Sergey Chernenko


Associate Professor of Management | Krannert School of Management | Purdue University
403 W. State Street, West Lafayette, IN 47907 | SSRN page | Google Scholar

Working Papers

Abstract: We propose a novel measure of bond market liquidity that does not depend on transaction data. Capturing how the strength of the relation between mutual fund cash holdings and uncertainty about fund flows varies in the cross section, our measure reflects funds’ perceived illiquidity of their portfolio holdings at a given point in time. Speculative grade and smaller bonds are perceived to be significantly less liquid, with the illiquidity of speculative grade bonds in particular deteriorating in the post-crisis period. Our measure can be applied to asset-backed securities, syndicated loans, and municipal securities for which publicly available data on transactions are not available.

R&R at the Review of Financial Studies

Abstract: Using novel contract-level data, we study the recent trend in open-end mutual funds investing in unicorns — highly valued, privately held start-ups — and the consequences of mutual fund investment for corporate governance provisions. Larger funds and those with more stable funding are more likely to invest in unicorns. Compared to venture capital groups (VCs), mutual funds appear to have weaker cash flow rights and to be less involved in terms of corporate governance, being particularly underrepresented on boards of directors. Having to carefully manage their own liquidity pushes mutual funds to require stronger redemption rights and eschew “pay-to-play” provisions, suggesting contractual choices consistent with mutual funds’ short-term capital sources.

R&R at the Journal of Financial Economics

Abstract: We provide novel systematic evidence on the terms of direct lending by nonbank financial institutions. Analyzing hand-collected data for a random sample of publicly-traded middle-market firms during the 2010-2015 period, we find that nonbank lending is widespread, with 32% of all loans being extended by nonbanks. Nonbank borrowers are smaller, more R&D intensive, and significantly more likely to have negative EBITDA. Firms are also more likely to borrow from a nonbank lender if local banks are poorly capitalized and less concentrated. Nonbank lenders are less likely to monitor by including financial covenants in their loans, but appear to engage in more ex-ante screening. Controlling for firm and loan characteristics, nonbank loans carry about 200 basis points higher interest rates. Using fuzzy regression discontinuity design and matching techniques generates similar results. Overall, our results provide evidence of market segmentation in the commercial loan market, where bank and nonbank lenders utilize different lending techniques and cater to different types of borrowers.

with Adi Sunderam

Joint winner of the ESRB research prize in memory of Ieke van den Burg, 2016.

Abstract: We study liquidity transformation in mutual funds using a novel data set on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds’ cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.

Presentation at the NBER Conference on New Developments in Long-Term Asset Management

Presentation at the First ESRB Annual Conference 


Journal of Financial Economics, accepted

Abstract: We develop three novel measures of the incentives of equity mutual funds to internalize the price impact of their trading. We show that mutual funds with stronger incentives to internalize their price impact accommodate inflows and outflows by adjusting their cash buffers instead of trading in portfolio securities. As a result, stocks held by these funds have lower volatility, and flows out of these funds have smaller spillover effects on other funds holding the same securities. Our results provide evidence of meaningful fire sale externalities in the equity mutual fund industry.

Journal of Finance 72(5): 1893-1936

Abstract: I study the incentives of the collateral managers who selected securities for ABS CDOs—securitizations that figured prominently in the financial crisis. Specialized managers that did not have other businesses that could suffer negative reputational consequences invested in low quality securities underwritten by the CDO's arranger. These securities perform significantly worse than observationally similar securities. Managers that invested in these securities were rewarded with additional collateral management assignments. Diversified managers that did assemble CDOs suffered negative reputational consequences during the crisis: institutional investors withdrew from their mutual funds. Overall, the results are consistent with a quid pro quo between the collateral managers and CDO underwriters.

Journal of Financial Economics 122(2): 248-269

Abstract: Many have argued that overoptimistic thinking on the part of lenders helps fuel credit booms. We use new micro-data on mutual funds’ holdings of securitizations to examine which investors are susceptible to such boom-time thinking. We show that firsthand experience plays a key role in shaping investors’ beliefs. During the 2003-2007 mortgage boom, inexperienced fund managers loaded up on securitizations linked to nonprime mortgages, accumulating twice the holdings of more seasoned managers. Moreover, inexperienced managers who personally experienced severe or recent adverse investment outcomes behaved more like seasoned managers. Training and institutional memory can serve as partial substitutes for personal experience.

Review of Financial Studies 27(6): 1717-1750

Abstract: We document frictions in money market mutual fund lending that lead to the transmission of distress across borrowers. Using novel security-level holdings data, we show that funds exposed to Eurozone banks suffered large outflows in mid-2011. These outflows had significant spillovers: non-European issuers relying on such funds raised less short-term debt financing. Issuer characteristics do not explain the results: holding fixed the issuer, funds with higher Eurozone exposure cut lending more. Due to credit market frictions, funds with low Eurozone exposure provided substitute financing only to issuers they had pre-existing relationships with, even though issuers are large, highly rated firms.

Review of Financial Studies 25(7): 2041-2070

Review of Financial Studies Young Researcher Prize, 2012.

Abstract: We study the real effects of market segmentation due to credit ratings by using a matched sample of firms just above and just below the investment-grade cutoff. These firms have similar observables, including average investment rates. However, flows into high-yield mutual funds have an economically significant effect on the issuance and investment of the speculative-grade firms relative to their matches, especially for firms likely to be financially constrained. The effect is associated with the discrete change in label from investment- to speculative-grade, not with changes in continuous measures of credit quality. We do not find similar effects at other rating boundaries.

with C. Fritz Foley and Robin Greenwood
Financial Management 41: 885-914

2nd place Pearson Prize for the best paper published in Financial Management between Autumn 2012 and Autumn 2014 

Abstract: Standard theories of ownership assume insiders ultimately bear all agency costs and therefore act to minimize conflicts of interest. However, overvalued equity can offset these costs and induce listings associated with higher agency costs. We explore this possibility by examining a sample of public listings of Japanese subsidiaries. Subsidiaries in which the parent sells a larger stake and subsidiaries with greater scope for expropriation by the parent firm are more overpriced at listing, and minority shareholders fare poorly after listing as mispricing corrects. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.

with Michael Faulkender
Journal of Financial and Quantitative Analysis 46: 1727-1754

Abstract: Existing cross-sectional findings on nonfinancial firms’ use of derivatives that are usually interpreted as the result of hedging may alternatively be due to speculation. Panel data examinations can distinguish between derivatives practices that endure over time and are therefore more likely to result from hedging, and those that are more transient, thus more consistent with speculation. Our decomposition results indicate that hedging of interest rate risk is concentrated among high-investment firms, consistent with costly external finance. Simultaneously, firms appear to use interest rate swaps to manage earnings and to speculate when their executive compensation contracts are more performance sensitive.

with Alain P. Chaboud and Jonathan H. Wright
Journal of the European Economic Association 6: 589-596

Abstract: This article introduces a new high-frequency data set that includes global trading volume and prices over five years in the spot euro-dollar and dollar-yen currency pairs. Studying the effects of US macroeconomic data releases, we show that spikes in trading volume tend to occur even when announcements are in line with market expectations, in sharp contrast to the price response. There is some evidence that the volume after announcements is negatively related to the ex ante dispersion of market expectations, contrary to the standard theoretical prediction. At very high frequency, we find evidence that much of the immediate jump in prices in reaction to an announcement occurs before the surge in volume.

with David W. Berger, Alain P. Chaboud, Edward Horowka, and Jonathan H. Wright
Journal of International Economics 75: 93-109

Abstract: We analyze the association between order flow and exchange rates using a new dataset representing a majority of global interdealer transactions in the two most-traded currency pairs at the one minute frequency over a six-year time period. This long span of high-frequency data allows us to gain new insights about the joint behavior of these series. We first confirm the presence of a substantial association between interdealer order flow and exchange rate returns at horizons ranging from 1 min to two weeks, but find that the association is substantially weaker at longer horizons. We study the time-variation of the association between exchange rate returns and order flow both intradaily and over the long term, and show that the relationship appears to be stronger when market liquidity is lower. Overall, our study supports the view that liquidity effects play an important role in the relationship between order flow and exchange rate changes. This by no means rules out a role for order flow as a channel by which fundamental information is transmitted to the market, as we show that our findings are quite consistent with a recent model by Bacchetta and Van Wincoop (2006: Can information heterogeneity explain the exchange rate determination puzzle? American Economic Review, 96, pp. 552–576.) that combines both liquidity and information effects.