RESEARCH INTERESTS: ETFs, Asset Management, Market Microstructure, Household Finance
Market Accessibility, Corporate Bond ETFs and Liquidity (with Craig Holden)
- In Preparation for submission
- The Best Paper Award in Fund Management at the Northern Finance Association (NFA) 2017 meeting
- Presentations: 14th Annual Conference on Corporate Finance Ph.D. Session at the Olin Business School at Washington University in St. Louis, FIRS Ph.D. session, Erasmus Liquidity Conference, NFA, FMA, Indiana University, MFA (scheduled), Texas Young Investigator Consortium (scheduled)
I provide evidence that market accessibility ex ante plays an important role in how the underlying assets’ liquidity changes when a basket security is introduced. First, using a multi-market version of the Kyle model, I show that if the underlying market was less accessible, then trading basket securities improves liquidity in the underlying market. In contrast, if the underlying market was more accessible, liquidity deteriorates. Second, I test the theoretical predictions using data on corporate bonds before and after the introduction of corporate bond ETFs. I find that in contrast to the stock market, the inception of corporate bond ETFs improves the liquidity of the underlying bonds. This liquidity improvement is larger for low volume, high yield, and long term bonds and for 144A bonds to which access was previously difficult for retail investors.
Do the LCAPM Predictions Hold? Replication and Extension Evidence (with Craig W. Holden)
- Forthcoming at Critical Finance Review
- 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.
Price Discovery in the Stock, OTC Corporate Bond, and NYSE Corporate Bond Markets (with Craig W. Holden and Yifei Mao, Cornell University)
- In preparation for submission
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.