heterogenous beliefs into an otherwise standard multi-sector New Keynesian model. In our framework, firms have imperfect and heterogenous assessments about the state of the economy. Therefore, price resetting firms adjust to different prices. As a result, the inflation in a sector is distortionary even if the underlining sector features a flexible price. Our finding suggests that the central bank should not solely stabilize the core inflation.
Bellaterra macro club, UAB Taller d’economia
The Paradox of Price Flexibility (with Shengliang Ou, Donghai Zhang)
The introduction of digital price tags may facilitate price adjustments and reduce the degree of nominal rigidity in the economy. Is this welfare improving? We address this question in a New Keynesian model, emphasizing the role of information frictions and dispersed beliefs. In such a model, in contrast to a model with perfect information, price dispersion within reoptimizing firms arises. The welfare losses associated with the latter are amplified with a more flexible price. In a static model, we derive analytically that consumers’ welfare losses are increasing in the price flexibility — the paradox of price flexibility. The results carry over to a dynamic quantitative model.
Bellaterra macro club, SUFE
SELECTED WORKS IN PROGRESS
Testing Expectation Formation in Stochastic Growth Models (with Pei Kuang, Li Tang, Tongbin Zhang)
Optimal Monetary Instruments for an Uncertain World (with Isaac Baley and Donghai Zhang)