Publication & Working Papers
Revise and Resubmit, Journal of Empirical Finance
Abstract: This paper investigates the impact of growing ownership of fixed-income ETFs and mutual funds on the commonality in liquidity across corporate bonds. The unpredictability of liquidity demands inherent in these funds can prompt correlated trading among underlying illiquid bonds. The empirical results reveal a positive and significant relationship between ETF ownership and liquidity commonality in investment-grade bonds, indicating that ETFs curtail opportunities for liquidity risk diversification. Conversely, mutual fund ownership does not impact bond liquidity co-movement, a feature that distinctly differentiates it from equity markets. The paper identifies three pivotal mechanisms that help explain the disparate impact of ETFs and mutual funds: correlated trading stimulated by fund flows, differences in investor clienteles, and the influence of ETF arbitrage activity.
Columns on the paper:
Credit Liquidity Risk Is Rising Thanks to Boom in Bond ETFs, Bloomberg
Rapid Growth of Bond ETFs Could Fuel Credit Liquidity Risks, ETF Trends
How 'Democratization' Of The Bond Market Killed Liquidity, Zero Hedge
Bond ETF explosion fuels liquidity risks, ETF Stream
Media mentions:
ETF Liquidity Mirage (The Weekly Fix), Bloomberg
What happens when the lights go out? An analysis of ETFs when liquidity vanishes, ETF Stream
Presentations: SFI Research Days (Virtual, 2020), AEFIN PhD Mentoring Days (Virtual, 2020), USI Lugano Brown Bag Seminar (2020), Bilkent University (2021), Sabanci University (2021), Tulane University (2021), WHU Otto Beisheim School of Management (2021), Paris Financial Management Conference (2022)
Abstract: The paper studies liquidity provision by institutional investors using trade-level data. We find that hedge fund trades are a more important predictor of stock-level liquidity than mutual fund trades. However, hedge funds' liquidity provision is more exposed to financial conditions than that of mutual funds. Hedge funds that are more constrained in terms of leverage, age, asset illiquidity, and past performance exhibit a stronger shift towards liquidity consumption when funding condition tighten. Stocks with more exposure to constrained liquidity providing hedge funds suffered more during the financial crisis.
Abstract: This paper empirically investigates the role of long-term institutional investors in information diffusion from the credit market to equities. The results show that a 1-percent increase in CDS slope is associated with a 0.175 percentage point increase in the sales of the long-term institutions. However, changes in CDS slope do not significantly predict short-term institutional trading. My findings provide evidence that a low CDS slope predicts improved creditworthiness, which in turn, is transmitted to the equity market through the trading of long-term institutions.
Presentations: AFA Ph.D. Student Poster Session (San Diego, 2020), XXVI Finance Forum (Santander, 2018), Spanish Finance Association 1st PhD Consortium (Santander, 2018), 35th Annual Conference of the French Finance Association (AFFI) (Paris, 2018), SFI Research Days (Gerzensee, 2017)