Gaiyan Zhang - Academia.edu (original) (raw)
Papers by Gaiyan Zhang
This paper develops a theoretical framework in which asset linkages in a syndicated loan agreemen... more This paper develops a theoretical framework in which asset linkages in a syndicated loan agreement can infect a healthy bank when its partner bank fails. We investigate how capital constraints affect the choice of the healthy bank to takeover or liquidate the exposure held jointly with the failing bank, and how the bank’s ex ante optimal capital holding and possibility of contagion are affected by anticipation of bail-out policy, capital requirements and the joint exposure. We identify a range of factors that strengthen or weaken the possibility of contagion and bailout. Recapitalization with common stock rather than preferred equity injection dilutes existing shareholder interests and gives the bank a greater incentive to hold capital to cope with potential contagion. Increasing the minimum regulatory capital does not necessarily reduce contagion, while the requirement of holding conservation capital buffer could increase the bank’s resilience to avoid contagion.
This study examines the information transfer effect of credit events across the industry, as capt... more This study examines the information transfer effect of credit events across the industry, as captured in the Credit Default Swaps (CDS) and stock markets. Positive correlations across CDS spreads imply dominant contagion effects, whereas negative correlations indicate competition effects. We find strong evidence of dominant contagion effects for Chapter 11 bankruptcies and competition effect for Chapter 7 bankruptcies. We also introduce a purely unanticipated event, which is a large jump in a company's CDS spread, and find that this leads to the strongest evidence of credit contagion across the industry. These results have important implications for the construction of portfolios with credit-sensitive instruments. JEL Classifications: G14 (Market Efficiency), G18 (Policy and Regulation), G33 (Bankruptcy)
This paper traces non-synchronicity of corporate credit default swap (CDS) spreads in a multi-fac... more This paper traces non-synchronicity of corporate credit default swap (CDS) spreads in a multi-factor international asset pricing setting. Evidence portrays a significant role of country-level creditor control rights (CR) inversely affecting CDS non-synchronicity and thereby firm-specific information production. This could reflect a weakened monitoring incentive by creditors or debtors strategically disclosing information to avoid creditors’ intervention. This “dark side” of CR are concentrated in firms with a high level of firm risk, investment intensity, and information opacity. Additionally, local cultural attitudes, e.g., trust and uncertainty tolerance, intensify the adverse effects of CR. A difference-in-difference analysis shows that exogenous pro-creditor reforms lead to an economically sizeable decline in CDS non-synchronicity, confirming the cross-country evidence.
SSRN Electronic Journal
We examine the impact of the COVID-19 pandemic on CDS spreads of companies around the world. We f... more We examine the impact of the COVID-19 pandemic on CDS spreads of companies around the world. We find that the pandemic-induced increases in corporate CDS spreads are concentrated in firms with higher leverage, non-investment-grade rating, lower profitability, and higher stock volatility. Further analysis shows that increases in CDS spreads are smaller for firms with employee health policies in place, better corporate social responsibility performance, stronger corporate governance, and operating in industries less affected by social distancing. Lastly, our results reveal that the successful vaccine trials and national policies including income support packages, lockdown policies and health policies help to reduce corporate CDS spreads.
SSRN Electronic Journal
This research analyzes how experiencing a natural disaster influences individual investor trading... more This research analyzes how experiencing a natural disaster influences individual investor trading in the stock market. Exploiting a unique stock trading dataset of retail investors in Taiwan, we determine that individual investors who experienced major natural disasters trade more aggressively and earn abnormal returns than do those who lack such experience. Difference-in-Difference analysis confirms our finding. Furthermore, this effect is considerably stronger for stocks preferred by individual investors. Our results imply that individual investors who experience major natural disasters become more risk-tolerant. Our finding is further corroborated by tests based on disease and fire experiences.
Journal of International Money and Finance
We investigate the impact of deposit insurance schemes on banks' credit risk – a predictor of... more We investigate the impact of deposit insurance schemes on banks' credit risk – a predictor of failure and a key element in the current financial crisis. Unlike most studies, which use balance sheet measurements of risk, we adopt a forward-looking and market-based measure of bank credit risk: the credit default swap (CDS) spread. We find that banks in countries with explicit deposit insurance systems have higher CDS spreads, supporting the “moral hazard” view. The results suggest that deposit insurance design features that lessen the adverse impact are risk-adjusted premium, coinsurance systems, government-established systems, “risk-minimizing” systems, and systems with dual-funding sources. Full coverage appears to stabilize bank risk only during the financial crisis period. More stringent bank regulation, such as capital adequacy regulation and independent supervision, could reduce the undesirable impact of deposit insurance. Deposit insurance seems to help stabilize volatile markets, as evidenced during the financial crisis and in countries with greater market volatility. In addition, we find that the adverse impact of deposit insurance on bank credit risk is more pronounced for banks with low asset quality and low liquidity.
The Journal of Alternative Investments, 2008
This paper explores the imbalance between China’s real estate market, which is booming, and the s... more This paper explores the imbalance between China’s real estate market, which is booming, and the stock market, which has plunged over four years. Our empirical analysis shows that the two markets are systematically negatively related due to fund flows. The plummeting stock indexes are partly caused by the surge of property market. In the meantime, the stock composite index is found to be significant in explaining housing price movements, which are also affected by inflation rate and hot money inflows. Policy measures redirecting influx of funds from the housing market to stock markets will help structural adjustment in stock markets, which is one of nation’s key tasks.
Journal of Financial Stability, 2015
This paper models the relationship between price and volume by tracking their adjustment path and... more This paper models the relationship between price and volume by tracking their adjustment path and speed in a world with heterogeneous investors. Motivated by widely observed information leakage in the stock market and fast-growing electronic communication networks (ECNs), the model features sequential information and direct order matching. I show that both the content and the dissemination speed of information are incorporated in price changes and volume accumulations simultaneously. A convergence trading strategy is proposed based on a joint statistic of price and volume, which should help to improve the timing of market entry and exit. The model offers an explanation for the mixed evidence on the relationship between price change and volume and provides several testable hypotheses.
SSRN Electronic Journal
This paper develops a theoretical framework in which contagion due to asset linkages arising from... more This paper develops a theoretical framework in which contagion due to asset linkages arising from a syndicated loan agreement may infect other healthy banks when a partner bank fails. We calibrate the process other banks go through in adjusting their optimal capital-asset ratio when they make choices between liquidating its investment in a joint project or taking over a failed partner’s loan. We examine the impacts of banks’ asset allocation, asset correlation, and the regulatory capital requirements on the re-adjusted capital-asset ratio, which determines banks’ optimal responses, survival likelihood, and government bailout cost. This study provides a possible operation tool to evaluate interbank contagion and theoretical support for the recently passed Basel III calling for banks to raise capital ratios.
This paper shows that studies of announcement effects of bond rating changes should take into acc... more This paper shows that studies of announcement effects of bond rating changes should take into account the initial rating. First, we provide theoretical support for different price effects as a non-linear function of the initial credit rating, using a structural, Merton-type model linking the change in default probability to the change in the stock price. Next, we show that this theoretical prediction is verified in the empirical data. We find much stronger stock price effects for bond rating changes for low-rated firms relative to high-rated firms. Accounting for the role of the initial rating explains in large part the puzzling empirical regularity that stock price effects are associated with downgrades but not upgrades. In addition, it eliminates the investment-grade barrier effect reported in previous studies.
International Journal of Services and Standards, 2014
We define risk containment in this study as the practice of retaining or attracting low business ... more We define risk containment in this study as the practice of retaining or attracting low business risk clients and dropping high business risk clients for revenue growth and litigation minimisation. We conduct a comprehensive study of the risk containment by the Big–4 accounting firms based on two market measures: (a) credit default swap (CDS) spread and (b) delisting ratios of their clients. We predict that the average risk of one Big–4 accounting firm's client portfolio is lower than that of the other three Big–4 firms. Results from a sample in 2002–2007 lend support to our prediction and are consistent with the notion that one Big–4 firm has better risk management practices than others. Further robustness tests still generate similar results. We further test our hypothesis with the delisting percentage of the Big–4 clients. The diverging trend after 2006 is consistent with our prediction too.
This paper investigates whether information asymmetry aects,corporate bond credit spreads. To gau... more This paper investigates whether information asymmetry aects,corporate bond credit spreads. To gauge the extent of information asymmetry, we use decomposed equity in- stitutional ownership based on the past investment and trading styles (Bushee(1998, 2001)). First, we detect that dierent institutional groups are associated with firms with varying degrees of information asymmetry. Moreover, we find that decomposed IOs contribute to
The Journal of Finance, 2009
Chinese Economy, 2006
ABSTRACT This article explores the imbalance between China's real estate market, which is... more ABSTRACT This article explores the imbalance between China's real estate market, which is booming, and the stock market, which has plunged over four years. Our empirical analysis shows that the two markets are systematically negatively related due to fund flows. The plummeting stock indexes are partly caused by the surge in the property market. In the meantime, the stock composite index is found to be significant in explaining housing-price movements, which are also affected by the inflation rate and hot money inflows. Policy measures redirecting the influx of funds from the housing market to the stock markets will help structural adjustment in stock markets, which is one of the nation's key tasks.
Chinese Economy, 2009
After the stock reforms in 2005, China's equity warrants market became the second-largest in ... more After the stock reforms in 2005, China's equity warrants market became the second-largest in terms of trading value after Germany and surpassed Hong Kong in 2006. The growth of the warrants market in China has been constrained by the gradual expiration of reform-related warrants, excessive speculation, and lack of understanding of the warrants market by its participants. The mechanism for creating special warrants designed as a transition to the development of covered warrants has been under hot debate. A more refined regulatory framework and a stronger institutional investor base are needed and are prerequisites for a well-functioning warrants market.
This paper develops a theoretical framework in which asset linkages in a syndicated loan agreemen... more This paper develops a theoretical framework in which asset linkages in a syndicated loan agreement can infect a healthy bank when its partner bank fails. We investigate how capital constraints affect the choice of the healthy bank to takeover or liquidate the exposure held jointly with the failing bank, and how the bank’s ex ante optimal capital holding and possibility of contagion are affected by anticipation of bail-out policy, capital requirements and the joint exposure. We identify a range of factors that strengthen or weaken the possibility of contagion and bailout. Recapitalization with common stock rather than preferred equity injection dilutes existing shareholder interests and gives the bank a greater incentive to hold capital to cope with potential contagion. Increasing the minimum regulatory capital does not necessarily reduce contagion, while the requirement of holding conservation capital buffer could increase the bank’s resilience to avoid contagion.
This study examines the information transfer effect of credit events across the industry, as capt... more This study examines the information transfer effect of credit events across the industry, as captured in the Credit Default Swaps (CDS) and stock markets. Positive correlations across CDS spreads imply dominant contagion effects, whereas negative correlations indicate competition effects. We find strong evidence of dominant contagion effects for Chapter 11 bankruptcies and competition effect for Chapter 7 bankruptcies. We also introduce a purely unanticipated event, which is a large jump in a company's CDS spread, and find that this leads to the strongest evidence of credit contagion across the industry. These results have important implications for the construction of portfolios with credit-sensitive instruments. JEL Classifications: G14 (Market Efficiency), G18 (Policy and Regulation), G33 (Bankruptcy)
This paper traces non-synchronicity of corporate credit default swap (CDS) spreads in a multi-fac... more This paper traces non-synchronicity of corporate credit default swap (CDS) spreads in a multi-factor international asset pricing setting. Evidence portrays a significant role of country-level creditor control rights (CR) inversely affecting CDS non-synchronicity and thereby firm-specific information production. This could reflect a weakened monitoring incentive by creditors or debtors strategically disclosing information to avoid creditors’ intervention. This “dark side” of CR are concentrated in firms with a high level of firm risk, investment intensity, and information opacity. Additionally, local cultural attitudes, e.g., trust and uncertainty tolerance, intensify the adverse effects of CR. A difference-in-difference analysis shows that exogenous pro-creditor reforms lead to an economically sizeable decline in CDS non-synchronicity, confirming the cross-country evidence.
SSRN Electronic Journal
We examine the impact of the COVID-19 pandemic on CDS spreads of companies around the world. We f... more We examine the impact of the COVID-19 pandemic on CDS spreads of companies around the world. We find that the pandemic-induced increases in corporate CDS spreads are concentrated in firms with higher leverage, non-investment-grade rating, lower profitability, and higher stock volatility. Further analysis shows that increases in CDS spreads are smaller for firms with employee health policies in place, better corporate social responsibility performance, stronger corporate governance, and operating in industries less affected by social distancing. Lastly, our results reveal that the successful vaccine trials and national policies including income support packages, lockdown policies and health policies help to reduce corporate CDS spreads.
SSRN Electronic Journal
This research analyzes how experiencing a natural disaster influences individual investor trading... more This research analyzes how experiencing a natural disaster influences individual investor trading in the stock market. Exploiting a unique stock trading dataset of retail investors in Taiwan, we determine that individual investors who experienced major natural disasters trade more aggressively and earn abnormal returns than do those who lack such experience. Difference-in-Difference analysis confirms our finding. Furthermore, this effect is considerably stronger for stocks preferred by individual investors. Our results imply that individual investors who experience major natural disasters become more risk-tolerant. Our finding is further corroborated by tests based on disease and fire experiences.
Journal of International Money and Finance
We investigate the impact of deposit insurance schemes on banks' credit risk – a predictor of... more We investigate the impact of deposit insurance schemes on banks' credit risk – a predictor of failure and a key element in the current financial crisis. Unlike most studies, which use balance sheet measurements of risk, we adopt a forward-looking and market-based measure of bank credit risk: the credit default swap (CDS) spread. We find that banks in countries with explicit deposit insurance systems have higher CDS spreads, supporting the “moral hazard” view. The results suggest that deposit insurance design features that lessen the adverse impact are risk-adjusted premium, coinsurance systems, government-established systems, “risk-minimizing” systems, and systems with dual-funding sources. Full coverage appears to stabilize bank risk only during the financial crisis period. More stringent bank regulation, such as capital adequacy regulation and independent supervision, could reduce the undesirable impact of deposit insurance. Deposit insurance seems to help stabilize volatile markets, as evidenced during the financial crisis and in countries with greater market volatility. In addition, we find that the adverse impact of deposit insurance on bank credit risk is more pronounced for banks with low asset quality and low liquidity.
The Journal of Alternative Investments, 2008
This paper explores the imbalance between China’s real estate market, which is booming, and the s... more This paper explores the imbalance between China’s real estate market, which is booming, and the stock market, which has plunged over four years. Our empirical analysis shows that the two markets are systematically negatively related due to fund flows. The plummeting stock indexes are partly caused by the surge of property market. In the meantime, the stock composite index is found to be significant in explaining housing price movements, which are also affected by inflation rate and hot money inflows. Policy measures redirecting influx of funds from the housing market to stock markets will help structural adjustment in stock markets, which is one of nation’s key tasks.
Journal of Financial Stability, 2015
This paper models the relationship between price and volume by tracking their adjustment path and... more This paper models the relationship between price and volume by tracking their adjustment path and speed in a world with heterogeneous investors. Motivated by widely observed information leakage in the stock market and fast-growing electronic communication networks (ECNs), the model features sequential information and direct order matching. I show that both the content and the dissemination speed of information are incorporated in price changes and volume accumulations simultaneously. A convergence trading strategy is proposed based on a joint statistic of price and volume, which should help to improve the timing of market entry and exit. The model offers an explanation for the mixed evidence on the relationship between price change and volume and provides several testable hypotheses.
SSRN Electronic Journal
This paper develops a theoretical framework in which contagion due to asset linkages arising from... more This paper develops a theoretical framework in which contagion due to asset linkages arising from a syndicated loan agreement may infect other healthy banks when a partner bank fails. We calibrate the process other banks go through in adjusting their optimal capital-asset ratio when they make choices between liquidating its investment in a joint project or taking over a failed partner’s loan. We examine the impacts of banks’ asset allocation, asset correlation, and the regulatory capital requirements on the re-adjusted capital-asset ratio, which determines banks’ optimal responses, survival likelihood, and government bailout cost. This study provides a possible operation tool to evaluate interbank contagion and theoretical support for the recently passed Basel III calling for banks to raise capital ratios.
This paper shows that studies of announcement effects of bond rating changes should take into acc... more This paper shows that studies of announcement effects of bond rating changes should take into account the initial rating. First, we provide theoretical support for different price effects as a non-linear function of the initial credit rating, using a structural, Merton-type model linking the change in default probability to the change in the stock price. Next, we show that this theoretical prediction is verified in the empirical data. We find much stronger stock price effects for bond rating changes for low-rated firms relative to high-rated firms. Accounting for the role of the initial rating explains in large part the puzzling empirical regularity that stock price effects are associated with downgrades but not upgrades. In addition, it eliminates the investment-grade barrier effect reported in previous studies.
International Journal of Services and Standards, 2014
We define risk containment in this study as the practice of retaining or attracting low business ... more We define risk containment in this study as the practice of retaining or attracting low business risk clients and dropping high business risk clients for revenue growth and litigation minimisation. We conduct a comprehensive study of the risk containment by the Big–4 accounting firms based on two market measures: (a) credit default swap (CDS) spread and (b) delisting ratios of their clients. We predict that the average risk of one Big–4 accounting firm's client portfolio is lower than that of the other three Big–4 firms. Results from a sample in 2002–2007 lend support to our prediction and are consistent with the notion that one Big–4 firm has better risk management practices than others. Further robustness tests still generate similar results. We further test our hypothesis with the delisting percentage of the Big–4 clients. The diverging trend after 2006 is consistent with our prediction too.
This paper investigates whether information asymmetry aects,corporate bond credit spreads. To gau... more This paper investigates whether information asymmetry aects,corporate bond credit spreads. To gauge the extent of information asymmetry, we use decomposed equity in- stitutional ownership based on the past investment and trading styles (Bushee(1998, 2001)). First, we detect that dierent institutional groups are associated with firms with varying degrees of information asymmetry. Moreover, we find that decomposed IOs contribute to
The Journal of Finance, 2009
Chinese Economy, 2006
ABSTRACT This article explores the imbalance between China's real estate market, which is... more ABSTRACT This article explores the imbalance between China's real estate market, which is booming, and the stock market, which has plunged over four years. Our empirical analysis shows that the two markets are systematically negatively related due to fund flows. The plummeting stock indexes are partly caused by the surge in the property market. In the meantime, the stock composite index is found to be significant in explaining housing-price movements, which are also affected by the inflation rate and hot money inflows. Policy measures redirecting the influx of funds from the housing market to the stock markets will help structural adjustment in stock markets, which is one of the nation's key tasks.
Chinese Economy, 2009
After the stock reforms in 2005, China's equity warrants market became the second-largest in ... more After the stock reforms in 2005, China's equity warrants market became the second-largest in terms of trading value after Germany and surpassed Hong Kong in 2006. The growth of the warrants market in China has been constrained by the gradual expiration of reform-related warrants, excessive speculation, and lack of understanding of the warrants market by its participants. The mechanism for creating special warrants designed as a transition to the development of covered warrants has been under hot debate. A more refined regulatory framework and a stronger institutional investor base are needed and are prerequisites for a well-functioning warrants market.