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Working Papers
Fund Flows, Liquidity, and Asset Prices
  • Management Science, Reject and Resubmit.
  • Presentations (selected): WFA 2020; Young Scholars Finance Consortium 2019 at Texas A&M; Fed Board 2019.
  • Abstract: This paper shows empirically that corporate bond mutual funds distort expected corporate bond returns due to a novel liquidity risk. Facing redemption obligations, mutual funds’ demand is low for bonds that are illiquid during outflows, incurring a substantial risk premium for the liquidity beta on flows: the co-movement of a security’s liquidity costs with aggregate fund flow shocks. Using firm-month fixed effects and the granular instrumental variables approach, this paper identifies the liquidity risk premium, while ruling out various alternative asset pricing channels. The liquidity beta is highly heterogeneous, even among bonds within the same firm, largely driven by redemption-forced selling interacting with liquidity costs. This mechanism highlights how sudden flows can amplify the equilibrium liquidity risk in the corporate bond market.
     
Short of Cash? Convex Corporate Bond Selling By Mutual Funds and Price Fragility (with Oliver Randall)    
  • Review of Finance, Revise and Resubmit.
  • Presentations (selected): Australian National University 2021; Fed Board 5th Short-Term Funding Markets Conference 2022.
  • Abstract: We solve a model that predicts mutual funds’ corporate bond selling, and its associated price pressure, are convex in funds’ cash shortfall, defined as outflows in excess of cash. This convexity arises from dual effects, providing a novel channel of price fragility: higher shortfalls today increase both the expected future shortfalls and expected future bond liquidity costs. Empirically, we find supporting evidence for this mechanism: cash shortfall substantially amplifies corporate bond selling, and shortfall-induced sales significantly depress corporate bond returns, which later revert. This price fragility is becoming more concerning as aggregate cash shortfall has trended upward recently.
     
Hidden Duration: Interest Rate Derivatives in Fixed Income Fund (with Jaewon Choi and Oliver Randall)
  • Presentations (selected): Fed Atlanta & GSU Workshop 2023, CFTC 2024, ESMA 2024, Fama-Miller Center Conference at Chicago Booth 2024, BI-SHoF 2024, AFA 2025, EFA 2025.
  • Media: Risk.net.
  • Abstract: Fixed income funds carry significant duration risk from their use of interest rate derivatives (IRDs). This duration risk is hidden, as funds have typically disclosed portfolio duration weighted by market values instead of notionals, concealing their true risk. We find substantial variation in IRD duration, both across funds and over time. The primary motive behind funds' use of IRDs is not to hedge interest rate risk or manage flow risk; rather, they are driven by risk-taking, closing the gap to the duration risk of their peers, and the desire for lower transaction costs. During our sample period from 2019 to 2023, returns on funds' IRD positions were the major driver of their performance, overshadowing returns on their non-IRD positions. The performance of funds' IRD positions is not associated with manager skill—funds that outperformed due to high IRD duration in early 2020 performed particularly poorly during interest rate hikes in 2022 and 2023.
     
Short-Run Income Shocks and Long-Run Distortions in Household Investments (with Sehoon Kim, Yoon Lee, and Hoonsuk Park)
  • Draft available upon request.
  • Presentations (selected): Boulder Summer Conference on Consumer Financial Decision Making 2024.
  • Abstract:  We show that short-run income shocks can create surprisingly long-run distortions in household investment behavior. Using transaction-level data, we find that households deposit significantly less money into their brokerage accounts for at least two years after a transitory unemployment shock compared to before. This response is stronger for larger shocks and among more constrained households, and driven more by changes in active rather than passive brokerage flows. In particular, deposits remain persistently lower after a household has missed out on higher stock market returns during an unemployment shock. On the other hand, we do not find similar effects for consumption or savings. Overall, our findings are consistent with long-lasting distortions caused by psychological anchors (i.e., "off-ramp effect"), but not fully explained by risk-based explanations.
Publication in Policy Research
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