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 focusing on recommendations by ETF issuers and strategists, we discover that these recommendations have a substantial impact on ETF flows. Model providers recommend their affiliated ETFs more frequently, and these tend to have higher fees and lower performance than recommended unaffiliated ETFs. In addition, investors who follow the recommendations exhibit weaker sensitivity to funds’ prices and returns. We fail to find evidence that recommendations are driven by private information about the future outperformance of affiliated funds.
Abstract: Entrusted loans are 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.
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.
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.
Work in Progress
Active and Passive Investing in ETFs