“Presale Discounts and Risk Sharing: Theory and Evidence from the Hong Kong Real Estate Market” joint with Quan Gan, Maggie Rong Hu, and Yang Shi (R&R at Journal of Financial Stability)
Abstract:
Real estate developers face significant risks in managing new developments, and presale contracts are commonly used to shift these risks to buyers. We develop a theoretical model to show that presale prices are an increasing function of time and that earlier presales are associated with greater discounts, reflecting the tradeoff between risk sharing benefits and presale prices. Using comprehensive presale transaction data in Hong Kong, we find an upward-sloping presale price-time relationship. This relationship is stronger for developers with weaker financial conditions and concentrated businesses in Hong Kong, as well as for listed developers. We also find that the Hong Kong government’s cooling intervention decreases the presale price-time sensitivity. Our study contributes to the literature on risk sharing in real estate development by providing new insights into the dynamics of presale prices and their implications for developers and policymakers.
Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4391486
Presented or Accepted for Presentation at:
- IFABS 2023, Oxford, July 2023, UK
- 2024 AREUEA Annual Conference (jointly with ASSA), January 2024, Sant Antonio, USA
- AsRES-GCREC 2023, July 2023, Hong Kong SAR, China
- AREUEA International Conference Cambridge 2023, July 2023, Cambridge, UK
“Price elasticity of demand in oligopoly games with N firms under distinct scale effects” joint with Xiaoliang Li and Jing Yang (R&R at Nonlinear Dynamics)
Abstract:
This paper examines the impact of price elasticity of demand on dynamic Cournot oligopoly games with 
firms operating under distinct scale effects. We consider a general isoelastic demand function and quadratic cost structures, allowing for increasing, constant, and decreasing returns to scale. Two adjustment mechanisms are analyzed: a gradient-based adjustment model (Model G) and a local monopolistic approximation (Model L). Despite differing adjustment processes, both models share an identical equilibrium equation, which is transcendental and lacks a closed-form solution. We establish the existence and uniqueness of equilibrium under decreasing or constant returns to scale, while under increasing returns to scale, Model G may admit multiple equilibria. A comparative static analysis reveals that higher demand elasticity leads to divergent firm strategies: firms with limited supply maintain high-price, niche strategies, whereas mass-market firms lower prices and expand output. Additionally, we analyze local stability and bifurcation behavior, demonstrating that price elasticity and cost structures significantly influence market dynamics. Our findings extend classical oligopoly theory by incorporating variable demand elasticity and non-constant marginal costs, providing new insights into equilibrium stability and firm strategy in dynamic oligopolies.
“PPO and Research Joint Venture” joint with Mingqing Xing (R&R at Scottish Journal of Political Economy)
Abstract:
We examine the welfare implications of PPO when it endogenously induces R&D information sharing in a duopoly. We find that when information permeability is low, PPO acts as a collusion device. However, when permeability is high and ownership stakes are large, PPO functions as an implicit research joint venture. In this regime, the dynamic efficiency gains from technological diffusion outweigh the static allocative inefficiency of market power, resulting in a simultaneous increase in innovation, consumer surplus, and social welfare. Consequently, antitrust authorities should adopt a rule-of-reason approach, distinguishing between efficiency-enhancing PPO in high-tech sectors and rent-seeking arrangements in mature industries.
“Environmental R&D cooperation and emission tax policy” joint with Mingqing Xing and Sang-Ho Lee (R&R at Economics of Innovation and New Technology)
Abstract:
We study the intensity of market competition within a theoretical framework of relative profit performance (RPP) competition and compares the impacts of different emission tax policy timings on firms’ environmental R&D (ER&D) cooperation. We find that cooperative ER&D levels are higher than non-cooperative ER&D levels under a committed emission tax. In contrast, cooperative efforts may be lower under a time-consistent emission tax, depending on the RPP competition and spillover parameters. We also demonstrate that firms consistently prefer cooperative ER&D under the time-consistent tax but may not do so under the committed tax. Furthermore, cooperative ER&D is socially desirable when both the RPP competition and spillover parameters are small under the time-consistent tax, or high under the committed tax. Our findings emphasize the importance of carefully delineating antitrust laws in conjunction with emission tax policies to avoid impeding ER&D cooperation, which could otherwise deter firms from participating in collaborative green initiatives.
“Green Goodwill and Effectiveness of Carbon Abatement Policies: Static and Dynamic Perspectives” joint with Xiaoliang Li (R&R at Economic Modelling)
Abstract:
This study investigates the effectiveness of carbon abatement policies in a Cournot duopoly framework, incorporating static and dynamic analysis. We evaluate four policy interventions— enhancing consumer green awareness, promoting corporate environmental responsibility, reducing carbon abatement costs, and increasing carbon tax rates—and their effects on firms’ environmental, economic, and social performance. A static model reveals equilibrium outcomes driven by consumer preferences for firms’ green goodwill, while a dynamic extension, incorporating bounded rationality, explores market stability. Our findings underscore the importance of balancing green innovation incentives with mechanisms to maintain stability, offering insights for effective and sustainable policy design in competitive markets.
Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5065181
“Best reply VS local monopolistic approximation” joint with Xiaoliang Li and Bo Huang
Abstract:
Analyzing the stability of firms’ adjustment mechanisms has been an active topic in the study of dynamic oligopoly games. This paper focuses on two boundedly rational mechanisms: the best reply mechanism and the local monopolistic approximation mechanism. A main contribution of our study is to demonstrate that the local monopolistic approximation mechanism with less information is more stable under fairly general conditions.
“The Micro-foundation of Arbitrage” joint with Xiaoliang Li
Previously circulated with the titles “Business Cycles and Arbitrage Cycles” and “Best Friend or Worst Enemy?”
Presented or Accepted for Presentation at:
- SFS Cavalcade North America conference, online
- SED, Barcelona, Spain
- AEA-North American Winter Meeting of the Econometric Society, San Diego, USA
“Recursive equilibria in dynamic economies with bounded rationality” joint with Runjie Geng
Abstract:
This paper provides a general framework to model bounded rationality in dynamic stochastic general equilibrium models with infinitely lived heterogeneous agents. A boundedly rational agent is associated with an information set 
and an extra parameter 
, which can be interpreted as the “level of irrationality”. To make decisions, the boundedly rational agent forms a belief of a stationary joint distribution of the exogenous and endogenous variables and uses the marginal distribution (conditional on ) to form forecasts. If the equilibrium distribution stays within of the forecasted next-period distribution, the agent would consider it as -stationary. In equilibrium, each agent maximizes utility with an -stationary belief and markets clear. The main theorem of this paper shows that for any strictly positive , a recursive equilibrium exists. With a quantifiable “level of irrationality”, the model incorporates many behavioral economics models as well as rational-expectations models with computational approximations into a unified framework. An illustration example is presented to show that the boundedly rational recursive equilibrium may substantially enrich the asset pricing dynamics of the rational-expectations model even for small .
Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3837485
Presented or Accepted for Presentation at:
- SED 2019,
- Lancaster University Management School, Feb 2018, Lancaster, UK
- Swiss Finance Institute Research Day 2017, June 2017, Gerzensee, Switzerland
- Institute for Banking & Finance Brown Bag Seminar, March 2018, University of Zürich, Zürich, Switzerland
“Analytical Option Pricing under an Asymmetrically Displaced Double Gamma Jump-Diffusion Model”, joint with Matthias Thul (Under Review)
Abstract:
We generalize the Kou (2002) double exponential jump-diffusion model in two directions. First, we independently displace the two tails of the jump size distribution away from the origin. Second, we allow for each of the displaced tails to follow a gamma distribution with an integer-valued shape parameter. Both extensions introduce additional flexibility in the tails of the corresponding return distribution. Our model is supported by an equilibrium economy and we obtain closed-form solutions for European plain vanilla options. Our valuation function is computationally fast to evaluate and robust across the full parameter space. We estimate the physical model parameters through maximum likelihood and for a diverse sample of equities, commodities and exchange rates. For all assets under consideration, the original Kou (2002) model can be rejected in favor of our newly introduced asymmetrically displaced double gamma dynamics.
Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2311673
Presented or Accepted for Presentation at:
- University of New South Wales Brown Bag Seminar, April 2013, Sydney
- 26th Australasian Finance & Banking Conference, December 2013, Sydney
- Institute for Banking & Finance Brown Bag Seminar, March 2014, Zürich
- Advances in Computational Economics and Finance, March 2014, Zürich
- 11th German Probability and Statistics Days, March 2014, Ulm
- Southwestern Finance Association 2014 Annual Conference, March 2014, Dallas
- 50th Anniversary Meeting of the Eastern Finance Association, April 2014, Pittsburgh
— The Chicago Trading Company Outstanding Paper in Derivatives Award — - 17th Annual Conference of the Swiss Society for Financial Market Research, April 2014, Zürich
- 8th World Congress of the Bachelier Finance Society, June 2014, Brussels
- 2014 FMA European Conference, June 2014, Maastricht