Kathy Yuan
Contact address:
Department of Finance
London School of Economics and Political Science
Houghton St
London, UK
WC2A 2AE
K.Yuan_atsign_lse.ac.uk
Tel: +44 (0)20 7955 6407
Fax: +44 (0)20 7849 4647.
Click for CV
Professor Yuan received her Ph.D. in Economics from Massachusetts Institute of Technology. Prior to obtaining her Ph.D., she worked briefly in the Emerging Markets Trading Desk at J. P. Morgan (now JPMorgan-Chase). Her academic research focuses on developing macro-finance and asset pricing theories with liquidity implications in environments with information and market frictions and testing their empirical implications. In the past few years, she has examined how crises spread through international financial markets and how introducing benchmark securities such as treasury bonds or stock indices improves the overall market liquidity. She is currently working on issue related to liquidity and financial stability in bank and non-bank financial institutions including DeFi, macro implications of digital payment technologies, and developing applied theories of (digital) money and public liquidity. She is a member of FMG, CEPR and has also received Houblon-Norman Fellowship at the Bank of England. She has also conducted policy research for central banks and financial market regulators.
Publications and Accepted Manuscripts
Christian Julliard, Ran Shi and Kathy Yuan, The Spread of COVID-19 in London: Network Effects and Optimal Lockdowns, accepted at The Journal of Econometrics
Abstract: We generalise a stochastic version of the workhorse SIR (Susceptible-Infectious-Removed) epidemiological model to account for spatial dynamics generated by network interactions. Using the London metropolitan area as a salient case study, we show that commuter network externalities account for about 42% of the propagation of COVID-19. We find that the UK lockdown measure reduced total propagation by 57%, with more than one third of the effect coming from the reduction in network externalities. Counterfactual analyses suggest that: i) the lockdown was somehow late, but further delay would have had more extreme consequences; ii) a targeted lockdown of a small number of highly connected geographic regions would have been equally effective, arguably with significantly lower economic costs; iii) targeted lockdowns based on threshold number of cases are not effective, since they fail to account for network externalities.
Emre Ozdenoren, Kathy Yuan and Shengxing Zhang, Dynamic Asset-Backed Security Design, accepted at Review of Economic Studies
Abstract: Borrowers obtain liquidity by issuing securities backed by the current period payoff and resale price of a long-lived collateral asset, and they are privately informed about the payoff distribution. Asset price can be self-fulfilling: a higher asset price lowers adverse selection and allows borrowers to raise greater funding, which makes the asset more valuable, leading to multiple equilibria. Optimal security design eliminates multiple equilibria, improves welfare, and can be implemented as a repo contract. Persistent adverse selection lowers debt funding, generates volatility in asset prices and exacerbates credit crunches. The theory demonstrates the role of asset-backed securities on stability of market-based financial systems.
Georgy Chabakauri, Kathy Yuan, and Konstantinos Zachariadis, Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims, Review of Economic Studies, 89, 2445-2490, 2021.
Abstract: We study a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors and noise traders. The assets can include state contingent claims such as Arrow-Debreu securities, assets with only positive payoffs, options or other derivative securities. The probabilities of states depend on an aggregate shock, which is observed only by the informed investor. We derive a three-factor CAPM with asymmetric information, establish conditions under which asset prices reveal information about the shock, and show that information asymmetry amplifies the effects of payoff skewness on asset returns. We also find that volatility derivatives make incomplete markets effectively complete, and their prices quantify market illiquidity and shadow value of information to uninformed investors.
Edward Denbee, Christian Julliard, Ye Li and Kathy Yuan, Network Risk and Key Players: A Structural Analysis of Interbank Liquidity, Journal of Financial Economics, 141 (3), 831-859, 2021.
Abstract: Using a structural model, we estimate the liquidity multiplier of an interbank network and banks' contributions to systemic risk. To provide payment services, banks hold reserves. Their equilibrium holdings can be strategic complements or substitutes. The former arises when payment velocity is high and payments begets payments. The latter prevails when the opportunity cost of liquidity is large, incentivising banks to borrow neighbors' reserves instead of holding their own. Consequently, the network can amplify or dampen individual shocks. Empirically, network topology explains cross-sectional heterogeneity in banks' contribution to systemic risks while changes in the equilibrium type drive the time-series variation.
Vicente Cunat, Dragana Cvijanovic and Kathy Yuan, Within-Bank Transmission of Real Estate Shocks, Review of Corporate Financial Studies, 7(2), 157-193, 2018, Winner of the Review of Corporate Finance Studies Best Paper Award.
Abstract: By considering banks as portfolios of assets in different locations, we study how real estate shocks get amplified across bankā's business areas while controlling for local demand shocks and bank location-specific factors. Affected banks substantially alter their loan portfolios: we find evidence of real estate price declines affecting both real estate and non-real estate types of lending. Banks also roll over and fail to liquidate problematic loans, while accumulating more non-performing loans. These results provide evidence of bank balance sheet amplification of real estate shocks.
Emre Ozdenoren and Kathy Yuan, Contractual Externalities and Systemic Risk, Review of Economic Studies 84 (4), 1789-1817, 2017.
Abstract: We study effort and risk-taking behaviour in an economy with a continuum of principal-agent pairs where each agent exerts costly hidden effort. Principals write contracts based on both absolute and relative performance evaluations (APE and RPE) to make individually optimal risk-return trade-offs but do not take into account their impact on endogenously determined aggregate variables. This results in contractual externalities when these aggregate variables are used as benchmarks in contracts. Contractual externalities have welfare changing effects when principals put too much weight on APE or RPE due to information frictions. Relative to the second best, if the expected productivity is high, risk-averse principals over-incentivise their own agents, triggering a rat race in effort exertion, resulting in over-investment in effort and excessive exposure to industry risks. The opposite occurs when the expected productivity is low, inducing pro-cyclical investment and risk-taking behaviours.
Itay Goldstein, Emre Ozdenoren and Kathy Yuan, Trading Frenzies and Their Impact on Real Investment, Journal of Financial Economics, 109(2), 566-582, 2013.
Abstract: We study a model where a capital provider learns from the price of a firm's security in deciding how much capital to provide for new investment. This feedback effect from the financial market to the investment decision gives rise to trading frenzies, where speculators all wish to trade like others, generating large pressure on prices. Coordination among speculators is sometimes desirable for price informativeness and investment efficiency, but speculators' incentives push in the opposite direction, so that they coordinate exactly when it is undesirable. We analyze the effect of various market parameters on the likelihood of trading frenzies to arise.
Itay Goldstein, Emre Ozdenoren, and Kathy Yuan, Learning and Complementarities in Speculative Attacks, Review of Economic Studies, 78(1), 263-292, 2011.
Abstract: We study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision. We show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non-fundamental volatility into exchange rates and policy decisions. We show that the central bank can improve the ex-ante effectiveness of its policy by committing to put a lower weight ex-post on the information from the market, and that transparency may either increase or decrease the effectiveness of learning from the market, depending on how it is implemented
Nandini Gupta and Kathy Yuan, On the Growth Effect of Stock Market Liberalizations, Review of Financial Studies, 22(11), 4715-4752, 2009.
Abstract: Using panel data on industries in emerging markets, we investigate the effect of a stock market liberalization on industry growth. Consistent with the view that liberalization reduces financing constraints, we find that industries that are more externally dependent and face better growth opportunities grow faster following liberalization. However, this increase in industry growth appears to come from an expansion in the size of existing firms rather than through new firm entry, which is puzzling since new firms are typically more financially constrained. To reconcile these conflicting results we examine whether barriers to entry arising out of institutional and regulatory frictions affect the impact of liberalization on new firms. We find that liberalization leads to new firm growth at the industry level in countries that allocate capital more efficiently, and in industries that privatize government-owned firms. From a policy perspective these results suggest that a stock market liberalization will have a larger and more uniformly distributed growth impact if it is accompanied by complementary reforms that enhance competition.
Emre Ozdenoren and Kathy Yuan, Feedback Effects and Asset Prices, The Journal of Finance, 63(4), 1939-1975, 2008.
Abstract: Feedback effects from asset prices to firm cash flows have been empirically documented. This finding raises a question for asset pricing: How are asset prices determined if price affects the fundamental value, which in turn affects the price? In this environment, by buying assets that others are buying, investors ensure high future cash flows for the firm and subsequent high returns for themselves. Hence, investors have an incentive to coordinate, which may generate self-fulfilling beliefs and multiple equilibria. Using insights from global games, we pin down investors' beliefs, analyze equilibrium prices, and find strong feedback leads to higher excess volatility.
Robert F. Dittmar and Kathy Yuan, Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets? Review of Financial Studies, 21(5) 1983-2014, 2008. Earlier versions circulated with the titles "The Price Impact of Sovereign Bonds" and "The Liquidity Service of Sovereign Bonds."
Abstract: We analyze the impact of emerging-market sovereign bonds on emerging-market corporate bonds by examining their spanning enhancement, price discovery, and issuance effects. We find the effect of spanning enhancement is positive and large; over one-fifth of the information in corporate yield spreads is traced to innovations in sovereign bonds; and most of these effects are due to discovery and spanning of systematic risks. Further, issuance of sovereign bonds, controlling for endogeneity of market-timing decisions, lowers corporate yield and bid-ask spreads. Our results indicate that sovereign securities act as benchmarks and suggest they promote a vibrant corporate bond market.
Brian Boyer, Tomomi Kumagai, and Kathy Yuan, How Do Crises Spread? Evidence from Accessible and Inaccessible Stock Indices, The Journal of Finance, 61 (2): 957-1003, 2006.
Abstract: We provide empirical evidence that stock market crises are spread globally through asset holdings of international investors. By separating emerging market stocks into two categories, those eligible for purchase by foreigners (accessible) and those that are not (inaccessible), we estimate and compare the degree to which accessible and inaccessible stock index returns co-move with the crisis country index returns. Our results show greater co-movement during high volatility periods, especially for accessible stock index returns, suggesting that crisis spread through the asset holdings of international investors rather than through changes in fundamentals.
Kathy Yuan, Lu Zheng, and Qiaoqiao Zhu, Are Investors Moonstruck? Lunar Phases and Stock Returns, The Journal of Empirical Finance,13 (1): 1-23, 2006.
Abstract: This paper investigates the relation between lunar phases and stock market returns of 48 countries. The findings indicate that stock returns are lower on the days around a full moon than on the days around a new moon. The magnitude of the return difference is 3% to 5% per annum based on analyses of two global portfolios: one equal-weighted and the other value-weighted. The return difference is not due to changes in stock market volatility or trading volumes. The data show that the lunar effect is not explained away by announcements of macroeconomic indicators, nor is it driven by major global shocks. Moreover, the lunar effect is independent of other calendar-related anomalies such as the January effect, the day-of-week effect, the calendar month effect, and the holiday effect (including lunar holidays).
Kathy Yuan, Asymmetric Price Movements and Borrowing Constraints: A REE Model of Crisis, Contagion, and Confusion, The Journal of Finance 60 (1): 379-411, 2005.
Nominated for the 2005 Smith Breeden Prize.
Abstract: This study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints. Consistent with empirical observations, the model finds: (1) Crises can be caused by small shocks to fundamentals; (2) market return distributions are asymmetric; and (3) correlations among asset returns tend to increase during crashes. The model also predicts: (1) Crises and contagion are likely to occur after small shocks in the intermediate price region; (2) the skewness of asset price distributions increases with information asymmetry and borrowing constraints; and (3) crises can spread through investor borrowing constraints.
Kathy Yuan, The Liquidity Service of Benchmark Securities, The Journal of the European Economic Association 3 (5): 1156 - 1180, 2005.
Abstract: We demonstrate that benchmark securities allow heterogeneously informed investors to create trading strategies that are perfectly aligned with their signals. Investors who are informed about security-specific risks but uninformed about systematic risks can take an offsetting position in benchmark securities to eliminate exposure to adverse selection in systematic risks, while investors who are informed about systematic risks but uninformed about security-specific risks can trade systematic risks exclusively using benchmark securities. We further show that introduction of benchmark securities encourages more investors to acquire both security-specific and systematic-factor information, which leads to increased liquidity and price informativeness for all individual securities.
Permanent Working Paper:
Policy Papers:
A Financial Regulatory Regime Reform Template to Ensure Financial Stability for the Chinese Economy with Philipp Paech, Dong Lou and Hao Zhou (March 2018)
A Distributed Ledger System to Settle Payments between Israel and the West Bank with Priscilla Toffano (April 2019)
LSE Seminar/Conferences/Public Lectures
Capital Markets Workshop (Wednesdays)
FMG London Financial Regulation Seminar (Mondays)
PhD Seminar (Thursdays)
Economic Theory Seminar (Thursdays)
Money-Macro Workshop (Tuesdays)
Management Seminar (Fridays)
Adam-Smith Asset Pricing Conference: Programs
Paul Woolley Centre Conference