top of page
Working Papers
1. Fund Flows, Liquidity, and Asset Prices
Presentations (selected): WFA 2020; Young Scholars Finance Consortium 2019 at Texas A&M; Federal Reserve Board of Governors.

Abstract: This paper shows empirically that mutual funds, facing fund flow risk and liquidity risk, significantly distort expected corporate bond returns due to their distinct asset demands as financial intermediaries. Funds actively engage in hedging by underweighting corporate bonds highly exposed to such risks, ultimately incurring substantial risk premia for fund flow betas: the co-movements of returns and, notably, liquidity costs with aggregate fund flow shocks. Using identification strategies that exploit distinctive structures in the corporate bond markets, this paper demonstrates that the unique variations of aggregate flow shocks are priced, while ruling out various alternative asset pricing channels.

2. Hidden Duration: Interest Rate Derivatives in Fixed Income Funds
Co-authors: Jaewon Choi and Oliver Randall.
Presentations (selected): Federal Reserve Bank of Atlanta & GSU Workshop 2023, CFTC (Commodity Futures Trading Commission),
ESMA (European Securities and Markets Authority), Fama-Miller Center at Chicago Booth.

Media coverage:

Abstract: Fixed income funds carry significant duration risk from their use of interest rate derivatives (IRDs). This duration risk is hidden, as funds typically disclose portfolio duration weighted by market values instead of notionals, concealing their true risk. We find substantial variation in the duration of IRDs, both across funds and over time. Funds use IRDs not only for hedging but also for speculation, often disregarding the risk in their bond portfolios. During interest rate hikes in 2022, funds that increased leverage through IRDs performed particularly poorly. In contrast, those that increased leverage during interest cuts in 2020 achieved outperformance, potentially reinforcing funds' inclination towards risk-taking during interest rate hikes in 2022.

 3. Short of Cash? Convex Corporate Bond Selling By Mutual Funds and Price Fragility
Co-author: Oliver Randall.
Review of Finance, Revise and Resubmit.
Presentations (selected): Federal Reserve Board 5th Short-Term Funding Markets Conference 2022; Australian National University.

Abstract: We show cash shortfall, i.e. outflows in excess of cash holdings, has quantitatively important implications for corporate bond funds’ trading and price fragility. We find corporate bond selling is strongly convex in cash shortfall, while Treasury selling is closer to linear. We solve a theoretical model that explains these patterns from dual effects: a higher cash shortfall today increases both the expected future shortfall and liquidity costs. Consistent with this, we show cash shortfall amplifies the sensitivity of corporate bond selling to outflows. Surprisingly, unless there is a cash shortfall, we find no relationship between corporate bond selling and outflows for investment-grade bond funds. In contrast, Treasury selling depends only on outflows, independent of cash shortfall. We find downward price pressure from shortfall-induced trading in corporate bond returns, particularly large during the Covid-19 crisis. This price fragility is becoming more concerning as we find cash shortfall has trended upward recently.

4. Short-Run Income Shocks and Long-Run Distortions in Household Investments
Co-authors: Sehoon Kim, Yoon Lee, and Hoonsuk Park.

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.
bottom of page