Working Papers

Bond Price Fragility and the Structure of the Mutual Fund Industry, November 2022. Revise and Resubmit at Review of Financial Studies.

We show that mutual funds with a large share of a bond issue sell their holdings of that issue to a lower extent when they experience redemptions, arguably because they attempt to avoid a drop in the bond price and the consequent negative spillovers on the unsold part of their position. Hence, ownership concentration limits bonds’ exposures to flow-induced fire sales. We exploit exogenous variation in the negative spillovers of forced sales arising from the Fed’s SMCCF to confirm the economic mechanism. We also explore our findings’ implications for fund performance and the stability of the bond mutual fund industry.

Does Search Friction Really Matter? Evidence from the Corporate Bond Market, May 2009 (permanent working paper).

Winner of BGI Award for Best Paper by a Ph.D. Candidate at 2007 European Finance Association Meetings

This paper provides empirical evidence for the importance of costly search in decentralized financial markets. Investors face a trade-off between information gathering costs and improved pricing. Significant search costs lead to a less exhaustive search and thus imperfect information. In equilibrium, dealers earn rents and trades are not necessarily executed at the best available price. Using corporate bond transaction data, I find that trade prices vary considerably for the same bond and on the same day. In the world of perfect information, the documented price dispersion is too large to be justified by either intraday price movements or dealer differences. The cross-sectional patterns of trading costs are consistent with the predictions of costly search models, based on the premise that investors’ incentives to price-shop increase with trade size. Both mean and dispersion of spreads decline with trade size after controlling for the impact of fixed costs, trading relationships, and investor sophistication. My findings support the theoretical predictions of Yin (JF, 2005) that quotation transparency (which reduces search costs) will lead to more competitive markets and better risk sharing among dealers.