WORKING PAPERS
MAN VS. MACHINE: QUANTITATIVE AND DISCRETIONARY EQUITY MANAGEMENT (the paper can be downloaded here)
I use a machine learning technique to classify the universe of active equity mutual funds into “quantitative”, who mostly rely of computer-driven models and fixed rules, or "discretionary", who mostly rely on human judgement. I propose an equilibrium model in which quantitative funds have greater information processing capacity but less adaptive strategies. The model predicts that quantitative funds hold more stocks and display pro-cyclical performance, but their trades are vulnerable to “overcrowding”. Discretionary funds alternate between stock picking in expansions and market timing in recessions, display counter-cyclical performance and focus on stocks for which less overall information is available. My empirical evidence supports these predictions.
WORK IN PROGRESS
MACHINE LEARNING AND THE CHANGING ECONOMICS OF KNOWLEDGE PRODUCTION (with Laura Veldkamp)
LEARNING FROM SOFT INFORMATION: CAPITAL ALLOCATION IN THE MUTUAL FUND INDUSTRY (with Anton Lines)
THE IMPACT OF MUTUAL FUND REGULATION ON ALLOCATIVE EFFICIENCY (with Anton Lines)
RESEARCH
PUBLICATIONS (including accepted and forthcoming)
THE CHANGING ECONOMICS OF KNOWLEDGE PRODUCTION
with Laura Veldkamp (paper download)
The Review of Financial Studies, Volume 37, Issue 1, January 2024, Pages 89–118
Big data technologies change the way in which data and labor combine to create knowledge. Is this a modest innovation or a data revolution? Using hiring and wage data, we estimate firms’ data stocks and their knowledge production functions. Quantifying changes in production functions informs us about the likely long-run changes in output, in factor shares, and in the distribution of income, due to big data technologies. For the investment management industry, our structural estimates predict a 5% decline in the labor share of income; that change is comparable to similar estimates for the industrial revolution.
BROKEN PROMISES, COMPETITION, AND CAPITAL ALLOCATION IN THE MUTUAL FUND INDUSTRY
with Anton Lines (paper download)
This paper was previously circulated under the title: "Do Mutual Funds Keep Their Promises?"
Journal of Financial Economics, Volume 162, December 2024
What characteristics of mutual funds do investors care about? In addition to performance and fees, we show that investors exhibit a clear preference for managers who adhere to the strategies they describe in their prospectuses. Capital flows respond negatively when funds diverge from the average holdings of their text-based strategy peer groups, but positively when they outperform those peer averages. We identify this effect using a novel instrumental variables approach, and show that funds face a delicate trade-off between keeping their promises and outperforming their peers who make similar promises.
WORKING PAPERS
DIFFERENT SHADES OF ESG FUNDS
with Andrea Buffa, and Meha Sadasivam. (paper download)
Analyzing US active equity mutual fund prospectuses, we find that only 20% of those using ESG terminology qualify as impact funds, tilting their portfolios based on non-pecuniary ESG considerations. The remainder are either exclusionary funds, using ESG criteria to restrict their investment universe, or opportunistic funds, leveraging ESG data for financial gain. Our findings indicate that only impact funds, and those engaging in ESG activism, exhibit higher ESG ratings. In contrast, most opportunistic funds display no clear ESG preference and may even short-sell high ESG-rated stocks. Overall, funds tend to adhere to their ESG claims, attenuating concerns about widespread greenwashing.
MAN VS. MACHINE:
QUANTITATIVE AND DISCRETIONARY EQUITY MANAGEMENT (paper download) (Theory) (online appendix)
I use machine learning to categorize US active equity mutual funds as quantitative (reliant on computer models and fixed-rules) or discretionary (reliant on human judgment). I then formulate hypotheses of how their holdings and performance might differ, based on the conjecture that quantitative funds might have more learning capacity but less flexibility to adapt to changing market conditions than discretionary funds. Consistent with those hypotheses, I find that quantitative funds hold more stocks, specialize in stock picking, and engage in more overcrowded trades. Discretionary funds hold lesser-known stocks, switch between picking and timing and outperform quantitative funds in recessions.
LEARNING FROM PROSPECTUSES
with Andrea Buffa, Apoorva Javadekar and Anton Lines. (paper download)
We study qualitative information disclosure by mutual funds when investors learn from these disclosures in addition to past performance. We show theoretically that fund managers with specialized strategies optimally choose to disclose detailed strategy descriptions, while managers with standardized strategies provide generic descriptions. Generic descriptions lead to errors in benchmarking by investors and thus higher volatility in capital flows. While all fund managers dislike such volatility, those with above-average factor exposures also benefit from benchmarking errors as investors incorrectly ascribe factor returns to managerial skill. The model generates a number of predictions that we are able to test empirically using a
comprehensive dataset of fund prospectuses. Consistent with the model's predictions, funds with standardized strategies include more boilerplate in their descriptions, grow larger and have lower flow-performance sensitivity, despite having greater flow volatility.
MARKET TIMING IN BAYESIAN PORTFOLIO OPTIMIZATION
(paper download)
I propose a portfolio allocation model that combines a data-based approach with macroeconomic considerations of the business cycle. It accounts for the two key features of business cycles, namely co-movement among macroeconomic variables and asymmetric development of the cycles. The joint treatment of these characteristics improves the ability of the model to time market turns, consequently enhancing portfolio gains. The estimation technique developed allows to simultaneously address the issues of parameter uncertainty, mispricing uncertainty and the uncertainty relative to structural instability within a Bayesian portfolio optimization problem.
WORK IN PROGRESS
BREAKING THE DATA CHAIN: THE RIPPLE EFFECT OF DATA SHARING RESTRICTIONS ON CAPITAL MARKETS
with Bo Bian and Huan Tang
This paper investigates the impact of privacy-motivated data sharing restrictions on financial markets, using Apple's App Tracking Transparency (ATT) policy as a laboratory. We show that ATT, by limiting the sharing of user data across apps, significantly reduces the predictive power of mobile-generated data, leading to increased forecast errors and decreased price informativeness. Firms reliant on third-party data experience a greater decline in information quality, which amplifies market forecast errors and reactions to earnings announcements. Our findings underscore the critical role of alternative data in financial markets and the broad implications of data sharing restrictions on market efficiency.