Research

Research Areas:

Asset management; investments; institutional investors; international finance; geography of finance.

Publications:

5. The Geography of Sub-advisors, Managerial Structure, and the Performance of International Equity Mutual Funds (with Michael Densmore, and Pauline Shum), Review of Asset Pricing Studies, forthcoming,

Abstract: We study whether sub-advising abroad provides an information advantage that improves the performance of international equity mutual funds. We find that it does not. In fact, internationally outsourced funds underperform on a risk-adjusted basis by up to 162 bps annually. The underperformance is concentrated in funds managed by single sub-advisors, who are less likely to be terminated after poor performance compared to funds with multiple sub-advisors. We dissect fund performance by the location of its sub-advisors and find that international sub-advisors underperform primarily in their local holdings. Finally, we show that the industry is nonetheless on a path towards equilibrium.

4. Naïve Style-level Feedback Trading in Passive Funds, 2021, Journal of Financial and Quantitative Analysis, 57(3), 1083-1114, 2022.

Abstract: Passive Exchange-Traded Funds (ETFs) are ideally suited to style-level feedback trading because of their high liquidity, ease of short-selling, and pure play on investment styles. I find strong evidence of short-term style momentum trading in ETFs. Institutional investors that use ETFs do not act as arbitrageurs by trading against style momentum. Institutions, especially less sophisticated ones, are themselves style momentum traders. Moreover, recent style-level demand predicts style-level return reversals. These findings suggest that uninformed positive feedback trading by less sophisticated market participants can destabilize financial markets in the short run.

3. Local Demand Shocks, Return Predictability and Excess Comovement, 2020, Journal of Banking & Finance, 119.

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 ETF return reversals. Betting against local mispricing yields significant abnormal returns of up to 20 percent per year after trading costs.

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.

1. Liquidity, style investing, and excess comovement of exchange-traded fund returns, 2016, Journal of Financial Markets, 30, pp. 27-53.

    • Presented at the 2015 AFA conference.

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:

2. Industry Co-agglomeration, Executive Mobility and Compensation, 2021, with Debarshi Nandy and Yisong Tian

Abstract: We find evidence of geographic segmentation in the market for top executives and identify industry co-agglomeration as the primary driver. When top executives move from one firm to another, nearly 40% of the moves are between local firms, which is more than five times greater than predicted by available employment opportunities. Furthermore, these local moves are dominated by moves among firms in co-agglomerated industries. While the strong local move bias is also accompanied by local co-movement in the compensation of top executives, the co-movement is only observed among local peers in co-agglomerated industries but not among other local peers.

1. On the Anomaly Tilts of Factor Funds (with Fabio Moneta), 2022.

Abstract: We find that a significant subset of Hedged Mutual Funds (HMFs) and smart-beta Exchange-Traded Funds (ETFs) tilt their portfolios towards well-known anomaly characteristics, especially on the short side, and that such tilts are highly predictable. Moreover, factor-based HMFs outperform ETFs with corresponding factor tilts, which is driven by short positions and higher factor-related returns. Perversely and in contrast to HMFs, large factor tilt ETFs underperform those with contrary tilts. Overall, our results demonstrate the importance of using portfolio holdings rather than stated objectives for benchmarking factor tilts, and indicate the superior factor replication ability of HMFs over ETFs.