By Chester Spatt Carnegie Mellon Unversity April 17, 2008 FDIC/Federal Reserve Bank of Cleveland Conference

1. Discussion: “Payoff Complemen-tarities and Financial Fragility: Evidence from Mutual Fund Outflows” by Qi Chen, Itay Goldstein and Wei Jiang By Chester Spatt Carnegie Mellon Unversity April 17, 2008 FDIC/Federal Reserve Bank of Cleveland Conference

2. So Why Me? • I don’t write mutual fund papers, but … • Adoption externalities (e.g., Dybvig and Spatt, J. Public Economics, 1983) • Capital gains taxes and externalities • SEC work—mutual fund market timing and late trading

3. So Why Me? and • I live in the Cleveland district (i.e., Pittsburgh)

4. Financial Fragility is Crucial in our Marketplace • Extremely important per Bear Stearns: Liquidity can dry up in the marketplace—especially if insufficient long run capital • Viability of auction-rate resets and short-term liquidity • Empirical analysis of it potentially valuable • Global games suggest a simple way to think about it (though underpinnings in prior gaming literature)

5. Alternative Rationales for Complementarity • Capital gains externality—Barclay, Pearson and Weisbach (JFE, 1998) and Dickson, Shoven and Sialm (National Tax Journal, 2000)—given theory some cross-sectional variation may be helpful • Mutual fund market timing—redemptions of others matter because timers dilute! • Qualitative magnitudes of the alternatives • Plausibility • Putnam example (Tufano’s assessment report)—not necessarily trades in both directions • Alternative conditioning variables for diverse sources

6. Role of Investor Size • What is the impact conceptually of large positions? My instinct is to disagree with the authors—more of an opportunity to get in front of the costs of your rivals • Spatt-Sterbenz (Rand Journal, 1985) concluded theoretically that if there is an advantage to “jumping the gun” the resulting behavior happens more quickly with concentrated ownership

7. Hedge Funds • Arguably the execution risk component to complementarity story is greatest in a hedge fund context (compared to mutual fund setting)—there I would see it as a motive for some investors to exit before the selling decisions of others depresses the price—this may be a huge issue now • Interesting institution—”liquidity gate” limits overall redemptions • “Liquidity gate” protects against a run or facilitates one, but limits the damage

8. Identifying a Mechanism • Economists don’t do well focusing upon assumptions • Consideration of explicit alternative sources of complementarity, such as capital gains taxes, would be helpful

9. Broader contributions • First context to study complementarity and mutual fund flows? • Interpretation of restrictions on redemptions such as SEC redemption fee rule and fund policies to discourage too much turnover—frequency (not discussed explicitly) and fees—mutual fund market timing rather than complementarity per se is at the core of these—an alternative explanation for liquid and illiquid comparisons

10. Technical Mutual Fund Matters • Use of day old pricing by mutual funds to set NAV (see Tufano et al) • Exclude retirement plans because of limited flexibility?—arguably retirement plans are cleaner with respect to taxes and flexibility