PhD Thesis Defense, Finance, P. Honkanen
We are happy to announce that Pekka Honkanen, PhD candidate in Finance, will defend his Thesis, "Essays in Finance", on May 26, 2pm.
Thesis Supervisor: Thierry Foucault, Professor of Finance, HEC Paris
Abstract: The three chapters of this study focus on information in the ﬁnancial markets, and how this is used and diffused by market participants. The ﬁrst article shows that investors observe prices and extract signals from them, leading to cross-asset learning and spillover effects in prices and liquidity between assets. The second article studies the securities lending market using a novel, handcollected dataset. I show that mutual funds react to short selling demand through the securities lending market, and that active funds reduce their holdings of stocks that are borrowed from them. In the ﬁnal article, we study how securities loans are allocated within mutual fund families.
In the ﬁrst article of this thesis, joint with Daniel Schmidt, we study the extent of cross-asset learning in ﬁnancial markets by examining spillover effects around mutual fund ﬁre sales. We ﬁnd that the well-documented impact-reversal pattern for the returns of ﬁre sale stocks (e.g., Coval and Stafford, 2007) spills over onto the stock returns of economic peers with a magnitude that is around one ﬁfth of the original effect. These spillovers extend to liquidity and are not explained by common funding shocks or the hedging activity of liquidity providers. We conclude that they represent information spillovers due to learning from prices, thus identifying cross-asset learning as an important driver for the commonality in returns and liquidity.
The second article studies the market for lending and borrowing securities in the United States. I ﬁnd that by making securities available for borrowing, mutual funds acquire information about short selling, which they exploit for trading. Funds with discretion in their investment choices re- balance their portfolios away from borrowed stocks, avoiding capital losses on stocks with decreasing prices. Funds also trade more aggressively on stocks with stronger signals. Finally, active funds charge lower lending fees than passive funds, consistent with funds paying for the information with lower fees.
In the third article, joint with Daniel Schmidt, we study the allocation of securities loans within mutual fund families. Using a novel dataset on fund level stock lending, we show that U.S. mutual fund families, ﬁrst, are more likely to enable index funds to lend securities than active funds. Second, we show that this also holds at the security level: index funds are allocated more securities loans than comparable active funds. We also ﬁnd no robust evidence that mutual fund families would strategically allocate securities loans to funds that prior literature has found to be more “valuable” to the families.