My papers are available online on SSRN.
Inverted Fee Structures, Tick Size, and Market Quality, Journal of Financial Economics Volume 134, Issue 1, 2019, Pages 141-164
Stock exchanges compete for order flow through their fee models. A traditional model pays rebates to liquidity suppliers, and an inverted model pays rebates to liquidity demanders. Using a regulatory intervention to examine the interaction between tick size, restrictions on dark trading, and exchange fees, we show that traders use inverted venues to adjust for suboptimal tick sizes. Increased inverted venue activity improves pricing efficiency and liquidity, especially when the tick size is binding. We show that the sub-tick price improvement offered by inverted venues enhances competition for liquidity provision and increases information impounded into prices through nonmarketable limit orders.
Award: Best Paper on Market Microstructure Award, NFA 2017
Shaping Expectations and Coordinating Attention: The Unintended Consequences of FOMC Press Conferences, Journal of Financial and Quantitative Analysis, Forthcoming
In an effort to increase transparency, the chair of the Federal Reserve now holds a press conference (PC) following some, but not all, Federal Open Market Committee (FOMC) announcements. Evidence from financial markets shows that investors lower their expectations of important decisions on days without PCs and that these announcements convey less price-relevant information. Correspondingly, we show that investors pay more attention to upcoming announcements with PCs. This coordination of attention can reduce welfare in models of the social value of public information. Consistent with theories of investor attention, the market risk premium is larger on days with PCs.
Note: From January 2019, the Chairman of the Federal Reserve will now hold a press conference after each meeting. A postscript at the end of the paper addresses this point.
Award: Best Paper on Financial Institutions and Markets Award, 7th Financial Markets and Corporate Governance Conference (2016)
- Article in the The Globe and Mail, 2019
- Live interview with Sky Business News, 2015
- Mention in LA Times, 2015
The Rise of Passive Investing and Index-linked Comovement, North American Journal of Economics and Finance, Forthcoming
I introduce a general equilibrium model with active investors and indexers. Indexing causes market segmentation, and the degree of segmentation is a function of the relative wealth of indexers in the economy. Shocks to this relative wealth induce correlated shocks to discount rates of index stocks. The wealthier indexers are, the greater the resulting comovement is. I confirm empirically that S&P 500 stocks comove more with other index stocks and less with non-index stocks, and that changes in passive holdings of S&P 500 stocks predict changes in comovement of index stocks.
Using copulas to model price dependence in energy markets, Energy Risk, 2008 with Christian Genest and Michel Gendron
Visible and infrared imagery for surveillance applications: software and hardware considerations, Quantitative InfraRed Thermography Journal, 2007 with Amar El-Maadi, Louis St-Laurent, Hélène Torresan, Benoit Turgeon, Donald Prévost, Patrick Hébert, Denis Laurendeau, Benoit Ricard and Xavier Maldague
Price Revelation from Insider Trading: Evidence from Hacked Earnings News
From 2010-2015, a group of convicted traders accessed earnings information hours before their public release by hacking several major newswire services. We use their ''insider'' trading as a natural experiment to investigate how efficiently markets incorporate private information in prices. 15% of a firm's earnings surprise was incorporated into its stock price prior to its public release when the hackers had access to non-public information. Volume and spread-based measures of informed trading detect this activity, but order flow-based measures do not. We find evidence that uninformed, professional traders traded in the same direction, amplifying the impact of informed trading.
How is Earnings News Transmitted to Stock Prices?
With Charles Martineau
The most anticipated firms' disclosures are often released in the after-hours market, a very illiquid trading environment. We examine the relationship between liquidity and market efficiency around earnings announced outside of regular trading hours. We find that price discovery of earnings surprises occurs through changes in quotes rather than through trades. Pre-announcement bid-ask spreads are wide enough to eliminate profits of informed liquidity-takers. Spreads narrow following announcements but do so asymmetrically. Ask (bid) prices adjust quickly and efficiently to reflect positive (negative) surprises while bid (ask) prices are slower to adjust. This asymmetry generates price drifts in midquotes. Our results suggest that using midquotes to examine market efficiency in illiquid markets underestimates the true speed of price discovery.
Double Bonus? Implicit Incentives for Money Managers with Explicit incentives
With Juan Sotes-Paladino
We use a unique dataset of European performance-fee mutual funds to examine the interaction between explicit incentives (performance fees) and implicit incentives (fund flows) of asset managers. Funds with performance fees can face substantially steeper implicit incentives compared to non-performance-fee funds. Among performance-fee funds, investors’ flows depend on the performance fee level and tend to attenuate the asymmetry in the total pay for performance of higher-fee funds. Thus, the investor preferences that we elicit favor performance-sensitive but not necessarily asymmetric compensation schedules for fund companies. Our results shed new light on several aspects of the contracting problem in asset delegation.
Do Mutual Fund Managers Adjust NAV for Stale Prices?
Mutual fund returns are predictable when the Net Asset Value is computed from prices that do not reflect all available information. This problem was brought to the public eye with the late trading and market timing scandal of 2003, which led to SEC intervention in 2004. Since these events, mutual fund managers have been more active in adjusting NAV, reducing predictability by about half. The simple trading strategy I present yields annual returns of 33% from 2001 to 2004 and 16% from 2005 to 2010. Even after accounting for trading restrictions in mutual funds, an arbitrager could earn annual returns of 2.73% from 2005 to 2010, suggesting the problem is not fully resolved. The main methodological contribution of this paper is to develop a filtering approach based on a state-space model that embeds the fund manager problem, thus accounting for unobserved actions of fund managers. I also show that predictability increases significantly when information sources suggested by prior literature, such as index and futures returns, are supplemented by premiums on related exchange traded funds).