Chao Zi

Ph.D. Candidate
Department of Finance
Gies College of Business
University of Illinois at Urbana–Champaign

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CV/Résumé Research


How Do Investors Perceive Greater Public Sector Investment?

Abstract:   Do expansions in public sector investment tend to benefit the U.S. economy? The answer is yes from investors’ perspective. This paper takes an asset pricing approach to evaluating the overall effect of public sector investment. I propose a factor pricing model with shocks to the public sector investment share (“PUB shocks”) as a risk factor. I demonstrate how a pricing kernel underpinning this factor model may endogenously arise in general equilibrium. I confront the factor model with a variety of test assets and find that PUB shocks are priced and carry a consistently positive price of risk. This finding is reinforced by another observation that arises from a sample of government contractors, in which I find that high-dependency firms (that is, firms with greater sales to government relative to their total sales) deliver a 6.5\% higher average return (in annual terms) compared to low-dependency firms. Together these findings point to an overall beneficial role of public sector investment, in which an expansion is likely associated with better welfare for investors.

Designated Market Makers Still Matter: Evidence from Two Natural Experiments

Abstract:   Independent technological glitches forced two separate trading halts on different U.S. exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit exogenous variation provided by this unprecedented coincidence, in conjunction with a proprietary data set, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. When the voluntary liquidity providers on one exchange were removed, liquidity remained unchanged; when DMMs were removed, liquidity decreased market-wide. We find evidence consistent with the idea that these DMMs, despite facing only mild formal obligations, significantly improve liquidity in the modern electronic marketplace.