My papers are available online on SSRN.
Inverted Fee Structures, Tick Size, and Market Quality, Journal of Financial Economics, Forthcoming
Shaping Expectations and Coordinating Attention: The Unintended Consequences of FOMC Press Conferences, Journal of Financial and Quantitative Analysis, Forthcoming
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.
How is Earnings News Transmitted to Stock Prices?
With Charles Martineau
We study price formation around earnings announcements for S&P 1500 stocks from 2011 to 2015 to understand the relationship between liquidity and price efficiency. Earnings are announced in the after-hours market, an illiquid trading environment with low trading volume. Spreads are wider before announcements and narrow more slowly after announcements for small firms. The narrowing of spreads is driven by one side of the quote as ask (bid) prices update instantaneously after positive (negative) news. On average, pre-announcement spreads include the post-announcement midquote, leaving no profits for liquidity traders other than trading against stale quotes. Midquote prices fully reflect earnings surprises before the opening of markets even if there are no trades.
Double Bonus? Implicit Incentives for Money Managers with Explicit incentives
With Juan Sotes-Paladino
Using a unique dataset of performance-fee mutual funds, we examine the interaction between direct and indirect incentives in the asset management industry. A comparison of the flow-performance relationships of performance-fee and non-performance-fee funds reveals that funds with direct incentives can face substantially steeper indirect incentives. Among performance-fee funds, the flow relationship depends on the performance fee level and tends to attenuate the asymmetry in total pay for good vs. poor performance. Altogether, our findings suggest that the market favors steep but symmetric ("linear") compensation schedules for asset managers. Our results shed new light on the contracting relation between delegating investors and their portfolio managers.
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).
Indexers and Comovement
Revise and resubmit, Financial Management
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.