Working Papers

The exchange-traded fund (ETF) market has become the most important development of the financial markets over the last decade. I show that the network of the ETF market — the linkages between ETFs based on portfolio weights — catalyzes the propagation of price dislocations, the gaps between prices and their fundamental values. Arbitrage trading induces price dislocations in connected ETFs, followed by strong responses in returns and subsequent reversals with a sizable effect of 4–6% per year. This is robust to controlling for arbitrage trading on its own mispricing and common factors. I reconfirm the effects with the Fed announcement of the Bond ETF purchase in March 2020. The findings suggest that arbitragers create externalities from trading. Finally, the ETF market works as a stabilizer for price dislocations, but induced returns can incur unexpected fluctuations.
Presentation: LSE, NSF/UChicago Annual Conference on Network Science and Economics, WFA 2021, SMU, Baruch College, Bank of England, NY Fed, Federal Reserve Board, PIMCO, BlackRock
BlackRock Applied Research Award Finalist, 2020
WFA PhD Candidate Awards for Outstanding Research, 2021
Although real integration conceptually plays an important role for the comovement of international equity markets, documenting this link empirically has proven challenging. We construct a new dataset of theory-guided, relevant measures of bilateral trade in final and intermediate goods and services. With these measures, we provide evidence of a strong link between changes in real integration – in particular global value chains – and equity market comovement. This also holds when controlling for financial openness and other factors that could confound the role of real openness. These results suggest that supply chain disruptions, for instance due to political tensions and the COVID-19 crisis, might also affect the interconnections between stock markets via rippling through the global production network.
Presentation: Annual Meeting of the Central Bank Research Association, BIS, European Commission*, Banque de France*
*: by coauthor


Discussions


"Two APs are Better Than One: ETF Mispricing and Primary Market Participation" by Evgenii Gorbatikov and Taisiya Sikorskaya at FMA, 2021

Work in Progress

Forward-looking International CAPM

I uncover the risk-neutral covariance of global asset returns and currency returns using options and securities. With this, I propose a new framework for the International CAPM model. The measure seems to capture some economic policy uncertainty roughly 2-4 weeks earlier than Baker, Bloom, and Davis (2016). It performs better than a standard International CAPM model and can offer a signal 1 month earlier and in real-time.