I provide evidence that a mutual fund’s flows create a positive payoff externality for other mutual funds holding similar assets. This externality drives the documented flow-based return and reversal pattern in mutual fund returns, both market-wide and within styles. Economically, the externality is 85% as large as the typical explanatory effects (e.g., lagged flows). Externality effects are substantial among mutual funds across different styles, providing evidence of so-called ‘crowded trades’ and are a likely propagation mechanism for retail investors’ biases. While this result holds among mutual funds, it has implications for externalities in financial markets in general.
- Lead Article, Journal of Financial Markets, September 2016
- Presented at the 2014 AFA meeting in Philadelphia, PA
- Presented at the 2011 Financial Research Association meeting in Las Vegas, NV
- Winner of Financial Research Association Michael J. Barclay Award for best solo-authored paper by a young scholar (Ph.D. student or Assistant Professor with Ph.D. in last three years)
- Winner of the Shmuel Kandel Award (Outstanding North American Ph.D. Student in Financial Economics), The Utah Winter Finance Conference, 2012
- Presented at the Olin Business School at Washington University in St. Louis Ph.D. Poster Session as a part of the 8th Annual Corporate Finance Conference.
- Formerly: “Contagious Capital: A Network Analysis of Interconnected Intermediaries”
- Special thanks to my committee (Jennifer Conrad, Adam Reed, Joey Engelberg, Greg Brown, and Pab Jotikasthira) for timely and helpful advice on this project. I am also grateful to Antti Petajisto, Jeff Busse, Nick Bollen, Rick Sias, Ethan Cohen-Cole, Tim Conley, Eric Ghysels, Chris Lundblad, Ed Van Wesep and Matt Ringgenberg for useful comments.