Research

“Time-Varying Liquidity and Momentum Profits”, with Doron Avramov and Allaudeen Hameed, forthcoming in Journal of Financial and Quantitative Analysis

Abstract: A basic intuition is that arbitrage is easier when markets are most liquid. Surprisingly, we find that momentum profits are markedly larger in liquid market states. This finding is not explained by variation in liquidity risk, time-varying exposure to risk factors, or changes in macroeconomic condition, cross-sectional return dispersion, and investor sentiment. The predictive performance of aggregate market illiquidity for momentum profits uniformly exceed that of market return and market volatility states. While momentum strategies are unconditionally unprofitable in US, Japan, and Eurozone countries in the last decade, they are substantial following liquid market states.

“Short-Term Reversals: The Effects of Past Returns and Institutional Exits”, with Allaudeen Hameed, Avanidhar Subrahmanyam and Sheridan Titman, forthcoming in Journal of Financial and Quantitative Analysis

Abstract: Price declines over the previous quarter lead to stronger reversals across the subsequent two months. We explain this finding based on the dual notions that liquidity provision can influence reversals, and agents that act as de facto liquidity providers may be less active in past losers. Supporting these observations, we find that active institutions participate less in losing stocks, and that the magnitude of monthly return reversals fluctuates with changes in the number of active institutional investors. Thus, we argue that fluctuations in liquidity provision with past return performance accounts for the link between return reversals and past returns.

“Scaling Up Market Anomalies”, with Doron Avramov, Amnon Schreiber and Koby Shemer, forthcoming in Journal of Investing

Abstract: This paper implements momentum among a host of market anomalies. Our investment universe consists of the 15 top (long-leg) and 15 bottom (short-leg) anomaly portfolios. The proposed active strategy buys (sells short) a subset of the top (bottom) anomaly portfolios based on past one-month return. The evidence shows statistically strong and economically meaningful persistence in anomaly payoffs. Our strategy consistently outperforms a naive benchmark that equal weights anomalies and yields an abnormal monthly return ranging between 1.273% and 1.471%. The persistence is robust to the post-2000 period, and various other considerations, and is stronger following episodes of high investor sentiment.

The Unexpected Activeness of Passive Investors: A World-Wide Analysis of ETFs”, with Massimo Massa and Hong Zhang

Abstract: The global ETF industry provides more complicated investment vehicles than low-cost index trackers. Instead, we find that the real investments of ETFs deviates from their benchmarks to leverage informational advantages (which leads to a surprising stock-selection ability), and to help affiliated OEFs through cross-trading. These effects are more prevalent in ETFs domiciled in Europe. Market awareness of such additional risk is reflected in ETF outflows. These results have important normative implications for consumer protection and financial stability.

“Short-Sale Constraints and the Pricing of Managerial Skills”, with Massimo Massa and Hong Zhang

Abstract: We investigate the impact of the absence of short selling on the pricing of managerial skills in the mutual fund industry. In the presence of divergent opinions regarding managerial skills, fund managers can strategically use fees to attract only the most optimistic capital. The recognition of this fee strategy helps explain a set of stylized observations and puzzles in the mutual fund industry, including the underperformance of active funds, the existence of flow convexity, and the negative correlation between gross-of-fee α and fees.

“Mutual Funds and Mispriced Stocks”, with Doron Avramov and Allaudeen Hameed

Abstract: We find strong and persistent cross-sectional differences in the propensity of active mutual funds to hold mispriced stocks. Funds with high propensity to hold overpriced stocks display poor stock-picking skills as they further purchase overpriced stocks during episodes of fund inflows and significantly underperform in subsequent periods. Intriguingly, overpriced funds attract considerable capital inflows when investor sentiment is high. The positive overpricing-flow relation is concentrated in funds with high marketing expenses and skewed returns. The evidence is consistent with an innocuous matching in the preference for stock characteristics by sentiment-driven managers and optimistic investors rather than active catering to investor preferences.

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