Advising the Advisors: Evidence from ETFs, with Jonathan Brogaard, Nataliya Gerasimova

Abstract: Asset managers play a dual role by simultaneously managing funds and increasingly providing investment model recommendations to third-party financial advisors. Using a novel data set on recommendations by ETF issuers and strategists, we show that the $4.8 trillion recommendation market has a substantial impact on ETF flows. Model providers recommend their affiliated ETFs more frequently. These funds tend to have higher fees and lower performance than recommended unaffiliated ETFs. In addition, investors following the recommendations exhibit weaker sensitivity to funds’ returns. We fail to find evidence that recommendations are driven by private information about the future performance of affiliated funds.

covered by: Bloomberg, Financial Planning, ETF Stream, Yahoo Finance

presented:  University of Lausanne, Annual Hedge Fund Research Conference, FMA, Annual Meeting of the German Finance Association (DGF), The China International Conference in Finance (CICF) , FMA Europe, 4th Future of Financial Information Conference, International Conference of the French Finance Association (AFFI), Financial Markets and Corporate Governance Conference(FMCG), NFN Young Scholars Finance Webinar Series, SHUFE, NHH

An Equilibrium Model of Entrusted Loans 

Abstract: Entrusted loan is a type of inter-corporate loan and a major component of shadow banking in China. In a model with entrepreneurial moral hazard and bank moral hazard, entrusted loans arise endogenously when the banking sector is highly competitive. Entrusted loans involve a lending chain in which high-capitalized firms channel bank loans into medium-capitalized firms. High-capitalized firms obtain cheap bank loans and over-borrow to form shadow banks with the extra capital. Medium-capitalized firms simultaneously borrow from both banks and shadow banks, while low and semi-highly capitalized firms borrow only from banks. As a result of lower bank monitoring, entrusted loans improve the total welfare of banks and firms. However, entrusted loans destroy firms’ value because firms earn reduced expected profits. Default risk is increased and real efficiency reduced. The model can explain the rapid growth of entrusted loans in China since the economic stimulus plan of 2009-2010: credit expansion policies drive up the competition of commercial banks and further trigger the growth of entrusted loans.

presented: Swissnex (Shanghai), The China International Conference in Finance (CICF), FMA Europe, SFI Research Day(Gerzensee), The Vanguard Group, Cass Business School, Chinese University of HongKong (Shenzhen), Queensland University of Technology, Australasian Finance and Banking Conference, HEC Paris Finance PhD Workshop, IFABS, University of Lausanne

Electronic Trading in OTC Markets vs. Centralized Exchange, with Sebastian Vogel and Yuan Zhang

Abstract: We model a two-tiered market structure in which an investor can trade an asset on a trading platform with a set of dealers who in turn have access to an interdealer market. The investor’s order is informative about the asset’s payoff and dealers who were contacted by the investor use this information in the interdealer market. Increasing the number of contacted dealers lowers markups through competition but increases the dealers’ costs of providing the asset through information leakage. We then compare a centralized market in which investors can trade among themselves in a central limit order book to a market in which investors have to use the electronic platform to trade the asset. With imperfect competition among dealers, investor welfare is higher in the centralized market if private values are strongly dispersed or if the mass of investors is large.

presented: 7th conference on Financial Markets and Corporate Finance, The China International Conference in Finance (CICF), Paris December Meeting, NFA, EFA, FMA Europe, SFI Research Day(Gerzensee),SGF Conference, EPFL

Why Do Large Investors Disclose Their Information?

Abstract: Large investors often advertise private information at private talks or in the media. To analyse the incentives for information disclosure, I develop a two-period Kyle (1985) type model in which an informed short-horizon investor strategically discloses private information to enhance price efficiency. I show that information disclosure is optimal when the scope of private information is large and when the large investor has a high reputation. Short investment horizons induce information disclosure among investors and are beneficial for price efficiency. However, strategic information disclosure reduces trading before disclosure and harms price discovery.

presented: USI Lugano, EFA-Doctoral Tutorial(Oslo), Asian Finance Association Conference, SFI Research Day(Gerzensee), University of Lausanne

Work in Progress

ETF Ownership and Market Segmentation: Evidence from Corporate Bond ETFs
Passive and Active investing in corporate bond mutual funds