Essays in International Macroeconomics and Finance
Open AccessThis dissertation examines how decisions and allocations by asset managers affect capitaland financial markets. In Chapter 1, I use fund-level data on mutual fund portfoliosinvested in a broad range of emerging and developed markets to study the behavior of fundmanagers. Existing literature has shown that mutual fund assets tend to fluctuate procyclically,amplifying the impact of shocks and crises. We may, however, expect these effectsto vary across funds depending on how active the fund is. I show that fund strategy affectsthe amplification channel. Flows through more passive or index funds don’t amplify pricechanges within a country and aren't sensitive to country crises. Active funds display a muchwider range of fund strategies, with some amplifying shocks and others behaving in a morecontrarian manner. The results suggest less amplification due to manager behavior as thecomposition of the mutual fund industry changes.In Chapter 2, I study liquidity management decisions in mutual funds domiciled globally.While we have knowledge on factors that drive investor flows, evidence is scarce onhow fund managers react to these flows. Do funds transmit the behavior of investors ordo they act as a buffer in any way? To answer these questions, I use fund-level data toestimate how funding shocks from investors affect both cash and country positions in theportfolio. My results are the first to describe liquidity management decisions by mutualfunds domiciled globally. I show that funds maintain small cash buffers, accommodatinginvestor flows with cash only to a minimal extent and instead transact more heavily in securitiesof the underlying portfolio. Notably, this flow-induced trading is stronger in activefunds than we may expect. These results have stability implications in periods of financial stress. To the extent fund managers use cash as a buffer to mitigate investor redemptions,they can either mitigate or amplify fire sales of assets in the portfolio. Finally, I show thatin forced asset sales, funds tend to sell allocations in countries with low returns and incountries with higher market liquidity.Chapter 3 is concerned with risks in hedge funds. The use of leverage is often considereda key potential systemic risk in hedge funds. Yet, data limitations have made empiricalanalyses of hedge fund leverage difficult. Using new regulatory data on hedge fund activities,we provide the most comprehensive assessment of hedge fund leverage to date. Weexamine the observable cross-sectional determinants of fund leverage, the relationship betweenleverage and risk in equilibrium, and the relationship between leverage and fundperformance. Our headline finding is that leverage and portfolio risk are weakly negativelycorrelated. Our findings suggest that the association between leverage and risk in hedgefunds is nuanced, and that leverage is in part used to scale the payoffs of low-beta, high alphasecurities, resulting in an essentially flat relationship between leverage and portfoliorisk.
- All rights reserved
Notice to Authors
If you are the author of this work and you have any questions about the information on this page, please use the Contact form to get in touch with us.