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.
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 net ETF flows exhibit strong evidence of style momentum trading up to a quarterly horizon. For institutional (13-F) demand, style momentum trading is particularly strong among previously poorly performing, low active share and short-term institutions. 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 recent style-level demand yields significant abnormal returns. These findings suggest that noise-trader demand for investment styles sometimes pushes prices away from fundamentals.

2. Does Sub-Advising Abroad Improve the Performance of International Mutual Funds?with Michael Densmore, and Pauline Shum, 2018
Abstract: We investigate the impact of having a foreign presence in research and asset management on the performance of international equity funds sold in the U.S.. We show that obtaining sub-advisors located abroad does not improve fund performance, suggesting that they are unable to exploit local information, and/or that U.S.-based managers are not disadvantaged by being physically away. Further, funds that hire outsourced, as opposed to in-house, international sub-advisors underperform on a risk-adjusted basis by up to 122 bps annually, compared to funds that are not sub-advised. The underperformance can partly be explained by the international outsourced sub-advisors being less active in managing the assets, particularly in their local holdings.

3.  Local Demand Shocks, Return Predictability and Excess Comovement, 2018
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.

4. Industry Co-agglomeration, Geographic Spillovers, Corporate Policy and Performance, 2018, with Debarshi Nandy and Yisong Tian
Abstract: We document how the level of industry co-agglomeration within a firm’s geographic neighborhood impacts its corporate policy and performance. Companies in highly co-agglomerated regions make more investment in R&D, grow at a higher rate, are more profitable, and earn greater risk-adjusted stock returns. They also borrow less, have lower capital expenditure and have better patent portfolios (both in numbers and citations), suggesting that the higher growth rate and profitability are more likely due to investment in intangible rather than tangible assets. This local spillover effect is much stronger among firms in co-agglomerated industries than unrelated industries. We further find that top executives of firms in highly co-agglomerated neighborhood share similar management styles, prefer to stay locally when they change jobs, and are paid similarly to other peers in nearby firms.