Working Papers

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 (Under Review)

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:

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

The Macroeconomic Implications of Limited Arbitrage” (Under Review)

Previously circulated with the titles “Business Cycles and Arbitrage Cycles” and “Best Friend or Worst Enemy?”

We develop a tractable model to study the macroeconomic impacts of limited arbitrage through collateralization. Arbitrage activities and the business cycle are mutually enhancing; but their interaction can escalate unexpected shocks into arbitrage crashes and recession.  Through the interaction, we derive a micro-foundation for the endogenous, time-varying, negative borrowing rates and identify the relevant policy transmission channel. With regime shifts, we account for the non-linear aspects of crises and the slow and incomplete recoveries. Given the post-crisis regulatory reforms, we derive policy implications on liquidity provision, financial resilience and economic growth.

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

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 I and an extra parameter \epsilon, 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 I) to form forecasts. If the equilibrium distribution stays within \epsilon of the forecasted next-period distribution, the agent would consider it as \epsilon-stationary. In equilibrium, each agent maximizes utility with an \epsilon-stationary belief and markets clear. The main theorem of this paper shows that for any strictly positive \epsilon, 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 \epsilon.

Available at SSRN:

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

Arbitrage Run” joint with Runjie Geng

We investigate the channel through which fluctuations in the market liquidity of real-sector repo collateral cause arbitrage crashes and failure of systemically important intermediaries during the global financial crisis. Intermediaries pledge productive capital as repo collateral to fund the margin for their arbitrage positions. A tiny drop in the market liquidity of capital induces higher haircuts and forces arbitrageurs to collectively unwind trading positions, resulting in adverse price movements and losses. This further reduces the collateral value of arbitrage portfolios and triggers more fire-sales in both capital and arbitrage trades. This channel creates stronger amplification effects than in Brunnermeier and Pedersen (2009), and can easily incur a simultaneous repo run and arbitrage crashes, where liquidity in several markets dry up altogether. We also show that “flight-to-liquidity” effects in intermediaries’ collateral choices after the repo run prolong the real-sector recession.

Available at SSRN:

Presented or Accepted for Presentation at:

  • European Winter Meeting of the Econometric Society 2017, December 2017, Barcelona
  • Advanced Computational Economics and Finance Seminar, December 2017, Zurich
  • Finance Department Seminar at Vrije Universiteit Amsterdam, May 2020, Amsterdam

“Analytical Option Pricing under an Asymmetrically Displaced Double Gamma Jump-Diffusion Model”, joint with Matthias Thul

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:

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

Recent Posts

FAQs for the AD-DG Model

In a recent working paper, cited as Thul and Zhang (2014) below, we propose a novel jump-diffusion model whose jump sizes follow an asymmetrically displaced double gamma (AD-DG) distribution. In this blog post I discuss some of the feedback that we received during seminar and conference presentations. The collection is not exhaustive and will be extended from time to time.

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  1. Stochastic Volatility with AD-DG Jumps Leave a reply