RESEARCH INTERESTS: ETFs, Asset Management, Market Microstructure, Household Finance

Publications and Working Papers:

Market Accessibility, Corporate Bond ETFs and Liquidity (with Craig W. Holden), Review of Finance (2024), Vol.28, pp1725-1758

• The Best Paper Award in Fund Management at the Northern Finance Association (NFA) 2017 meeting

We develop a stylized model that generates the following empirical predictions: the less (more) accessible the underlying market is ex ante, the more its liquidity improves (deteriorates) when basket trading becomes available. We empirically test these predictions using corporate bonds before and after the introduction of ETFs. Consistent with the model’s prediction, liquidity improvement is larger for highly arbitraged, low-volume, and high-yield bonds, and for 144A bonds to which retail investor access is prohibited by law. Our paper leads to a more nuanced understanding of the impact of basket security introduction than previous research suggested.

Do the LCAPM Predictions Hold? Replication and Extension Evidence (with Craig W. Holden), Critical Finance Review (2019) Vol. 8, pp29-71

• SAS codes

First, we extend tests of the Liquidity-adjusted Capital Asset Pricing Model (LCAPM) following the Lee (2011) methodology and expanding to: (1) cover 90 years, (2) add NASDAQ stocks, (3) use four alternative liquidity measures, and (4) add risk or characteristic factors. Summarizing 60 tests of the two-beta LCAPM, we find that: (1) the intercept is zero 57% of the time, (2) expected liquidity cost is priced 43% of the time, (3) market risk is priced 20% of the time, (4) net liquidity risk is priced 12% of the time, and (5) the market risk coefficient equals the liquidity risk coefficient 0% of the time. Tests of the four-beta LCAPM yield similar results. Thus, the extension evidence robustly rejects most of the LCAPM predictions. Next, we replicate the LCAPM tests of Acharya and Pedersen (2005) using their original methodology and covering both their original and a more recent time period. We successfully qualitatively replicate the descriptive and first stage tables and figure, but are not successful in replicating any of second-stage tables that perform cross-sectional tests. The replication evidence rejects most of the LCAPM predictions. We make publicly available our SAS code and the resulting data.

Contract Evaluation Horizon and Fund Performance (with Jung Hoon Lee, Veronika K. Pool, and Feng Zhang)

• Semi-finalist for the Best Paper Award in Financial Institution and Markets at the FMA 2024 meeting

• The best paper award in the CAFM 2024 meeting

Mutual funds face the risk of withdrawals if they perform poorly in the short term, which encourages manager myopia. We show that fund families can insulate managers from this funding pressure via compensation tied to long-term fund performance. Managers with long-horizon contracts are more likely to undertake long-term investments and outperform their constrained peers. Since long-horizon pay does not shut off the funding pressure but simply insulates the manager from it, not all families can offer these contracts. Long-horizon contracts are more prevalent in families that cater to patient investors and have more resources to buffer liquidity shocks. 

Cross Trading in the Corporate Bond Market (with Lina Han, Stacey Jacobsen, and Veronika K. Pool)

We examine cross-trading by mutual funds in corporate bonds. Because internally matched trades are not observable, we construct two measures that rely on reported trade volume and opposite-signed trades within a family. We find that cross-trading is common—more than 5% of bond-family-quarters have positive indicators. There is large variation across families and higher crossing activity for illiquid and hard-to-obtain bonds. Cross-trading is particularly elevated around demand shocks (e.g., maturity cutoffs and credit rating changes), indicating that cross-trading is beneficial in times of stress. We document large transaction cost savings, although these savings have diminished following a new regulation that significantly limits cross trading in corporate bonds.

Price Discovery in the Stock, OTC Corporate Bond, and NYSE Corporate Bond Markets (with Craig W. Holden and Yifei Mao)

This paper examines intraday price discovery in three closely-related U.S. markets: stocks, Over-The-Counter (OTC) corporate bonds, and New York Stock Exchange (NYSE) electronically-traded corporate bonds. We calculate Hasbrouck's (1995) information share in these three markets during three times of day (pre-open, regular, and post-close) over eight years. We find that OTC corporate bonds have an 8.1% information share despite having zero pre-trade transparency. Further, NYSE corporate bonds have a 31.5% information share despite having a low market share, due to the public display and continuously updated bid-ask quotes that can be hit at any time. Corporate bond information shares are inversely related to credit quality and relatively constant over time. OTC corporate bond information shares are much smaller in pre-open and post-close hours. These findings are consistent with multi-security informed trading theory and the Merton (1973) corporate bond model.