Xun Zhang

Synthetic CDO Pricing: The Perspective of Risk Integration

The underlying asset pool of collateral debt obligations (CDOs) simultaneously encompasses credit risk and market risk. However, the standard CDO pricing model not only underestimates the risk to the asset pool due to a poor description of the correlation structure among obligors but is also incapable of reflecting the impacts of interdependent markets, credit risks and systematic sudden shocks on the asset pool. This paper studies the joint impact of interrelated market and credit risk factors on the key inputs of CDO pricing (default probability, default correlation and default loss rate) under the framework of factor copula CDO pricing model and constructs a risk-integrated model for CDO pricing. In addition, we extend the static integrated model to a dynamic version by allowing the risk factors driven by the copula-GARCH process. The simulation results show that, compared with an integrated model, the premium of senior tranches is significantly lower under the standard model. Such difference is mainly due to different assumptions of the distributions of risk-driving factor.

Technical change and income inequality in China

The purpose of this paper was to explore the inequality–technical change relationship. Different from earlier studies, we aim to gauge the impact of technical change on the overall inequality, not just a particular component of inequality. This is achieved by establishing that the labour share of income is negatively correlated with overall inequality as indicated by the popular Gini coefficient and by modelling the labour share of income as a function of technical change. The empirical model of labour share of income is estimated using 1978–2012 provincial panel data from China. The main estimation results show that technical change in China had been mostly capital-biased. It contributed to the successive reductions in Chinas labour share of income and thus rapid rises in income inequality.

Aging and inequality: The link and transmission mechanisms

There exists a shortage of rigorous empirical analyses that focus on the aging‐to‐inequality transmission mechanisms although both developed and some developing countries have been confronted with the challenge of population aging. Using cross‐country panel data covering the period of 1975 to 2015, this paper contributes to the literature by directly modeling the relationship between aging and inequality and exploring the transmission mechanisms. Our estimation results show that (1) Aging worsens income distribution; (2) This adverse impact is attributable to its negative correlation with the share of labor income that in general is more equally distributed than capital income; (3) The labor share‐reducing effect of aging can be further attributed to the significant and negative impact of aging on both labor input or supply and wage or labor productivity; and (4) Our findings are robust to changes in model specifications, use of different indicators of aging, different inequality and labor share data sources.

Catch-Up Cycle: A General Equilibrium Framework

Successful economic latecomers have certain stylized facts: an inverse U-shaped growth rate, high growth rates of per capita output with high capital returns, and rapid structural changes. In this paper, we document for the first time a catch-up cycle that successful latecomers likely experience. The economic growth literature is inadequate to explain economies’ catching-up. We argue that technology imitation, together with diminishing marginal return of capital are the two driving forces of the catch-up cycle. This paper also sheds light on the different policy choices in various stages of the catch-up cycle.

Urbanizing with Equity Consideration

Research has not yet been undertaken on the optimal level of urbanization, notwithstanding the pioneering work of Au and Henderson (2006) on optimal urban concentration. We develop two-sector general equilibrium models of urbanization, with and without equity consideration, respectively. It is shown that considering equity will result in a higher level of urbanization than otherwise, when urban inequality is sufficiently small or migration costs are sufficiently large. Such a theoretical prediction is confirmed by empirical modeling results using panel data from People’s Republic of China (PRC). Provincial governments that paid attention to the inequality issue are found to have higher urbanization levels than those that did not. Finally, we explore possible equity consideration-to-urbanization transmission channels, and empirically establish that equity consideration in PRC (e.g., government initiatives towards combating rural poverty or the urban-rural gap) is positively correlated with road density, which helps reduce migration costs, and with bank lending to the manufacturing sector, which helps enhance the pulling force of migration. Thus, policy makers in the developing world should reverse their prevailing anti-urbanization attitudes and practices that tend to slow down urbanization or restrict rural-to-urban migration.

Capital Structure Premium in Multinational SOEs: Evidence from China

We investigate the relationship among multinational operation, ownership and capital structure using data from China’s A-share listed companies. We find that, in general, multinational enterprises (MNEs) have lower leverages than domestic enterprises (DEs). More importantly, we document a capital structure premium in China’s multinational state-owned enterprises (SOEs). Since the state supports multinational SOEs that promote overseas national strategy, these multinational SOEs will have higher credit availability and therefore higher debt-equity ratios. This study sheds light on government’s impact on firm’s creditability.

Structural Change and Income Distribution: Accounting for Regional Inequality in the People's Republic of China and its Changes During 1952–2012

This study explores the relationship between inequality and structural transformation by constructing a theoretical model, developing analytical frameworks, and implementing a case study. The general equilibrium model we develop demonstrates that inequality exhibits an inverted U shape as structural change proceeds from onset to completion. Our analytical frameworks enable decomposition of total inequality into sector contributions and a change in total inequality into a component attributable to structural transformation and the other component to concentration or spatial agglomeration. Applying the decomposition frameworks to data from the People’s Republic of China yield various interesting findings and more importantly confirms the inverted U shape as predicted by our theoretical model.

Who Gains More from Which Infrastructure in Rural People’s Republic of China?

The importance of infrastructure in economic development has been increasingly recognized by governments, development institutions, and the research community. Despite a sizable literature on its efficiency and growth effects, the distributive impacts of infrastructure have been largely overlooked, with a few recent exceptions. This is regrettable, particularly given the overwhelming concern about inequality and inclusive growth all over the world. This paper will: (i) demonstrate the deficiency of conventional approaches to modelling inequality; (ii) extend the Mincer earnings function so that both growth and distributive effects of infrastructure can be evaluated; and (iii) fit the extended model to a large sample of individual-level data from rural People’s Republic of China (PRC) over the period of 1989–2011, providing estimates of growth and the distributive impacts of specific physical infrastructures—telephone, tap water and electricity. All these infrastructures are found to promote rural income growth, helping narrow the rural–urban gap, which is the dominant component of the PRC’s overall inequality. Further, the poor are found to gain more than the rich, implying benign distributive effects of these infrastructures. In addition, males, the more experienced, the better educated, and to some extent the married benefited more than their counterparts, especially from telephones. Finally, some of these subpopulation effects have become more significant in recent years and are larger in central PRC, possibly because infrastructure helps open up more opportunities for those with better education or more experience. The empirical results are robust to different definitions of the experience variable, consideration of the mortality selection bias, reconstruction of the telephone data, and possible reverse causality.