By Caroline Brooks
Since the global financial crisis of 2008, it seems as though people from all walks of life pay a little closer attention to the stock market, real estate trends, and their savings and retirement funds. Hao Jiang, Broad College of Business assistant professor of finance, is among the world’s top financial experts who provides the public with insight on these trends and what they mean for the global economy.
Jiang joined the Broad faculty in 2014 and has presented at MIT, the American Finance Association Annual Meeting, and the European Finance Association Annual Meeting, among many others. His research garnered him the Standard & Poor’s Dow Jones SPIVA Award First Prize, and he serves as a reviewer on national and global financial journals.
What first got you interested in institutional finance? What keeps you interested?
The occurrence of the Asian finance crisis in 1997 attracted my initial attention to the mysteriously interesting behavior of financial markets. Since then, the formation and burst of the dot.com bubble, the real-estate bubble, the global financial crisis opened more and more fascinating topics for financial research.
How would you describe your specific area of financial expertise?
My research studies the working of financial markets, the central topic in finance, through the lens of financial institutions. Focusing on the incentive and behavior of financial institutions, my body of work generates new insights into the behavior of asset prices, market efficiency, liquidity, origin of risk, and financial fragility.
You entered higher education during a very tumultuous economic environment in the U.S. (2008). How has the economic rebound changed your research?
The global financial crisis and the resulting shifts in economic and regulatory activities reinforce the relevance of the central theme of my research. I become ever-convinced that it is crucial to study financial markets through a micro-founded analysis of financial institutions.
As an academic, how have technology and innovation changed how you conduct your research in the finance and investment sectors?
The explosion in the amount and types of data, combined with faster computation technology, has both challenged and enriched research in finance.
What was the most challenging published paper you’ve worked on to date, and why?
A recent paper, “Investor Flows and Fragility in Corporate Bond Funds” (forthcoming in the Journal of Financial Economics), has been dealing with an issue at the center of a debate on financial fragility of the shadow banking sector among policy makers, regulators, academics, and practitioners. The key observation of the paper is our identification of a flaw in the design of the open-end mutual funds that can lead to fragility in the financial system.
Open-end mutual funds are the dominant form of mutual funds in the U.S., with more than $10 trillion of assets under management. The flaw arises from the fact that, when mutual fund investors redeem their shares, their redemption value does not take fully into account the costs of fund asset liquidation, and is based only on closing prices on the day of redemption. In this situation, one investor’s redemption request creates negative externalities on the payoffs of other fund investors, which generates a first-mover advantage and creates a risk of a run on the fund. This run risk is especially pronounced when a mutual fund invests in illiquid assets.
In our paper, we study a growingly important investment vehicle, open-end fixed income funds that invest in illiquid corporate bonds, but provide investors with daily redeemability. Our research unraveled an intriguing result: outflows from corporate bond funds are highly sensitive to bad performance, which is very different from the well-known insensitive outflows from equity (or Treasury bond) funds that invest in more liquid asset classes.
This research caught widespread attention of financial regulators like the Securities and Exchange Commission (SEC), the Financial Stability Oversight Council, Federal Reserve Board, and the Bank for International Settlements (BIS). Due to the strong policy implications of our research, the paper has received challenges from many circles in the finance community. Ultimately, the SEC issued new rules in October 2016 to strengthen liquidity management programs for open-end mutual funds, and our paper was accepted for publication in the Journal of Financial Economics.
What’s next for you?
I plan to execute my ever expanding research program on financial institutions and financial markets, which contributes to building a more robust and better functioning financial system. On the teaching side, I wish to bring more cutting-edge tools and state-of-the-art knowledge in finance to MSU students.