Research

Research Areas:

Investments, international finance, corporate governance, geography and financial markets, institutional and retail investors, information and market efficiency.


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 have positive relative liquidity (i.e., are more liquid than their underlying securities), are particularly attractive to short-term investors. We find that relative liquidity predicts both inflows and outflows positively and significantly. This is inconsistent with reverse causality from increased trading to liquidity. We further document a liquidity clientele amongst institutional investors: i) liquidity is significantly more important for short- than for long-term investors; and ii) liquidity is inversely related to institutional investors’ average holding duration in ETFs.

Abstract: I investigate the asset pricing implications of local demand shocks. My sample contains 4560 pairs of Exchange-Traded Funds (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 are amplified for funds that are more liquid and which have a larger number of competitors in the local market. Local demand shocks (based on price-deviations between local and foreign twins) strongly predict not only future ETF returns, but also local stock market returns.

3. Industry Co-agglomeration, Job Relocation, and Executive Compensation, 2016, 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 41% of their job relocations are local which is nearly six times as high 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 the local bias is associated with strong co-movement in both executive compensation and management styles in nearby firms. More importantly, the local co-movement is only found within the subset of nearby firms in the same or co-agglomerated industries but not in other industries.

4. Why Do Investors Chase Passive Returns?, 2017
Abstract: Return chasing (aka positive feedback trading) in open-end funds can arise rationally when investors associate past performance with managerial skill. This explanation is, however, irrelevant for passively managed exchange-traded funds (ETFs) that represent pure plays on investment styles. Return chasing is nevertheless evident for short-term ETF flows (representing both retail and institutional demand), and for short-term institutional trading (based on SEC’s 13-F filings). Institutional style-level herding does not explain, nor is it explained by, institutional return chasing. A trading strategy based on the return chasing behaviour of ETF investors is highly profitable, suggesting that it is rational for investors to chase style returns in the short-run. The strong positive contemporaneous relationship between investor demand and fund returns, and the rapid subsequent reversal (over the following six months) is consistent with the notion that noise-trader demand for investment styles sometimes pushes prices away from fundamentals.

Work in progress:

1. Global Equity Funds: the Value of a Global Analyst Network, with Pauline Shum