Xiang Fang

Job Market Paper

Intermediary Leverage and Currency Risk Premium

This paper proposes an intermediary-based explanation of the risk premium of currency carry trade in a model with a cross-section of small open economies. In the model, bankers in each country lever up and hold interest-free cash as liquid assets against funding shocks. Countries set different nominal interest rates, while low interest rates encourage bankers to take high leverage. Consequently, bankers' wealth drops sharply with a negative shock. This reduces foreign asset demand and leads to a domestic appreciation, which in turn makes low-interest-rate currencies good hedges. The model implies covered interest rate parity deviations when safe assets differ in liquidity. The empirical evidence is consistent with the main model implications: (i) Low-interest-rate countries have high bank leverage and low currency returns; (ii) the carry trade return is procyclical with a positive exposure to the bank stock return; and (iii) comovement of the carry trade return and the stock return increases with the stock market volatility.

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Other Research

Volatility, Intermediaries, and Exchange Rates, with Yang Liu (HKU) (revise and resubmit at Journal of Financial Economics)

This paper studies how time-varying volatility drives exchange rates through financial intermediaries’ risk management. We propose a model where currency market participants are levered intermediaries subject to value-at-risk constraints. Higher volatility translates into tighter financial constraints. Therefore, intermediaries require higher returns to hold foreign assets, and the foreign currency is expected to appreciate. Estimated by the simulated method of moments, our model quantitatively resolves the Backus-Smith puzzle, the forward premium puzzle, the exchange rate volatility puzzle, and generate deviations from covered interest rate parity. Our empirical tests verify model implications that volatility and financial constraint tightness predict exchange rates.

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Comparing Solution Methodologies for Macro-Finance Models with Nonlinear Dynamics, with Winston Dou (Wharton), Andrew Lo (MIT Sloan), and Harald Uhlig (Chicago)

We provide a global solution method for a class of macroeconomic models featuring nonlinear dynamics and compare the global method with first order, second order, and occasionally binding local perturbation methods. This class of models includes macroeconomic models for unconventional monetary policies with financial intermediaries. Within this framework, we show that the solving the model globally is essential for policy function and impulse response analysis when the intermediary's financial constraint only binds occasionally, and when risk plays an important role in the economy. We also present an economy in which local methods fail when there does not exist a steady state with binding constraint.

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The Effects of Higher Bank Capital Requirements on Credit in Peru, with David Jutrsa (IMF), Maria Soledad Martinez Peria (IMF), Andrea Presbitero (IMF), Lev Ratnovski (IMF), and Felix Vardy (IMF)

This paper offers novel evidence on the impact of raising bank capital requirements in the context of an emerging market: Peru. Using quarterly bank-level data and exploiting the adoption of bank-specific capital buffers, we find that higher capital requirements have a short-lived, negative impact on bank credit in Peru, although this effect becomes statistically insignificant in about half a year. This finding is robust to estimating different specifications to address concerns about the exogeneity of capital requirements. The fact that the reform was gradual and pre-announced and that banks were highly profitable at the time could explain the short-lived effects on credit.

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Teaching Experience

2014-2017 Fall, Introduction to Economics for Business (Undergraduate), teaching assistant for Professor Anne Duchene (2015-2016) and Professor Gizem Saka (2014-2017)

2015-2016 Spring, Introduction to Econometrics (Undergraduate), teaching assistant for Professor Francis X. Diebold

2017 Spring, 2017-2018 Fall, Financial Derivatives (Undergraduate and MBA), teaching assistant for Professor Winston Dou

2017 Spring, Health Economics (Undergraduate), teaching assistant for Professor Juan Pablo Atal

2017 Fall, Advanced Topics in Dynamic Asset Pricing (Ph.D.), teaching assistant for Professor Winston Dou

2017 Fall, Financial Derivatives (Undergraduate and MBA), guest lecturer on “Forwards and Futures Contracts for Currencies”

Other Information


MFA (2019, Scheduled), AEA (2019, Scheduled), Midwest Macro (2018), Peking University (2018), Shanghai Jiaotong University (2018*), EFA (2018), MFM Summer Session (2018, Poster), Econometric Society China Meeting (2018*), CEPR MMCN Conference at Frankfurt (2017*), WFA (2017), FIRS (2017), Econometric Society European Winter Meeting (2016), Penn Economics (2016-2018), Wharton Finance (2016-2018)

(* indicates presentation by coauthors)

Research Experience

2017 June-August  International Monetary Fund, Fund Internship Program (Monetary and Capital Market Department)

2015-2016 Research Assistant for Professor Karen Lewis

Honors and Awards

2017 Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research, Western Finance Association

2013-2018 Patrick Ma Fellow, University of Pennsylvania

2018 Macro Finance Society, Ph.D. Student Award

Professional Activities

Referee for Journal of Monetary Economics




International Finance, Asset Pricing, Macro-Finance, and Financial Intermediation


Department of Economics
The Ronald O. Perelman Center for Political Science and Economics
133 South 36th Street
Office 526
Philadelphia, PA 19104





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Urban Jermann

Nikolai Roussanov


Urban Jermann (Co-advisor)
Finance Department, Wharton School
University of Pennsylvania

Nikolai Roussanov (Co-advisor)
Finance Department, Wharton School
University of Pennsylvania

Alessandro Dovis
Department of Economics
University of Pennsylvania

Karen Lewis
Finance Department, Wharton School
University of Pennsylvania

Enrique Mendoza
Department of Economics
University of Pennsylvania

Job Market Candidate Status
I am on the job market and will be available for interviews during the ASSA meetings in Atlanta from 2019/1/3 to 2019/1/7.