Publications:
Publications:
with Hendrik Bessembinder, Shuaiyu Chen, Michael J. Cooper, and Feng Zhang
Revise and Resubmit at Review of Financial Studies
We show that positive flows to active mutual funds with high recent returns are partially reversed at longer horizons. This outcome is robust across a broad range of alternative specifications. The reversal is due to greater outflows associated with high prior returns, not reduced inflows. We test theories with potential to explain the reversal: investment lifecycles, tax loss selling, and a behavioral “disappointment” hypothesis based on investors’ overreaction to positive returns. While tax loss selling and short investor lifecycles can both contribute, the evidence supports a role for investor disappointment, whereby investors redeem when return performance fails to meet expectations.
with Alan Guoming Huang, Maureen O'Hara, and Xing (Alex) Zhou
We investigate principal trading in corporate bond ETFs. While rare in equity ETFs, we show that principal trading by bond ETF managers is widespread, occurring on 35% of trading days, more often than either creations or redemptions. Adjusted for ETF size, volumes of principal trading and creation/redemption are comparable. Because bond ETFs hold more issues and face maturities, redemptions, and credit migrations, we show how principal trading allows passive bond ETF managers to more effectively align bond holdings and reduce tracking error. Principal trading also increases portfolio alpha for active ETFs by 25 basis points.
with Alan Guoming Huang, Russ Wermers, and Xing (Alex) Zhou
This paper identifies a novel mechanism through which uncertainty in corporate bond valuation shapes the creation process of corporate bond ETFs. Although multiple ETFs can potentially accept the same bond during the “in-kind” creation process, they often value it differently. Such valuation dispersion is driven by fund pricing conventions and external pricing sources, but can also reflect ETFs’ efforts to minimize tracking error. Authorized Participants (APs) exploit these differences by delivering a bond to create the ETF that values it most highly. While this strategic behavior increases APs’ profits, it dilutes holdings of incumbent investors and undermines ETF pricing efficiency.
with Chotibhak Jotikasthira, and Christian T. Lundblad
We uncover several dealers in the municipal bond market that focus on geographically adjacent states, a characteristic distinct from centrality. These “specialized” dealers enjoy larger market shares in states with greater local ownership and bonds with more complex features. Trades intermediated by specialized dealers have significantly larger markups than those intermediated by national dealers. Our analyses of retail- and institution-sized trades reveal that specialized dealers possess monopoly power yet also provide unique differentiated services, including immediacy, new bond allocations, help to overcome information frictions, and access to local investor clientele. The latter two account for the bulk of specialization benefits.
Best Paper semifinalist - Financial Management Association Meeting (2023)
CICF Best Paper Awards (2024)
with Alan Guoming Huang and Russ Wermers
Using a comprehensive database of corporate news, we find that bond funds trade against the direction of news sentiment. The trading against news phenomenon is concentrated in funds selling on positive news and in the post-financial crisis period when dealer liquidity provision is constrained. Funds in so doing exhibit higher alphas, and a potential source of such alphas is bond price reversals post news events. Our findings highlight that bond mutual funds represent a significant liquidity provider in the corporate bond market and play a complementary role to dealers in corporate news events.
Media: Dow Jones
with Gurdip Bakshi, John Crosby, and Xiaohui Gao
with Haibo Jiang and Georgios Skoulakis