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Mutual funds investing in illiquid corporate bonds actively manage Treasury positions to buffer redemption shocks. This liquidity management practice can transmit non-fundamental fund flow shocks onto Treasuries, generating excess return volatility. Consistent with this hypothesis, we find that Treasury excess return volatility is positively associated with bond fund ownership, and this pattern is more pronounced among funds conducting intensive liquidity management. Causal evidence is provided by exploiting the U.S. Securities and Exchange Commission’s 2017 Liquidity Risk Management Rule. Evidence also suggests that the COVID-19 Treasury market turmoil was attributed to intensified liquidity management, an unintended consequence of the 2017 Liquidity Risk Management Rule.
February 2025
The Review of Financial Studies
The Interactions of Customer Reviews and Price and Their Dual Roles in Conveying Quality Information
Customer reviews help communicate product information, but their effectiveness may suffer from selection bias (i.e., depending on factors, such as the individual experience and price, not all consumers may voluntarily write reviews). Consequently, a seller may have to resort to additional means (e.g., signaling through price in the context of an experience good) to convey its quality. This paper develops an analytical model to investigate the interaction of customer reviews and price with the presence of selection bias in marketing an experience good with uncertain quality to consumers. Our analysis reveals the dual roles played by both customer reviews and price in communicating quality information. On one hand, customer reviews may either directly convey product information with unbiased distribution of reviews or facilitate price signaling when reviews are biased because of selection. On the other hand, price may be adjusted to mitigate the selection bias of reviews to make them more informative, and it may also signal quality directly in the presence of review bias. As a result, we show that bias in reviews may actually benefit consumers without compromising information communication as the incentive to reduce review selection bias makes it credible and profitable for the high-quality seller to signal its type by undercutting the price that would be set if it is of low quality. We then extend our analysis to examine the information, profits, and welfare impacts of several important design elements of a review system as well as the impact of consumers’ aversion to risk. Finally, the implications of our findings on the management of user-generated content and pricing are discussed.
January-February 2025
Marketing Science
Short selling regulation has been a longstanding topic of debate in financial markets, particularly during times of crisis. While proponents argue that short selling aids in price discovery and market efficiency, critics raise concerns about manipulative short selling practices that can destabilize markets. This paper presents a theoretical model to analyze the impact of short selling, specifically manipulative short selling (MSS), on bank runs and efficiency. The model demonstrates that MSS can emerge as an equilibrium outcome driven by uninformed speculators seeking to profit from artificially depressing stock prices. The prevalence of MSS is influenced by the level of informed trading and coordination friction among creditors. We find that short selling bans can enhance welfare by mitigating the negative effects of MSS, particularly in scenarios with high coordination frictions. We also provide policy and empirical implications.
January 2025
Journal of Economic Theory
Key Takeaways Net-zero portfolios (NZPs), managing over $130 trillion USD in assets, align financial performance with climate goals. These portfolios reward firms that actively reduce emissions while excluding those lagging behind, driving market incentives for decarbonization.
The study introduces distance to exit (DTE), a forward-looking metric that measures a firm’s risk of exclusion from NZPs based on its carbon footprint and decarbonization efforts.
Firms with higher DTEs—seen as safer from exclusion—tend to have higher valuations but lower expected returns, highlighting the market’s pricing of carbon-transition risks.
DTE serves as both a risk measure and a catalyst for action, incentivizing firms to accelerate decarbonization to remain in NZPs, while enabling portfolios to achieve up to 95% reductions in carbon intensity without sacrificing sector diversification. Source Publication:
10 Jan 2025
Research
Key Takeaways The agricultural export value of Brazil has quadrupled over the last two decades due to rising global demand.
Brazil’s agricultural export boom drives deforestation: between 1997 and 2019, trade-induced agricultural expansion led to the loss of 3.6 million hectares of forest.
Trade-induced deforestation causes severe health consequences: it results in over 700,000 premature deaths, primarily from cardio-respiratory diseases linked to pollution from deforestation in upwind areas.
The economic cost of these deaths is estimated at $513 billion USD—about 18% of Brazil’s total agricultural export value during the same period.
These findings highlight the negative health impacts of trade-induced deforestation and the resulting regional inequality, because mortality costs and economic benefits are not always shared by the same populations. Source Publication:
8 Jan 2025
Research
Key Takeaways This study develops a theoretical framework to explore how carbon taxes and financial market tools (e.g., sustainability-linked loans and bonds) interact in reducing carbon emissions.
Carbon taxes remain the most effective tool for achieving emission reductions and increasing welfare but are often politically constrained.
Carbon-contingent financing provides an alternative incentive for standard agents to adopt green technologies, but its effectiveness depends on the financial resources of environmentally motivated agents who are funding the transition.
Although carbon taxes and market-based solutions can coexist, carbon-contingent financing may undermine political support for taxes, potentially reducing their overall effectiveness in addressing emissions.
The model’s predictions emphasize the need for a balanced climate strategy, whereby carbon taxes and financial market solutions complement each other by targeting different regions or sectors with distinct characteristics. Source Publication:
5 Jan 2025
Research
While computer languages may sound alien to economics, I aim to showcase that good programming skills are conducive not limited to economic research, it can also open up endless career possibilities for you in the business world.
31 Jan 2022
Economics
As a teacher, I will push myself to understand the expectations of local employers' and the market dynamics of Hong Kong.
18 Jan 2022
Finance
As a science person, I am impressed by our students' strong business acumen. But as a teacher, other than teaching them how to use quantitative tools to make scientific claims, I also hope that I can encourage them to continue to stay inquisitive about the world and apply their classroom knowledge for the betterment of the society.
5 Jan 2022
Marketing
Earlier, the U.S. and China engaged in tariff talks in Geneva and unexpectedly reached a consensus for a truce, temporarily lowering tariff rates to levels prior to the so-called "Liberation Day" in the U.S. However, the global situation remains difficult to restore to its previous state. U.S. President Trump has been employing so-called negotiation tactics, fluctuating offers between high and low, and using both genuine and deceptive strategies to create negotiation space for his side. Yet, due to a lack of confidence and logical inconsistencies, the trade war resembles a poorly executed circus act, pushing the global economic policy uncertainty index to a historic high.
21 May 2025
Faculty
Hong Kong has long been successful in its four pillar industries, comprising trading and logistics, financial services, professional and producer services and tourism. According to the research by the HK government, they contributed close to 60% of Gross Domestic Product (GDP) and almost half of the total employment before COVID. However, all these four pillars have encountered the decline in their respective area – resulting from the rapid change in market need & user behavior, regional and global competition, the development in new value-chain and advanced technology, as well as geo-political environment. As a solution, ‘innovation’ has been introduced to address these pain-points of Hong Kong. The question to ask, how should we develop the innovation strategies – instead of coming up ideas for the sake of ‘innovation’? In this article, we will discuss how innovation strategy could be approached from the perspective of poverty alleviation to Web3 industry development – two topics sound not-related, but their common ground might give us the insight on how we could find the development path of Hong Kong.
14 May 2025
Faculty
關稅豪賭 只有輸家
國際貨幣基金組織在上月發表的《世界經濟展望》,將全球經濟增長預測從今年 1 月的 3.3% 顯著調低至 2.8%。報告指出,中國和印度將成為推動全球經濟增長的主要動力,預計未來5年貢獻比例分別為 23%和超過15%;而美國因其關稅政策的不確定性,對全球經濟的貢獻率遭下調至 11.3%。
7 May 2025
Faculty
Have you noticed how, historically, industrial revolutions across various nations mainly impacted low-income jobs? What’s different now is that the current wave in artificial intelligence seems different. AI not only automates entry-level positions but also has the potential to replace high-skilled, high-income roles. According to the International Monetary Fund (IMF), AI could affect up to 40% of global employment. That figure could be as high as 60% in developed economies like Hong Kong.
16 May 2025
Will consumers pay more because of double tariffs from China due to the trade war? Prof. Heiwai Tang, Associate Dean of HKU Business School and Director of the Asia Global Institute, offered his perspective on how the trade war has placed foreign companies in China at the centre of a double-tariff squeeze. He was included in a Financial Times article on the broader implications for businesses and economies worldwide.
1 May 2025
With the rapid development of artificial intelligence technology, some borrowers may use it to enhance their credit data in order to obtain loan approvals. Instead of approving borrowers through extensive data collection from multiple sources, lenders might consider self-imposing limits to focus on improving the quality of the data collected while also increasing loan profits.
17 Apr 2025
Prof. Heiwai Tang, Associate Dean of the HKU Business School and Director of the Asia Global Institute, has highlighted the need for Hong Kong to diversify its economy beyond its current narrow structure. To drive sustainable growth, he calls for the development of "new industries" and introduces a groundbreaking method to assess their economic contributions. This innovative approach enables the government to track industrial trends, design targeted policies, and measure their effectiveness with precision. Applying this method, Prof. Tang’s research uncovers the substantial potential of new industries to expand Hong Kong’s GDP. Fueled by rapid advancements in innovation and technology, sectors like "research, design, testing, and environmental engineering" saw their value added soar from HK$3.3 billion to HK$13.3 billion between 2000 and 2023. Similarly, "computer programming, data, and industrial internet services" has surged from HK$5 billion to HK$25.5 billion in the same period. Beyond these emerging sectors, Prof. Tang underscores Hong Kong’s pivotal role in the global supply chain. He notes that productive services, ranging from logistics to legal services, are essential in supporting not only local industries but also worldwide supply networks, making them a vital component of Hong Kong’s economic future.
22 May 2025
Faculty
Earlier, the U.S. and China engaged in tariff talks in Geneva and unexpectedly reached a consensus for a truce, temporarily lowering tariff rates to levels prior to the so-called "Liberation Day" in the U.S. However, the global situation remains difficult to restore to its previous state. U.S. President Trump has been employing so-called negotiation tactics, fluctuating offers between high and low, and using both genuine and deceptive strategies to create negotiation space for his side. Yet, due to a lack of confidence and logical inconsistencies, the trade war resembles a poorly executed circus act, pushing the global economic policy uncertainty index to a historic high.
21 May 2025
Faculty
Currently, public housing tenants earning more than HK$60,000 per month can use the Green Form to apply for flats under the Home Ownership Scheme (HOS). The Green Form is reserved for people already living as public housing tenants. On the other hand, people not living in public housing but earning the same income level are barred from applying for the White Form Secondary Market Scheme to purchase HOS flats, as their income exceeds the eligibility limit. Next, although the Housing Department aims to encourage upward mobility through the purchase of HOS or private flats, the threshold for evicting tenants living in public housing is set at a cumulative HK$125,500 for a three-person household’s monthly income. So long as they collectively earn less than HK$125,500 per month and can pay their rent, they can stay and then buy a flat. Dr. Vera Yuen, Lecturer in Economics at HKU Business School, commented, “Those earning HK$20,000 to HK$40,000 per month and renting privately can struggle to pay their rent, exhausting their monthly income. But in public housing, even those earning over HK$100,000 can remain—it’s actually very difficult for the Housing Department to evict these people earning a relatively high income from their public housing flat.”
18 May 2025
Faculty