Research

Research Areas:

Investments (ETFs, mutual funds and hedge funds); information and market efficiency; institutional and retail investors; international finance; geography and financial markets; corporate governance.


Publications:

1. Liquidity, style investing, and excess comovement of exchange-traded fund returns, 2016, Journal of Financial Markets, 30, pp. 27-53.
Abstract: This study shows that exchange-traded fund (ETF) misvaluation — based on return differentials between ETFs and their net asset values (NAV) — comove excessively across ETFs. Excess comovements are positive (negative) and significant across ETFs in similar (distant) investment styles. Further tests based on return reversals suggest that misvaluation stems primarily from the ETF, rather than the NAV price. Excess comovements are greater for funds with high commonality in demand shocks and attractive liquidity characteristics. These findings are consistent with the idea that the high liquidity of ETFs attracts a clientele of short-horizon noise traders with correlated demand for investment styles.


Working Papers:
Abstract: We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele amongst institutional investors: (i) relative liquidity is significantly more important for short- than for long-term investors; and (ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. These two findings provide evidence that relative liquidity encourages short-term demand.

Abstract: I investigate the importance of local demand shocks on excess comovements among Exchange-Traded Funds (ETFs). My sample contains 4560 pairs of ETFs that are traded synchronously in 15 country-pairs. Each ETF in a pair has identical fundamentals, but is traded by investors from different countries. Controlling for fundamentals, ETF returns in the same country comove excessively with one another. Excess comovements have increased over time, they are stronger for more liquid funds and for funds with more competitors in the local market. In contrast, comovements are not materially different among ETFs that are more attractive to fundamental investors. I create a local measure of mispricing based on price deviations between local ETFs and their foreign peers, and show that it strongly predicts return reversals not only for ETFs, but also for the local stock market. Taken together, the results are more consistent with the local non-fundamentals-based view of excess comovements.

3. Industry Co-agglomeration, Job Relocation, and Executive Compensation, 2017, with Debarshi Nandy and Yisong Tian
Abstract: We document how industry co-agglomeration patterns lead to geographic segmentation in the market for top executives. Approximately 38% of their job relocations are local, more than five times as predicted by available local job opportunities. The strong local bias is primarily driven by relocations to nearby firms in the same or co-agglomerated industries. We further show that geographies with strong co-agglomerated industries and greater local bias are associated with co-movement in both executive compensation and management styles among firms in the co-agglomerated industries. More importantly, the local co-movement is compensation is not driven by peer firm compensation or managerial style.

4. Style-level Return Chasing and Noise Trader Demand, 2017
Abstract: Rational explanations of return chasing center on investors’ pursuit of superior talent or fund managers’ flow-induced trading. These explanations are irrelevant for passively-managed Exchange-Traded Funds (ETFs). Nevertheless, return chasing is very strong for net fund flows (representing both retail and institutional demand), but only up to quarterly horizons. Return chasing is also strong for 13-F institutional investors, particularly among short-term institutions. Institutional style-level herding does not explain institutional return chasing. Style-level demand for ETFs has a positive and significant price impact, but the effect is reversed over the following six months. This suggests that noise-trader demand for investment styles sometimes pushes prices away from fundamentals, even in the presence of sophisticated institutions. By comparing the performance of all “new money” invested at the style-level relative to “old money” based on assets in place, I show that style-level demand for ETFs reflects a dumb money effect.


Work in progress:

1. The Value of Sub-Advisory: Evidence from Global Mutual Funds, with Michael Densmore, Pauline Shum