Research

Publications

Corporate Bond Multipliers: Substitutes Matter

Manav Chaudhary, J. Zhiyu Fu, and Jian Li

accepted at the Review of Financial Studies

2026

Awards: TADC's AQR Asset Management Institute Prize for best economics paper

Presentations: NBER SI 2023 Asset Pricing, Columbia Business School, Trans-atlantic Doctoral Conference 2023, David Backus Memorial Conference on Macro-Finance, AFFECT 2023 mentorship workshop

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Many economic questions require estimating the price impact of demand shifts in the bond market. In spite of corporate bonds having salient characteristics that distinguish close versus distant substitutes, existing estimates of corporate bond multipliers (the price increase in response to demand shifts) typically assume that all bonds, regardless of their characteristics, are equally good substitutes. In this paper, we show that accounting for the heterogeneous substitutability between bonds is critical for estimating multipliers. By allowing rich heterogeneous substitution patterns among bonds, we demonstrate that security-level multipliers are an order of magnitude smaller than previously estimated and are essentially zero. Nonetheless, aggregated portfolios exhibit substantially larger multipliers, reflecting the reduced availability of near substitutes for more aggregated portfolios. Furthermore, we find that the price impact reverts after a quarter, and that the multiplier is larger for high-yield bonds, longer-maturity bonds, and bonds with greater arbitrage risks.
The Convenience Yield, Inflation Expectations, and Public Debt Growth

J. Zhiyu Fu, Jian Li, and Yinxi Xie

The Review of Financial Studies, 2025

2025

Presentations: MFA 2023, 2022 CEA annual conference, Summer Institute of Finance (SAIF, Shanghai) 2022, Midwest Macro Meeting, 2022

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U.S. long-term Treasury debt serves the important role of safe and liquid assets in the economy, hence carrying significant convenience yields. We present two new findings relating the convenience yield to inflation and government fiscal policy. First, the convenience yield of Treasury debt is negatively correlated with inflation expectations. Second, inflation expectations predict future debt-to-GDP growth at different horizons. To explain these findings, we incorporate convenience yields into a staggered-price model with a non-Ricardian fiscal policy. The convenience yield for long-term debt is the discounted value of future convenience service flows, thus negatively correlated with future debt supply. Furthermore, a government deficit shock leads to both higher debt in the future as well as higher expected inflation simultaneously. The model rationalizes the two empirical findings and provides a natural framework to study the interactions among inflation, debt growth, and cost of borrowing, particularly the convenience yield component.

Working Papers

Which Intermediary Costs Matter for Asset Prices?

Manav Chaudhary, J. Zhiyu Fu, and Jian Li

2026

Presentations: Bank of England, Bayes Business School, Booth Banking Workshop, Bridging Theory and Empirical Research in Finance Conference, Columbia Business School, David Backus Memorial Conference on Macro-Finance, Demand in Asset Markets workshop, HEC Paris, Imperial College, Frankfurt School, London Junior Conference, London School of Economics, Goethe University, Olin Business School, University College London, and WAPFIN

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When intermediaries such as dealers lack the balance-sheet capacity to absorb investor demand, asset prices deviate from fundamentals. Arbitrage spreads (e.g., Treasury-OIS spreads) are widely used to diagnose such distortions. Yet, it is the overall level of prices (e.g., Treasury yields) that ultimately governs borrowing costs and monetary policy transmission, not spreads. It remains unclear whether spreads accurately capture distortions in these levels. We develop a model where intermediaries face two costs: one proportional to portfolio risk, another tied to gross position size. Gross position costs predominantly drive spread distortions; risk costs primarily drive price-level distortions. The theory delivers a sufficient statistic: differences in the rate at which price levels and spreads revert after a demand shock separately identify these costs. We apply this framework to U.S. Treasury and OIS markets using high-frequency demand shocks identified from Treasury auctions. Risk costs dominate on average: demand shocks move yields substantially while leaving spreads largely unchanged. A calibrated model reinforces the disconnect: relaxing position costs such as the supplementary leverage ratio sharply reduces spread volatility with little effect on yield volatility, while easing risk-based costs does the reverse. Overall, spreads alone miss the dominant source of price-level distortions.
Rethinking Volume: The Illusion of Liquidity

Philippe van der Beck, Lorenzo Bretscher, J. Zhiyu Fu

revise & resubmit at the Review of Financial Studies

2026

Presentations: Demand in Asset Markets Workshop, 11th BI-SHOF Conference on Asset Pricing and Financial Econometrics, Harvard Business School, the University of Hong Kong (HKU), the Hong Kong University of Science and Technology (HKUST)

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We document a striking fact: While gross trading volume has increased fivefold since 1980, net volume -- trading from persistent portfolio reallocations, which excludes transitory round-trip trades -- has remained largely unchanged. Our evidence suggests that the rise in transitory round-trip trades is driven primarily by high-frequency intermediation. While this activity has enhanced high-frequency liquidity, it has not materially altered long-term liquidity. Consistent with the widening gap between gross and net trading volume, we find that long-term liquidity have largely remained stable over the past four decades, while high-frequency liquidity measures have significantly improved. In both cross-sectional and time-series applications, we further demonstrate that net volume better captures liquidity for long horizons than gross volume. Together with the stable net volume, this corroborates our argument that long-term liquidity in the U.S. equity market has not materially changed.
A Bound on Price Impact and Disagreement

Philippe van der Beck, Lorenzo Bretscher, and J. Zhiyu Fu

revise & resubmit

2025

Awards: Best Paper in Asset Pricing, SFS Cavalcade North America 2026

Presentations: Demand in Asset Markets Workshop, Harvard Business School, the University of Hong Kong (HKU), and the Hong Kong University of Science and Technology (HKUST), the 11th BI-SHOF Conference on Asset Pricing and Financial Econometrics, Yale Junior Finance Conference, Olin Business School, Minnesota Junior Finance Conference, Kellogg School of Management, and Federal Reserve Bank of St. Louis

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Asset prices are highly volatile, yet portfolio flows – changes in portfolio holdings – are relatively small. This reveals a fundamental tension between the price impact of portfolio flows and the agreement among investors: if price volatility is high while portfolio turnover is low, then either market participants largely agree with each other, or they are not sensitive to price changes (they are "inelastic"), resulting in large price impacts of portfolio flows. We formalize this trade-off and demonstrate that the ratio of return volatility to portfolio turnover provides a lower bound on price impact, conditional on the level of investor disagreement. Using several measures from survey data, we document substantial disagreement, implying meaningful lower bounds on price impacts. The bounds align closely with reduced-form estimates from a variety of quasi-experiments, such as price impacts from index reconstitutions. We demonstrate how these bounds vary across horizons, different assets, and at various levels of aggregation, including the aggregate stock market, and discuss their implications for asset pricing models. We argue that in such markets with high disagreement and price impact, observed trading activity is not peripheral but central to understanding asset price movements.
Anatomy of the Treasury Market: Who Moves Yields?

Manav Chaudhary, J. Zhiyu Fu, and Haonan Zhou

2024

Awards: Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade Asia-Pacific 2025

Presentations: HKUST, Bank of Canada, Brown University, HBS Junior Finance Conference (2025), UCLA Conference on Financial Markets (2025), University of Zurich, The Chicago Booth Treasury Markets Conference (2025), Second UIC Finance Conference, the 2025 OFR Rising Scholar Conference, 2025 Sovereign Bond Markets International Conference, NBER SI Asset Pricing (2025), EFA 2025, University of Virginia, Fixed Income and Financial Institutions 2025

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We develop a novel quantity-based framework to study the drivers of U.S. Treasury yields. Our method allows for flexible identification of price and factor sensitivities for heterogeneous investors in a demand-supply model using granular idiosyncratic shocks. Overall, a 1 percent demand increase for U.S. Treasury notes and bonds results in a 1 percent increase in prices, equivalent to a 10 basis points decline for the ten-year yield. We uncover substantial heterogeneity across investors and regimes in sectors' sensitivity to Treasury yield changes and aggregate factors. Using the estimated model, we decompose changes in Treasury yields over the past two decades, and document three main findings: (i) Contrasting to the conventional wisdom, foreign investors contribute little to Treasury price appreciation during flight-to-safety episodes; (ii) U.S. banks and foreign investors becomes more price insensitive after the global financial crisis, while the Federal Reserve has stepped up its role as a state-contingent liquidity provider; (iii) while major foreign Treasury holders are the biggest contributor to Treasury yield compression before the financial crisis, the influence of foreign demand on Treasury yields has substantially weakened since 2010.
Capital Flows and the Making of Risky Currencies

J. Zhiyu Fu

revise & resubmit at the Review of Financial Studies

2024

Awards: BlackRock's Applied Research Award Finalist (2023), Best PhD Student Paper Award at Young Scholars Finance Consortium (2024)

Presentations: Colorado Finance Summit Job Market Session 2023, Yiran Fan Memorial Conference 2023, 18th Economics Graduate Students' Conference, 2024 Young Scholars Finance Consortium, 2024 BFI International Macro-Finance Conference

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I show that currency risk is explained by the relative flightiness of foreign capital flows across countries' external assets and liabilities. Foreign flows are "flighty": foreign investors withdraw capital more aggressively than domestic investors in global drawdowns, with flightiness varying across asset classes and issuing countries. I develop a model in which a currency is risky when its external liabilities face flightier flows than its external assets. I construct "net asset flightiness"—external assets minus liabilities weighted by their asset-specific flightiness—and show it strongly correlates with currency risk in the cross-section.

Permanent Working Papers

Risk-Based Regulations in Credit Markets: A Heterogeneous Risk Accelerator

J. Zhiyu Fu

2023

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Credit markets in the U.S. are dominated by institutional investors, whose risk capacity is limited by various risk-based regulations. I study the macroeconomic implications of such risk-based regulations in a general-equilibrium model featuring firms with heterogeneous credit risks and a bond investor subject to risk-based constraints. During economic downturns, these risk-based constraints become a heterogeneous risk accelerator: It increases the debt financing cost for risky firms, amplifying their default risk, while generating convenience yields for the safest firms. In aggregate, these constraints significantly amplify the drop in investment and output. I evaluate the effects of credit market intervention programs using this framework. I find that during credit market disruptions, credit facilities mitigate the initial damage and speed up the follow-up recovery.
The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S.

J. Zhiyu Fu, Greg Kaplan, Benjamin Moll, and Giovanni L. Violante

2020

Presentations: Bank for International Settlements 2022, International Monetary Fund 2021, Mean Field Games in Economics 2020, Conference on Monetary Policy and Heterogeneity 2020, Banco Central de Chile 2020

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We provide a quantitative analysis of the trade-offs between health outcomes and the distribution of economic outcomes associated with alternative policy responses to the COVID-19 pandemic. We integrate an expanded SIR model of virus spread into a macroeconomic model with realistic income and wealth inequality, as well as occupational and sectoral heterogeneity. In the model, as in the data, economic exposure to the pandemic is strongly correlated with financial vulnerability, leading to very uneven economic losses across the population. We summarize our findings through a distributional pandemic possibility frontier, which shows the distribution of economic welfare costs associated with the different aggregate mortality rates arising under alternative containment and fiscal strategies. For all combinations of health and economic policies we consider, the economic welfare costs of the pandemic are large and heterogeneous. Thus, the choice governments face when designing policy is not just between lives and livelihoods, as is often emphasized, but also over who should bear the burden of the economic costs. We offer a quantitative framework to evaluate both trade-offs.