Using a unique data set on the ownership composition of euro area equity funds, we find substantial differences in the flow-performance sensitivity across mutual fund clienteles. Households, followed by insurers, display the weakest sensitivity, whereas investment funds-as investors in mutual funds-exhibit the strongest sensitivity. Crucially, these behavioral differences hold within the same fund-quarter, ruling out heterogeneity across funds as a potential driver. We relate these clientele effects to monitoring incentives and balance sheet constraints. Lastly, we find that households respond more strongly to poor performance when surrounded by more performance-sensitive investors, indicating strategic interactions in investor flows.

We utilize the Eurosystem securities lending facilities as a laboratory to investigate the impact of collateral scarcity on market functioning. The reduction of securities lending fees, implemented in November 2020, provides a quasi-natural experiment for our analyses. This policy change results in a surge in the utilization of securities lending facilities, particularly for bonds with limited supply elasticity in the repo market. We find no evidence of substitution effects; instead, the overall activity in the repo market expands through the collateral multiplier. The improved pricing conditions alleviate collateral scarcity and enhance market quality in both the repo and cash markets.

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Using microdata on stock-level lending positions from German mutual funds, we show that active funds use the equity lending market to obtain information about short sale demand. Funds reduce long positions in response to these demand signals, which allows fund managers to front-run public disclosure of big short positions and avoid future losses. Fund managers exploit this information advantage across funds they manage, but do not share it within their fund family, consistent with short demand signals providing an information advantage. Our results suggest a new motive for securities lending and an information aggregation role for the equity lending market.

Using the exogenous shock of the COVID-19 pandemic, we study how informed market participants incorporate fiscal space into their trading decisions. At the onset of the pandemic, short-selling activity shifted towards companies with low financial flexibility but only in countries with limited fiscal space. Among such companies, short sellers specifically targeted those that generate their revenues mainly in the domestic market. These short sellers entered their positions before the market crash, thereby generating significant abnormal returns. We find no evidence of either herding behavior prior to the market crash or a long-run performance reversal of short sellers. These findings support the notion that short sellers help to promote price efficiency in times of crisis, where governments with budgetary constraints are unable to provide sufficient stimuli to their economies.

The reuse of collateral can support the efficient allocation of safe assets in the financial system. Exploiting a novel dataset, we show that banks substantially increase their reuse of sovereign bonds in response to scarcity induced by Eurosystem asset purchases. While repo rates react little to purchase-induced scarcity when reuse is low, they become increasingly sensitive at high levels of reuse. An elevated reuse rate is also associated with more failures to deliver and a higher volatility of repo rates in the cross-section of bonds. Our results highlight the trade-off between shock absorption and shock amplification effects of collateral reuse.

We quantify the causal effects of central banks' securities lending facilities on financial markets, using the Eurosystem's change in pricing conditions of November 2020 as a natural experiment. After reducing fees in their securities lending arrangements, utilization of securities lending facilities surged, in particular for bonds with otherwise inelastic supply to the repo market. There are no substitution effects, but rather total securities borrowing and lending in the repo market increased via the collateral multiplier. The improved pricing conditions alleviate scarcity in the repo market and enhance cash market liquidity.

Using a unique dataset on the sectoral ownership structure of euro area equity mutual funds, we study how different investor groups contribute to the negative performance externality from large outflows. Investment funds, as holders of mutual funds, are the main contributors to the flow externality. Insurers and households, in particular less financially-sophisticated ones, are the main receivers. These differences are due to investment funds reacting more strongly on past performance and displaying a more procyclical investment behavior compared to households and insurers. Our results raise consumer protection and financial stability concerns due to the trading activity of short-term oriented investors.

Merging a sample of matched green-conventional bond pairs with data on their ownership structure, we document that the greenium (the yield differential between green and conventional bonds) is largely borne by banks, investment funds, pension funds, insurances and their clients. Strikingly, while investment funds and pension funds pay the greenium largely due to their clients' general green preference, banks display no such pattern. Rather, banks overweight certain bonds that display a sizeable greenium, pointing towards an interaction between the greenium and bank-specific financial frictions. Overall, our findings shed light on the question who finances the green transition and who ultimately pays the costs arising from greening investment portfolios.

This paper studies short sellers' trading behavior during the COVID-19 pandemic. Short sellers targeted less liquid companies headquartered in countries with a low credit rating. This trading pattern suggests that short sellers traded on the fiscal capacity of governments, which is crucial for providing emergency funding and economic stimulus to support troubled companies. Furthermore, they had already initiated this highly profitable strategy two weeks before the market collapse on February 24, 2020. The portfolio of shorted illiquid companies headquartered in countries with a low credit rating experienced an abnormal return of -10% during the market crash period.

Using a unique data set that contains the complete ownership structure of the German stock market, we study the momentum and contrarian trading of different investor groups. Foreign investors and financial institutions, and especially mutual funds, are momentum traders, whereas private households are contrarians. Contrarian trading by private households declines with investors' financial sophistication though, as proxied by financial wealth and equity home bias. Observing momentum trading over time, we document substantial increase in sales of loser stocks by foreign and institutional investors during the market downturn of the Great Recession and just before the crash of the momentum strategy in 2009. Finally, our evidence indicates that excessive sales of loser stocks pushed prices below their fundamental value, predicting the relative overperformance of past losers and the reversal of the momentum strategy.

We relate Schumpeter's notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms must offer higher expected returns to compensate for the risk posed by serendipitous invention activity, whereas large-growth stocks provide protection against creative destruction and receive expected return discounts. A 2-factor model that accounts for creative-destruction risk effectively explains the cross-sectional return variation of size-and book-to-market-sorted portfolios. The estimated risk compensations associated with creative destruction are substantial and statistically significant, indicating their relevance for asset pricing.

We study how disclosure requirements for large short positions affect investor behavior and security prices. Short positions accumulate just below the applicable disclosure threshold as certain investors never disclose any of their positions. Further tests suggest that this secrecy is part of investors’ general policy of avoiding disclosure to protect their unique, profitable investment strategies against reverse engineering by competitors. No evidence supports the notion that short sellers avoid disclosure because of potential adverse effects on securities' lending fees, risk of recall, or short squeezes. Finally, the evasive behavior by short sellers in response to transparency regulations hampers price discovery.

We study the dynamics of stock market volatility and retail investors' attention to the stock market. The latter is measured by internet search queries related to the leading stock market index. We find a strong co-movement of the Dow Jones' realised volatility and the volume of search queries for its name. Furthermore, search queries Granger-cause volatility: a heightened number of searches today is followed by an increase in volatility tomorrow. Including search queries in autoregressive models of realised volatility improves volatility forecasts in-sample, out-of-sample, for different forecasting horizons, and in particular in high-volatility phases.

This paper documents how the changing composition of U.S. publicly traded firms has prompted a decline in the long-run mean of the aggregate dividend-price ratio, most notably since the 1970s. Adjusting the dividend-price ratio for such changes resolves several issues with respect to the predictability of stock market returns: the adjusted dividend-price ratio is less persistent, in-sample evidence for predictability is more pronounced, there is greater parameter stability in the predictive regression (particularly during the 1990s), and there is evidence of out-of-sample predictability. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1883 . This paper was accepted by Itay Goldstein, finance.

This paper investigates the returns and flows of German money market funds before and during the liquidity crisis of 2007/2008. The main findings of this paper are: In liquid times money market funds enhanced their returns by investing in less liquid papers. By doing so they outperformed other funds as long as liquidity in the market was high. Investing in less liquid assets, however, widens the narrow structure of money market funds and makes them vulnerable to runs. During the shortening of liquidity caused by the subprime crisis illiquid funds experienced runs, while more liquid funds functioned as a safe haven.

Short sellers are perceived as informed, sophisticated investors. Yet little is known about their actual performance and trading strategies. Using a novel, hand-collected data set of daily position disclosures in Europe, we identify the entry, change, and exit dates of large short-sale positions for a wide cross section of stocks and investors. We find that hedge funds, the predominant investor group, generate an annualized Fama and French (1993) risk-adjusted return of about 5.5%, outperforming other investors. Evidence indicates that hedge funds act as arbitrageurs, generating their returns by trading on the mispricing-related factors, e.g. momentum, betting-against-beta, and quality-minus-junk. In the cross section of hedge funds, local, diversified, and active funds outperform their counterparts. On the position level, we document a first-mover advantage. The profitability of short sales also varies significantly with investors' holding period, location, and industry experience.

To determine whether negative shocks to specialized human capital are priced in the cross section of stock returns, this study measures shocks to industry-specific human capital by employment growth in that industry. In industries in which employment contracts, exposure to the value factor is significantly higher than in industries in which employment expands. Cross-sectional predictive regressions and hedging portfolio returns document that stocks belonging to industries with low employment growth have higher expected returns than stocks belonging to industries with high employment growth. The return premium related to employment growth is pervasive across small, big, and micro stocks, as well as when micro stocks are excluded. The premium cannot be explained by the capital asset pricing model, but the hedging portfolio's payoffs are inversely related to that of the value-minus-growth risk factor.

This paper investigates the purchases and redemptions of a large cross-sectional sample of German equity funds. We find that investors punish bad performance by selling their shares, but also have a tendency to sell winners. Investors in large fund families show higher sales and redemption rates. Furthermore, family size also affects the flow-performance relationship. On the one hand, investors in large families punish bad performance more, on the other, they also tend to sell winners more. Finally, we find that inner-family rankings play an important role for redemptions, with investors strongly redeeming their shares from intra-family losers.

This paper investigates the relation between mutual fund flows and the real economy. The findings of this paper support the theory that the positive co-movement of flows into equity funds and stock market returns is explained by a common response to macroeconomic news. Variables that predict the real economy as well as the equity premium – in particular dividend-price ratio, default spread, relative T-Bill rate and consumption-wealth ratio – are related to fund flows and can account for the correlation of flows and market returns. Furthermore, consistent with the information-response hypothesis, mutual fund flows are forward-looking and predict real economic activity.