Kathy Yuan, Professor of Finance, London School of Economics and Political Science
Borrowers obtain liquidity by issuing securities backed by current period payoff and resale price of a long lived collateral asset. They are privately informed about the payoff distribution. Asset price can be self fulfilling: higher asset price lowers adverse selection, allows borrowers to raise more funding which makes the asset more valuable, leading to multiple equilibria. Optimal security design eliminates multiple equilibria, improves welfare, and can be implemented as a repo contract. Persistence in adverse selection lowers debt funding, generates volatility in asset price, and exacerbates credit crunch. The theory demonstrates the role of asset backed securities on the stability of market based financial systems.
Professor Yuan received her PhD in Economics from Massachusetts Institute of Technology. Prior to obtaining her PhD, she worked briefly in the Emerging Markets Trading Desk at J. P. Morgan (now JPMorgan-Chase). Her academic research focuses on developing macrofinance and asset pricing theories with liquidity implications in environments with information and market frictions and testing their empirical implications. In the past few years, she has examined how crises spread through international financial markets and how introducing benchmark securities such as treasury bonds or stock indices improves the overall market liquidity. She is currently working on issues related to liquidity and financial stability in bank and non bank financial institutions including defi, macro implications of digital payment technologies, and developing applied theories of money and public liquidity. She is a member of FMG, CEPR and has also received Houblon-Norman Fellowship at the Bank of England. She has also conducted policy research for central banks and financial market regulators.