PUBLICATIONS

"Fast-Moving Habit: Implications for Equity Returns" (with Anthony Lynch), Journal of Financial and Quantitative Analysis, 2023, Volume 58, Issue 7, pp. 3153 - 3194.

Abstract: We find that the Campbell-Cochrane external-habit model can generate a value premium if the persistence of the consumption surplus is sufficiently low.  Such low persistence is supported by micro evidence on consumption.  If the mean and conditional volatility of consumption growth are highly persistent, as in the Bansal-Yaron long-run risk model, then fast-moving habit can also generate, without eroding the value premium:  1) empirically sensible long horizon return predictability; and, 2) a price-dividend ratio for market equity that exhibits the high autocorrelation found in the data.  Fast-moving habit also delivers several empirical properties of market-dividend strips.


“Reproducibility in Management Science” (with Fišar, M., Greiner, B., Huber, C., Katok, E., Ozkes, A., and the Management Science Reproducibility Collaboration. Note: Member of the Management Science Reproducibility Collaboration), Management Science, 2024, Volume 70, Issue 3, pp. 1343 - 2022.

Abstract: With the help of more than 700 reviewers we assess the reproducibility of nearly 500 articles published in the journal Management Science before and after the introduction of a new Data and Code Disclosure policy in 2019. When considering only articles for which data accessibility and hard- and software requirements were not an obstacle for reviewers, the results of more than 95% of articles under the new disclosure policy could be fully or largely computationally reproduced. However, for almost 29% of articles at least part of the dataset was not accessible for the reviewer. Considering all articles in our sample reduces the share of reproduced articles to 68%. The introduction of the disclosure policy increased reproducibility significantly, since only 12% of articles accepted before the introduction of the disclosure policy voluntarily provided replication materials, out of which 55% could be (largely) reproduced. Substantial heterogeneity in reproducibility rates across different fields is mainly driven by differences in dataset accessibility. Other reasons for unsuccessful reproduction attempts include missing code, unresolvable code errors, weak or missing documentation, but also soft- and hardware requirements and code complexity. Our findings highlight the importance of journal code and data disclosure policies, and suggest potential avenues for enhancing their effectiveness. 



WORKING PAPERS


“Short of Cash? Convex Corporate Bond Selling By Mutual Funds and Price Fragility” (with Minsoo Kim). Conditionally accepted at the Review of Finance.

Abstract: We show cash shortfall, i.e. outflows in excess of cash holdings, has quantitatively important implications for corporate bond funds’ trading and price fragility. We find corporate bond selling is strongly convex in cash shortfall, while Treasury selling is closer to linear. We solve a theoretical model that explains these patterns from dual effects: a higher cash shortfall today increases both the expected future shortfall and liquidity costs. Consistent with this, we show cash shortfall amplifies the sensitivity of corporate bond selling to outflows. Surprisingly, unless there is a cash shortfall, we find no relationship between corporate bond selling and outflows for investment-grade bond funds. In contrast, Treasury selling depends only on outflows, independent of cash shortfall. We find downward price pressure from shortfall-induced trading in corporate bond returns, particularly large during the Covid-19 crisis. This price fragility is becoming more concerning as we find cash shortfall has trended upward recently.


"Hidden Duration: Interest Rate Derivatives in Fixed Income Funds" (with Jaewon Choi and Minsoo Kim)

Abstract: Fixed income funds carry significant duration risk from their use of interest rate derivatives (IRDs), exacerbating their fragility. This duration risk is hidden, as funds typically disclose portfolio duration weighted by market values instead of notionals, concealing their true risk. We find substantial variation in the duration of IRDs, both across funds and over time. Funds use IRDs not only for hedging but also for speculation, often disregarding the risk in their bond portfolios. During interest rate hikes in 2022, funds that increased leverage through IRDs performed particularly poorly and experienced substantial outflows. In contrast, those that increased leverage during interest cuts in 2020 achieved outperformance, potentially reinforcing funds’ inclination towards risk-taking in the future. Furthermore, our findings indicate that government-bond funds with speculative IRD positions exhibit higher flow sensitivity to returns, as further evidence of the link between interest rate risk and financial fragility.


“How Inventory Costs affect Dealer Behavior in the US Corporate Bond Market”. Revise-and-resubmit at the Journal of Financial Economics.

Abstract: I show that dealer behavior in the US corporate bond market is consistent with dealers bearing a time-varying cost of holding inventory. Liquidity is worse when inventory costs increase, especially for bonds with lower credit ratings, customers with lower bargaining power, and larger trades. When inventory costs increase, dealers sell more high yield bonds, but sell less investment grade, suggesting a flight to quality. Inventory costs don't affect dealers' trades immediately unwound in the inter-dealer market, but do affect the rate at which these trades occur, as dealers' willingness and ability to risk-share in the inter-dealer market change.

 

“Pricing and Liquidity in Over-The-Counter Markets”

Abstract: I show that if dealers are averse to holding inventory, then prices, liquidity, and dealers' inventory positions depend on inventory costs in negotiated over-the-counter markets. The solution to my dynamic equilibrium model rationalizes the following stylized facts in the US corporate bond market:

(i) a reduction in dealers' inventories during crises;

(ii) a reduction in average trade size since the onset of the financial crisis and tighter regulatory environment;

(iii) better prices for customers to buy than sell in the financial crisis;

(iv) a generally negative relationship between transaction costs and trade size.

 


MEDIA ATTENTION