Research Interests

Market Microstructure

Asset Pricing

Market Design



Dark pool trading and information acquisition (with Jing Pan) 2021. Review of Financial Studies, forthcoming. Abstract

Theory suggests that dark pools may facilitate or discourage information acquisition. We find that more dark pool trading leads to greater information acquisition. We measure information acquisition using stock price dynamics around earnings announcements. To overcome endogeneity concerns, we exploit a large exogenous decrease to dark pool trading that results from the implementation of the Security and Exchange Commission’s (SEC’s) Tick Size Pilot Program. The results cannot be explained by lit venue liquidity, algorithmic trading, or informational efficiency. A battery of additional tests, such as documenting a shift in SEC EDGAR searches, supports the information acquisition interpretation.

Political influence and the renegotiation of government contracts (with Matthew Denes and Ran Duchin) 2021. Review of Financial Studies, forthcoming. Abstract

This paper provides novel evidence that corporate political influence operates through renegotiations of existing government contracts. Using detailed data on contractual terms and renegotiations around sudden deaths and resignations of local politicians, the estimates show that politically connected firms initially bid low and successfully renegotiate contract amounts, deadlines, and incentives. The effects hold across different industries and contract types, enhance firm value, and persist around the exogenous increase in contract supply due to the American Recovery and Reinvestment Act of 2009. Overall, this paper puts forth an unexplored link between political influence, ex-post renegotiations and ex-ante bidding of government contracts.

A BIT goes a long way: Bilateral investment treaties and cross-border mergers (with Vineet Bhagwat and Brandon Julio) 2021. Journal of Financial Economics, 140(2): 514-538. Abstract

We examine whether Bilateral Investment Treaties (BITs), an external governance mechanism, stimulate cross-border mergers by protecting the property rights of foreign acquirers. Exploiting the staggered adoption and bilateral nature of the treaties, we find that BITs have a large positive effect on cross-border mergers. The probability and dollar volume of mergers between two given countries more than doubles after the signing of a BIT. The increase is driven by deals flowing from developed economies to developing economies and is concentrated in target countries with medium levels of political risk. The results suggest BITs are effective in expanding the global market for corporate control, particularly in the developing world.

Global political uncertainty and asset prices (with Lili Dai, Phong Ngo, and Bohui Zhang) 2020. Review of Financial Studies, 33(4): 1737-1780. Abstract

We show that global political uncertainty, measured by the U.S. election cycle, on average, leads to a fall in equity returns in 50 non-U.S. countries. At the same time, market volatilities rise, local currencies depreciate, and sovereign bond returns increase. The effect of global political uncertainty on equity prices increases with the level of uncertainty in U.S. election outcomes, and a country’s equity market exposure to foreign investors, but does not vary with the country’s international trade exposure. These findings suggest that global political uncertainty causes an increase in investors’ aggregate risk aversion, leading to a flight to safer assets.

The economic impact of index investing (with Matthew Ringgenberg and David Sovich) 2019. Review of Financial Studies, 32(9): 3461-3499. Abstract

We study the impact of index investing on firm performance by examining the link between commodity indices and firms that use index commodities. Starting in 2004, there was a dramatic increase in commodity index investing, an event referred to as the financialization of commodity markets. Following financialization, firms that use index commodities make worse production decisions and earn lower profits. Consistent with a feedback channel in which market participants learn from prices, our results suggest that index investing in financial markets distorts the price signal thereby generating a negative externality that impedes firms' ability to make production decisions.

Price discovery without trading: Evidence from limit orders (with Terrence Hendershott and Ryan Riordan) 2019. Journal of Finance, 74(4): 1621-1658 (Lead Article).Abstract

Adverse selection in financial markets is traditionally measured by the correlation between the direction of market order trading and price movements. We show this relationship has weakened dramatically with limit orders playing a larger role in price discovery and with high-frequency traders’ (HFTs) limit orders playing the largest role. HFTs are responsible for 60–80% of price discovery, primarily through their limit orders. HFTs’ limit orders have 50% larger price impact than non-HFTs’ limit orders, and HFTs submit limit orders 50% more frequently. HFTs react more to activity by non-HFTs than the reverse. HFTs react more to messages both within and across stock exchanges.

High frequency trading competition (with Corey Garriott) 2019. Journal of Financial and Quantitative Analysis, 54(4): 1469-1497 (Lead Article). Abstract

Theory on high-frequency traders (HFT) predicts that market liquidity for a security decreases in the number of HFT trading the security. We test this prediction by studying a new Canadian stock exchange, Alpha, that experienced the entry of 11 HFT firms over four years. Bid-ask spreads on Alpha converge to those at the Toronto Stock Exchange as more HFT trade on Alpha. Effective and realized spreads for nonHFT improve as HFT firms enter the market. To explain the contrast with theoretical predictions we test the model assumption of price competition and reject it in favor of quantity competition.

Risk and return in high frequency trading (with Matthew Baron, Bjorn Hagstromer and Andrei Kirilenko) 2019. Journal of Financial and Quantitative Analysis, 54(3): 993-1024 (Lead Article). Abstract

We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs’ trading performance. HFTs that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for a variety of strategies including market making and cross-market arbitrage. We explore implications of competition on relative latency and find support for various theoretical predictions.

Do upgrade matter?: Evidence from trading volume (with Jennifer Koski and Andrew Siegel) 2018. Journal of Financial Markets, 43(1): 54-77. Abstract

Prior research documents no significant abnormal returns around upgrades of credit ratings, suggesting that upgrades do not convey new information. These tests are limited by lack of data, liquidity screens, and ambiguous predictions. We extend prior research using trading volume. Because volume is highly non-normally distributed (especially in the bond market), we derive a new, more powerful nonparametric test statistic that can be used in other applications. Our results show significant abnormal volume in both stock and bond markets around both upgrades and downgrades. Some of this volume is attributable to credit-ratings-based regulations and other factors. Controlling for other effects, we also find evidence that upgrade announcements contain information.

Institutions and deposit insurance: Empirical evidence (with Kathryn Dewenter and Alan Hess) 2018. Journal of Financial Services Research, 54(3): 269-292. Abstract

Do banks’ responses to changes in deposit insurance vary across countries even if the countries have comparable institutions? If so, by how much? Using data on the financial performance of large banks in 15 financially and economically developed countries, we find that where deposit insurance has an effect, it is large and varies depending on the level of economic freedom, rule of law and corruption in the bank’s home country. As in prior papers, we show that during stable economic periods, increases in deposit insurance are associated with higher bank risk, both problem loans and leverage. In most, but not all cases, stronger institutions temper these effects. The institutions’ effects are substantial. For example, average changes in the Rule of Law double the impact of a change in deposit insurance on bank leverage. We contribute to the substantial literature in this area by showing that the institutional effects are significant even across a set of countries with comparable institutions; by conducting a careful calibration of the economic significance of the effects; by providing evidence that during stable periods changes in deposit insurance only affect bank risk and not other measures of performance; and finally by showing that the effects of both deposit insurance and institutions vary across stable and crisis economic periods. The stable period results are consistent with the moral hazard effects of deposit insurance, while the crisis period results are consistent with endogeneity concerns that poor bank performance could drive changes in regulations.

Do economists swing for the fences after tenure? (with Joseph Engelberg and Ed van Wesep) 2018. Journal of Economic Perspectives, 32(1): 179-194. Abstract

Using a sample of all academics who pass through top 50 economics and finance departments from 1996 through 2014, we study whether the granting of tenure leads faculty to pursue riskier ideas.  We use the extreme tails of ex-post citations as our measure of risk and find that both the number of publications and the portion consisting of “home runs” peak at tenure and fall steadily for a decade thereafter.  Similar patterns hold for faculty at elite (top 10) institutions and for faculty who take differing time to tenure.  We find the opposite pattern among poorly-cited publications: their numbers rise post-tenure.

High frequency trading and extreme price movements (with Ryan Riordan, Andriy Shkilko, Konstantin Sokolov, Allen Carrion, and Thibaut Moyaert) 2017. Journal of Financial Economics, 128(2): 253-265. Abstract

Are endogenous liquidity providers (ELPs) reliable in times of market stress? We examine the activity of a common ELP type – high frequency traders (HFTs) – around extreme price movements (EPMs). We find that on average HFTs provide liquidity during EPMs by absorbing imbalances created by non-high frequency traders (nHFTs). Yet HFT liquidity provision is limited to EPMs in single stocks. When several stocks experience simultaneous EPMs, HFT liquidity demand dominates their supply. There is little evidence of HFTs causing EPMs.

Stock liquidity and default risk (with Dan Li and Ying Xia). 2017. Journal of Financial Economics, 124(3): 486-502. Abstract

This paper examines the impact of stock liquidity on firm bankruptcy risk. Using the Securities and Exchange Commission’s decimalization regulation as a shock to stock liquidity, we establish that enhanced liquidity decreases default risk. Stocks with the highest default risk experience the largest improvements. We find two mechanisms through which stock liquidity reduces firm default risk: through improving stock price informational efficiency and facilitating corporate governance by blockholders. Of the two mechanisms, the informational efficiency channel has higher explanatory power than the corporate governance channel.

High frequency trading and the 2008 short sale ban (with Terrence Hendershott and Ryan Riordan). 2017. Journal of Financial Economics, 124(1): 22-42. Abstract

We examine the effects of high-frequency traders (HFTs) on liquidity using the September 2008 short sale-ban. To disentangle the separate impacts of short selling by HFTs and non-HFTs, we use an instrumental variables approach exploiting differences in the ban’s cross-sectional impact on HFTs and non-HFTs. Non-HFTs’ short selling improves liquidity, as measured by bid-ask spreads. HFTs’ short selling has the opposite effect by adversely selecting limit orders, which can decrease liquidity supplier competition and reduce trading by non-HFTs. The results highlight that some HFTs’ activities are harmful to liquidity during the extremely volatile short-sale ban period.

Trading fast and slow: Colocation and liquidity (with Bjorn Hagstromer, Lars Norden, and Ryan Riordan). 2015. Review of Financial Studies, 28(12): 3407-3443. Abstract

We exploit an optional colocation upgrade at NASDAQ OMX Stockholm to assess how speed affects market liquidity. Liquidity improves for the overall market and even for noncolocated trading entities. We find that the upgrade is pursued mainly by participants who engage in market making. Those that upgrade use their enhanced speed to reduce their exposure to adverse selection and to relax their inventory constraints. In particular, the upgraded trading entities remain competitive at the best bid and offer even when their inventories are in their top decile. Our results suggest that increasing the speed of market-making participants benefits market liquidity.

The asset pricing implications of government economic policy uncertainty (with Andrew Detzel). 2015. Management Science, 61(1): 3-18 (Lead Article). Abstract

Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ (2013) Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns. An increase of one standard deviation in EPU is associated with a 1.5% increase in forecasted three-month abnormal returns (6.1% annualized). Furthermore, innovations in EPU earn a significant negative risk premium in the Fama–French 25 size–momentum portfolios. Among the Fama–French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities.

High-frequency trading and the execution costs of institutional investors (with Terrence Hendershott, Stefan Hunt, and Carla Ysusi). 2014. Financial Review, 49(2): 345-369 (Winner of the Outstanding Publication Award). Abstract

This paper studies whether high-frequency trading (HFT) increases the execution costs of institutional investors. We use technology upgrades that lower the latency of the London Stock Exchange to obtain variation in the level of HFT over time. Following upgrades, the level of HFT increases. Around these shocks to HFT institutional traders’ costs remain unchanged. We find no clear evidence that HFT impacts institutional execution costs.

High frequency trading and price discovery (with Terrence Hendershott and Ryan Riordan). 2014. Review of Financial Studies, 27(8): 2267-2306 (Lead Article and Winner of the Michael J. Brennan Best Paper Award). Abstract

We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs' liquidity supplying orders are adversely selected. The direction of HFTs' trading predicts price changes over short horizons measured in seconds. The direction of HFTs' trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.

Network position and productivity:  Evidence from journal editor rotations (with Joseph Engelberg and Christopher Parsons). 2014. Journal of Financial Economics, 111(1): 251-270. Abstract

Using detailed publication and citation data for over 50,000 articles from 30 major economics and finance journals, we investigate whether network proximity to an editor influences research productivity. During an editor's tenure, his current university colleagues publish about 100% more papers in the editor's journal, compared to years when he is not editor. In contrast to editorial nepotism, such “inside” articles have significantly higher ex post citation counts, even when same-journal and self-cites are excluded. Our results thus suggest that despite potential conflicts of interest faced by editors, personal associations are used to improve selection decisions.


Under Review

Spillovers from equity to banking markets: Evidence from stock liquidity and the cost of bank loans (with Phong Ngo and Ying Xia) Abstract

We use the SEC Tick Size Pilot Program to show that stock liquidity reduces the cost of bank loans. Treated firms experience a 52 basis point increase in the cost of borrowing during the Tick Size Pilot Program; an effect that reverses when the program ends. We find similar results in a broad panel of firms using both retail and institutional measures of liquidity. We identify three non-mutually exclusive channels driving this effect. Liquidity increases the informativeness of prices, enhances external monitoring of the borrower by blockholders, and weakens the holdup problem in relationship banking. Finally, we show that firms respond to lower borrowing costs by using more bank credit.

Do analysts improve investment efficiency (with Wei Shi, K.C. John Wei, and Haifeng You) Abstract

To maximize firm value managers must efficiently invest new capital. This paper examines whether analyst coverage impacts a firm’s investment efficiency. Using broker mergers and closures as exogenous shocks to the number of analysts covering a firm, we find that firm investment efficiency significantly decreases after losing an analyst. The impact is largest for firms with the fewest number of analysts. We find evidence that the effect is driven by the role analysts play in information acquisition and in price efficiency. Our results suggest that the recent decline in analyst coverage may negatively impact resource allocation and future firm performance.

Does floor trading matter? (with Matthew Ringgenberg and Dominik Rosch) Abstract

While algorithmic trading now dominates financial markets, some exchanges continue to use human floor traders. On March 23, 2020 the NYSE suspended floor trading because of COVID-19. Using a difference-in-differences analysis, we find that floor traders are important contributors to market quality, even in the age of algorithmic trading. The suspension of floor trading leads to higher effective and quoted spreads and larger pricing errors. Moreover, consistent with theoretical predictions about automation, the effects are strongest around the opening and closing auctions when complexity is highest. Our findings suggest that human expertise can complement algorithms in complex situations.

Machine learning and the stock market (with Abalfazl Zareei) Abstract

Practitioners allocate substantial resources to technical analysis whereas academic theories of market efficiency rule out technical trading profitability. We study this long-standing puzzle by designing a machine learning algorithm to search for profitable technical trading rules while controlling for data-snooping. Our results show that an investor can find profitable technical trading rules using past prices, and that this out-of-sample profitability decreases through time, implying that markets have recently become more efficient.

Preventing information leakage (with Dan Li, Matthew Ma, and Ryan Riordan) Abstract

Investors devote significant resources to producing private information. The value of such informational is eroded when it is leaked. We study the use of multiple brokers by institutions to help mitigate information leakage. We document that trades using multiple brokers better predict future returns, consistent with information possessed by investors driving the decision to use multiple brokers. We find that trades using multiple brokers have lower price impacts and implementation shortfalls, larger long-term trade profitability, and fewer follower trades than similar single broker trades. The results suggest that traders use multiple brokers to successfully avoid information leakage.

What moves stock prices? The role of news, noise, and information (with Thanh Huong Nguyen, Talis Putnins, and Eliza Wu) Abstract

 We develop a return variance decomposition model to separate the role of different types of information and noise in stock price movements. We disentangle four components: market-wide information, private firm-specific information revealed through trading, firm-specific information revealed through public sources, and noise. 31% of the return variance is from noise, 37% from public firm-specific information, 24% from private firm-specific information and 8% from market-wide information. Since the mid 1990s there has been a dramatic decline in noise. During this period firm-specific information is increasing, consistent with increasing market efficiency. Our findings help reconcile the mixed results in the R^2 literature.


Working Papers

Competition and exchange data fees (with James Brugler and Dominik Rosch) Abstract

Exchanges are monopolist suppliers of their own order book data. We examine three events where exchanges begin charging a fee for order book data for the first time and test whether or not these fees affect their market share in a difference-in-differences setting. We find that the introduction of fees leads to a fall of market share of around 5-8 percent. Examining average trading costs, price impact and dealer revenue per trade around the events indicates that order routing decisions of informed traders are relatively more sensitive to order book data fees than other trader categories.

Does financial innovation lead to real innovation? Evidence from financial derivatives (with Lora Dimitrova and Sapnoti Eswar) Abstract

We investigate whether financial innovation, specifically the introduction of derivative products, spurs firms’ real innovation, measured with patent based metrics. Consistent with financial innovation being an important contribution to real innovation, we find that the use of financial derivatives causes firm patent production to increase. The main mechanism behind the relationship is improved risk management. Derivatives usage decreases cash flow volatility, decreasing the need for external financing, and allowing firms to expand their innovative projects.

Does shareholder litigation risk cause public firms to delist? Evidence from securities class action lawsuits (with Nhan Le, Duc Duy Nguyen, and Vathunyoo Sila) Abstract

The number of listed firms in the U.S. has fallen by half since the late 1990s. Our paper examines whether and to what extent the costs of shareholder litigation have contributed to this trend. Using the staggered adoption of universal demand (UD) laws, we find that the reduction in shareholder litigation risk lowers incidences of firms delisting from stock exchanges. Furthermore, the effect is concentrated among firms facing higher ex ante litigation risk. UD law adoptions also encourage new listings. Overall, our findings suggest that the pressure imposed by shareholder litigation increases the costs of listing.

ETF trading and the bifurcation of liquidity (with Davidson Heath and Da Huang) Abstract

Passively managed exchange traded funds (ETFs) are a financial technology that has risen dramatically in the last two decades. Over the same period liquid stocks have become more liquid while illiquid stocks have not experienced a similar improvement. We model investors shifting from trading individual stocks to trading ETFs and generate predictions consistent with the documented bifurcation in liquidity. Using daily ETF creation and redemption activity, we provide empirical evidence that closely matches the model's predictions. The results show that the effects of ETFs on underlying asset markets are driven by their index replication strategy.

How do extreme price movements end? (with Konstantin Sokolov and Jiang Zhang) Abstract

We test competing theories on liquidity dynamics during extreme price movements (EPMs). Our findings indicate that market makers strategically allow for price pressures and earn compensation from pricing errors. As a result, liquidity provision intensifies towards the end of an average EPM. This goes counter to a widespread concern that market making constraints cause the deterioration of liquidity as EPMs develop. Finally, we demonstrate that limit order book dynamics during EPMs is in line with a socially beneficial equilibrium.

On the causal effect of fame on citations (with Joseph Engelberg, Sapnoti Eswar, and Ed Van Wesep) Abstract

Papers published in economics journals whose first authors are famous have more citations than papers whose second or third authors are famous. As a paper ages, its citation rate varies most with variation in the fame of the first author and less so with the fame of second and third authors. Author order is alphabetical so these patterns are unrelated to underlying quality. The magnitudes we find are large: a three-author paper written by the most prolific author in economics and his two research assistants would receive, on average, more than double the citations if the prolific author were first rather than second or third. The effect is especially pronounced in three, rather than two, author papers, suggesting that burying a famous author in the “et al” reduces citations even further.