Doctoral Student

Gordon Liao

Gordon Y. Liao is a Ph.D. candidate in Business Economics at Harvard University. His research interests include corporate finance, asset pricing, behavorial finance, macroeconomics, and entrepreneurship. Prior to entering the Ph.D. program, Gordon worked as a derivatives trader at the Harvard Management Company. He holds an A.B. in Applied Mathematics from Harvard College.

Working Papers

  1. Credit Migration and Covered Interest Rate Parity

    Gordon Y Liao

    I provide a theory of liability-driven international capital flows in which firms act as cross-market arbitrageurs in the global credit market. I show that credit markets are segmented along currency fault lines. The relative pricing of credit risks denominated in different currencies are impacted by shocks to investor demand that are slow to revert. Through the choice of the issuing currency, firms act as cross-market arbitrageurs helping to partially integrate these segmented credit markets. This cross-market arbitrage exposes firms to foreign exchange (FX) risk, which they partially hedge. The currency hedging activities in turn generate violations of covered interest rate parity (CIP) as an equilibrium outcome. I document large and sustained violations of long-term CIP and offer explanations of these violations in the context of liability-driven capital flows. Consistent with my theory, CIP deviations function as an indicator for imbalances in the supply and demand of relative funding conditions. Full integration of global credit markets is hindered by capacity constraints of the currency forward market. Segmentation in the credit market at different maturities also provide an equilibrium characterization of the term structure of CIP violations.

    Keywords: Market segmentation; Debt Issuance; covered interest rate parity; cross-currency basis; Financial Markets; Credit;


    Liao, Gordon Y. "Credit Migration and Covered Interest Rate Parity." Working Paper, May 2016. View Details
  2. Options-Pricing Formula with Disaster Risk

    Robert J. Barro and Gordon Y. Liao

    A new options-pricing formula applies to far-out-of-the money put options on the overall stock market when disaster risk is the dominant force, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. In the applicable region, the elasticity of the put-options price with respect to maturity is close to one. The elasticity with respect to exercise price is greater than one, roughly constant, and depends on the difference between the power-law tail parameter and the coefficient of relative risk aversion, γ. The options-pricing formula conforms with data from 1983 to 2015 on far-out-of-the-money put options on the U.S. S&P 500 and analogous indices for other countries. The analysis uses two types of data—indicative prices on OTC contracts offered by a large financial firm and market data provided by OptionMetrics, Bloomberg, and Berkeley Options Data Base. The options-pricing formula involves a multiplicative term that is proportional to the disaster probability, p. If γ and the size distribution of disasters are fixed, time variations in p can be inferred from time fixed effects. The estimated disaster probability peaks particularly during the recent financial crisis of 2008-09 and the stock-market crash of October 1987.

    Keywords: option pricing; rare disaster; Price; Stock Options; Financial Crisis;


    Barro, Robert J., and Gordon Y. Liao. "Options-Pricing Formula with Disaster Risk." NBER Working Paper Series, No. 21888, January 2016. View Details
  3. Asset Price Dynamics in Partially Segmented Markets

    Robin Greenwood, Samuel Gregory Hanson and Gordon Y. Liao

    How do large supply shocks in one financial market affect asset prices in other markets? We develop a model in which capital moves quickly within an asset class, but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists can gradually re-allocate capital across markets. Upon arrival of a supply shock, prices of risk in the impacted asset class become disconnected from those in others. Over the long-run, capital flows between markets and prices of risk become more closely aligned. While prices in the impacted market initially overreact to shocks, under plausible conditions, prices in related asset classes underreact.

    Keywords: System Shocks; Asset Pricing;


    Greenwood, Robin, Samuel Gregory Hanson, and Gordon Y. Liao. "Asset Price Dynamics in Partially Segmented Markets." Working Paper, May 2016. (Internet Appendix Here.) View Details