Recently, the Ministry of Education announced the Ninth Higher Education Scientific Research Outstanding Achievement Awards (Humanities and Social Sciences). Three faculty members from the Tsinghua University PBC School of Finance were honored with this prestigious award:

The second prize for scholarly articles:

-Associate Professor Zhou Zhen, "Diffusing Coordination Risk";

The Youth Achievement Award:

-Associate Professor Chen Zhuo, "The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes";

-Associate Professor Shi Zhan, "Time-Varying Ambiguity, Credit Spreads, and the Levered Equity Premium"

The Higher Education Scientific Research Outstanding Achievement Awards (Humanities and Social Sciences) are established by the Ministry of Education to award the outstanding achievements made by those in the humanities and social sciences across national universities. The awards are announced every three years, including scholarly articles, consulting service reports, popular science works, and youth achievements award. The Higher Education Scientific Research Outstanding Achievement Awards (Humanities and Social Sciences) is among the most credible and influential awards in the field of philosophy and social sciences in China.

Introduction to the papers:

Diffusing Coordination Risk

Authors:

ZHOU Zhen, Associate Professor, Tsinghua PBCSF

Deepal BASAK, Assistant Professor, Kelley School of Business, Indiana University

Abstract:

In a regime change game, privately informed agents sequentially decide whether to attack without observing others' previous actions. To dissuade them from attacking, a principal adopts a dynamic information disclosure policy, frequent viability tests. A viability test publicly discloses whether the regime has survived the previous attacks. When such tests are sufficiently frequent, in the unique cutoff equilibrium, agents never attack if the regime passes the latest test, regardless of their private signals. We apply this theory to demonstrate that a borrower can eliminate panic-based runs by sufficiently diffusing the rollover choices across different maturity dates.

The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes

Authors:

CHEN Zhuo, Associate Professor, Tsinghua PBCSF

HE Zhiguo, James Irvin Miller Professor of Finance, Stanford Graduate School of Business

LIU Chun, Associate Professor, School of Economic and Management, Tsinghua University

Abstract:

The upsurge of shadow banking is typically driven by rising financing demand from certain real sectors. In China, the 4 trillion yuan stimulus package in 2009 was behind the rapid growth of shadow banking after 2012, expediting the development of Chinese corporate bond markets in the post-stimulus period. Chinese local governments financed the stimulus through bank loans in 2009 and then resorted to nonbank debt financing after 2012 when faced with rollover pressure from bank debt coming due. Cross-sectionally, using a political-economy-based instrument, we show that provinces with greater bank loan growth in 2009 experienced more municipal corporate bond issuance during 2012-2015, together with more shadow banking activities including trust loans and wealth management products. China’s post-stimulus experience exhibits similarities to financial market development during the US National Banking Era.

Time-Varying Ambiguity, Credit Spreads and the Levered Equity Premium

Author:

SHI Zhan, Associate Professor, Tsinghua PBCSF

Abstract:

This paper studies the effects of time-varying Knightian uncertainty (ambiguity) on asset pricing in a Lucas exchange economy. Specifically, it considers a general equilibrium model where an ambiguity-averse agent applies a discount rate that is adjusted not only for the current magnitude of ambiguity but also for the risk associated with its future fluctuations. As such, both the ambiguity level and volatility help to raise the asset premiums and accommodate richer dynamics of asset prices. Based on a novel empirical measure of the ambiguity level, the estimated model can capture the empirical levels of corporate credit spreads and the equity premium while endogenously matching the historical default probability. More importantly, the model-implied credit spread and equity price-dividend ratio perform remarkably in tracking the time variations in their historical counterparts.