Market fairness and efficiency: Evidence from the Tokyo Stock Exchange, with David Kemme and Thomas McInish, Journal of Banking & Finance, 2022 [SSRN]
How do extreme price movements end? with Jonathan Brogaard and Konstantin Sokolov [SSRN]
We test competing theories of liquidity dynamics during extreme price movements (EPMs). We find that market makers strategically allow for price pressures and are compensated from correcting pricing errors. As a result, liquidity provision intensifies towards the end of a typical EPM. This goes counter to a widespread concern that market making constraints cause liquidity to deteriorate as EPMs develop. The prevailing limit order book dynamics during EPMs are in line with Weill’s (2007) socially beneficial equilibrium.
Presentations: International Conference of the French Finance Association (2021), FMA Annual Meeting (2020), University of Virginia (2020), Mid-Atlantic Research Conference in Finance (2020)
A Real Cost of Free Trades: Retail Option Trading Increases the Volatility of Underlying Securities, with Marc Lipson and Davide Tomio [SSRN]
We examine the link between retail trading in options and the volatility of the underlying assets. Using Robinhood's introduction of options as a shock to retail trading, we confirm that option volume increased around this event and show that volatility similarly increased for: interlisted US securities, relative to their Canadian counterparts; optioned shares relative to optionless shares for firms with dual class shares; and more so for shares that would be become more attractive to retail traders as a result of the fee change (relatively high stock prices or low option prices). We provide further evidence suggesting the effect is permanent and that the underlying mechanism is related to market makers hedging their option exposure: volatility increases more for shares with higher option-embedded leverage; spreads and price impacts are lower; market maker volumes increase; and the volatility of retail option volume increases. Our results suggest that a shift in retail trading toward options drives an increase in the volatility of the optioned securities due to that actions of market makers hedging their exposure.
Presentations: Derivatives and Asset Pricing Conference (2023)
Tax-loss selling and the January effect revisited: Evidence from municipal bond closed-end funds and exchange-traded funds, with Allen Carrion [SSRN]
We revisit the tax-loss selling hypothesis as a potential explanation of the well-known January effect in securities markets. We expand the empirical evidence from municipal bond closed-end funds (CEFs) by extending the sample period by almost 20 years and adding exchange-traded funds (ETFs) to the sample. Our updated sample covers the recent growth of municipal bond ETFs and a significant increase in municipal bond trading volume and liquidity. Both developments reduce arbitrage costs and thus are expected to increase tax loss selling in the funds and increase the transmission of price effects to the underlying bonds. We find that the January effect of municipal bond CEFs becomes stronger in more recent years, and show evidence that largely supports the tax-loss hypothesis. We also find some evidence indicating a smaller discrepancy between the abnormal returns of the funds and underlying bonds. For the municipal bond ETFs, we find a smaller January effect that cannot be explained by the tax-loss selling hypothesis.
Presentations: University of Memphis (2020)
International information flow and market quality, sole-authored
Does the informational interdependence among countries affect market quality? Guided by theoretical literature, this paper examines international information flow disruptions as a source of financial market frictions. Using non-overlapping holidays as a novel identification method, I find that disruptions in foreign information inflow result in the deterioration of domestic market liquidity and fairness. I document evidence indicating that liquidity worsens through both the information asymmetry surge and the manipulative trading channels, while fairness worsens through only the latter channel. Furthermore, intraday volatility increases via both channels. Additional analyses show that an increase in international trade strengthens the information asymmetry surge channel and that a stock exchange upgrade weakens the manipulative trading channel. These findings suggest that international information flow is important to financial market quality.
Presentations: FMA Annual Meeting (2022)
Semifinalist, Best Paper Award in Market Microstructure at the FMA annual meeting (2022)
Works in Progress
Which municipal bond liquidity measures work best? with Allen Carrion and Abby Kim
Institutional trading during extreme market movements, with Marc Lipson and Andy Puckett
Intraday higher moments and liquidity: Liquidity suppliers’ preference on tail properties of the return distribution, with Pankaj Jain