Research

Research Areas:

Investments (mutual funds, ETFs and hedge funds), market efficiency, institutional and retail investors, geography and financial markets.


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.

2. Relative Liquidity, Fund Flows 
and Short-term Demand: Evidence 
from Exchange-Traded Funds
, 2018, Financial Review, 53(1), 87-115, with Pauline Shum.
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.


Working Papers:

Abstract: I investigate the importance of local demand shocks on excess comovements and return predictability for 4560 twin-pairs of Exchange-Traded Funds (ETFs) from 15 country-pairs. The returns on ETFs traded in the same country comove excessively with one another. These comovements are stronger for funds with greater liquidity and more competitors in the local market. In contrast, comovements are not materially different among ETFs that are attractive to fundamental (factor) investors. A local measure of mispricing, based on price-deviations between ETFs and their foreign peers, strongly predicts return reversals not only for ETFs, but also for the local stock market. Betting against local mispricing yields significant abnormal returns of up to 25 percent per year after trading costs.

2. 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.

3. Style-level Feedback Trading and Noise Trader Demand, 2018
Abstract: Exchange-Traded Funds (ETFs) represent pure plays investment styles. This makes them ideally suited to style switchers that naively allocate more (less) money to styles that have recently performed well (poorly) in the cross-section. I show that aggregate ETF demand (net flows) display strong evidence of style momentum trading, but only up to a quarterly horizon. For institutional (13-F) demand, the evidence is particularly strong among short-term investors. Alternative explanations based on institutional style-level herding do not explain the results. Style-level demand for ETFs has a positive and significant price impact, but the effect is reversed over the following six months. A trading strategy that bets against short-term style-level demand yields significant abnormal returns. These findings suggest that noise-trader demand for investment styles sometimes pushes prices away from fundamentals.


Work in progress:

1. Global Mutual Funds: The Effect of Sub-Advising Abroad, with Michael Densmore, Pauline Shum