Department of Finance
London School of Economics and Political Science
Tel: +44 (0)20 7955 6407
Fax: +44 (0)20 7849 4647.
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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 research focuses on developing new asset pricing theories with heterogeneous 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 modeling systematic risk using network theory, studying higher order beliefs and strategic complementarities in the financial market, building dynamic and multi-asset REE models of asset prices with short-sale and borrowing constraints, constructing new metrics for performance evaluations, and developing new asset pricing tests based on revealed beliefs in investor portfolio holdings.
She is a member of FMG, CEPR and has recently received Houblon-Norman Fellowship at the Bank of England.
Publications and Accepted Manuscripts
Emre Ozdenoren and Kathy Yuan, Contractual Externalities and Systemic Risk, accepted at Review of Economic Studies.
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. Con- tractual 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 ex- pected 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.
Goldstein, Itay, 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.
Goldstein, Itay, Emre Ozdenoren, and Kathy Yuan, Learning and Complementarities in Speculative Attacks, Review of Economic Studies, 78(1), 263-292, January 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
Gupta, Nandini 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.
Ozdenoren, Emre 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.
Dittmar, Robert F. 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.
Boyer, Brian, 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.
Yuan, Kathy, 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).
Yuan, Kathy, 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.
Yuan, Kathy, 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:
The Price Impact of Borrowing and Short-Sale Constraints (Latest version: September 2006)
Securities Trading under Asymmetric Information and Trading Constraints (Last Revision, August 2004) (This is the theory part of my job market paper. Earlier versions of this paper were circulated with the title "A Non-linear Rational Expectations Equilibrium Model for Single or Multi-Asset Securities Markets." It has been evolved into several working papers. The latest version of this paper is available upon request.)
LSE Seminar/Conferences/Public Lectures
Capital Markets Workshop (Wednesdays)
FMG Lunchtime Seminar (Wednesdays)
FMG London Financial Regulation Seminar (Mondays)
PhD Seminar (Thursdays)
Economic Theory Seminar (Thursdays)
Money-Macro Workshop (Tuesdays)
Management Seminar (Fridays)
FMG Public Lectures
Adam-Smith Asset Pricing Conference: Programs
Paul Woolley Centre Conference