Diversification through pooling and tranching securities was supposed to mitigate creditor runs in financial institutions by reducing their credit risk, yet many financial institutions holding diversified portfolios experienced creditor runs in the recent financial crisis of 2007-2009. We...

This paper develops a tractable dynamic model to study bank runs in a financial system, featuring the linkage between bank runs and asset market prices. The model speaks to the evolution of a systemic crisis. In our model economy, there are many banks and they share a common asset market. The...

This paper studies how financial information frictions can generate sentiment-driven fluctuations in asset prices and self-fulfilling business cycles. In our model economy, exuberant financial market sentiments of high output and high demand for capital increase the price of capital, which...

We model the interplay between trade in the interbank market and creditor runs on financial institutions. We show that the feedback between them can amplify a small shock into "interbank market freezing" with "liquidity evaporating". Credit crunches of the interbank market drive up the interbank...

How do exchange-traded funds (ETFs) influence real investment policies? We find that ETF ownership is associated with an increase in the sensitivity of real investment to Tobin's q. This implies a managerial learning channel, wherein higher ETF ownership increases price informativeness about...

This paper studies how financial information frictions can generate sentiment-driven fluctuations in asset prices and self-fulfilling business cycles. In our model economy, exuberant financial market sentiments of high output and high demand for capital increase the price of capital, which...

This paper presents a model to study the transmission of liquidity shocks across financial institutions through the creditor channel. In the model, a borrower institution obtains funds from a large institutional lender and small investors. When the large lender's asset market is hit by a...

This paper documents a hallmark feature of China's state capitalism as the state controlling the economy in a vertical economic structure: State-owned enterprises (SOEs) monopolize key industries and markets in the upstream, whereas the downstream industries are largely open to private...

Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known unique fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions...

Uncertainty in both financial markets and the real economy rises sharply during recessions. We develop a model of informational interdependence between financial markets and the real economy, linking uncertainty to information production and aggregate economic activities. We argue that there...