Wenhao Li

RESEARCH + PUBLICATIONS

• Term Structure of Liquidity Premium

  Abstract

  We analyze the term structure of Treasury liquidity premium (LP). Through a model

  where illiquidity shocks are alleviated by holding Treasuries, we show that LP term

  structure is shaped by expectations of future market liquidity, liquidity term premium, and Treasury supply. As predicted, the LP term structure is downward-sloping

  in recessions but upward-sloping in booms, and forward LP predicts future LP and

  market liquidity. Furthermore, LP is quantitatively important for monetary policy

  pass-through: LP dampens the pass-through of interest rate policy yet strengthens

  the pass-through of quantitative easings. We also use LP to infer the term structure

  of Treasury safety premium.

  Author[s]

  • Scott Joslin
  • Wenhao Li
  • Yang Song

  Publication Date

  03.01.2021

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• The Demand for Money, Near-Money, and Treasury Bonds (R&R at RFS)

  Abstract

  Author[s]

  • Wenhao Li

  Publication Date

  01.01.2021

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• Dissecting Mechanisms of Financial Crises: Intermediation and Sentiment

  Abstract

  We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the post-crisis period characterized by a slow recovery in output. A pure amplification mechanism quantitatively matches the crisis and aftermath period but fails to match the pre-crisis evidence. Mixing sentiment and amplification allows the model to additionally match the pre-crisis evidence. We consider two versions of sentiment, a Bayesian belief updating process and one that overweighs recent observations. Both models match the crisis patterns qualitatively, while the non-Bayesian model better matches the pre-crisis froth quantitatively. Finally, we show that a lean-against-the-wind policy has a quantitatively similar impact in both versions of the belief model, indicating that policy need not condition on true beliefs.

  Author[s]

  • Wenhao Li

  Publication Date

  01.01.2020

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• The Distortionary Effects of Central Bank Direct Lending on Firm Quality Dynamics

  Abstract

  Author[s]

  • Wenhao Li

  Publication Date

  01.01.2020

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• Liquidity Premium and the Substitution Between Bank Deposits and Treasurys

  Abstract

  Author[s]

  • Wenhao Li

  Publication Date

  01.01.2019

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