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, 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 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 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
Using machine learning techniques, we uncover an important number of dealers in the U.S. municipal bond market who focus on geographically adjacent states, a characteristic distinct from dealer centrality. These “specialized” dealers enjoy larger market shares in states with greater local ownership and in local bonds with more complex features. We also find that trades intermediated by these specialized dealers have significantly larger markups than those intermediated by national dealers. For the average retail trade, about two-thirds of the differential markup is attributed to rent, with the remaining third to the unique benefits of specialization. Only the latter matters for institution-sized trades. Together, these results suggest that specialized dealers possess some monopoly power yet also provide important differentiated services. Specialized dealers provide immediacy, reward customers with an allocation of new bond offerings, help customers overcome information frictions, and facilitate access to local investor clientele. The latter two account for the bulk of the specialization benefits. Over time, as transparency improves and local ownership declines, the average market share of specialized dealers decreases along with differential markups.
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