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Exchange-traded funds and FX volatility: Evidence from Turkey

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  • Burchan Sakarya
  • Aykut Ekinci

Abstract

Exchange-Traded Funds (ETFs) have become one of the most popular passive investment instruments since they bring together the advantages of stocks and mutual funds. As passive investors are more risk averse and sensitive to possible adverse market developments, ETF’s fund flows can provide distinct information in certain periods in comparison with active funds. This study looks at ETF fund flows in foreign exchange uncertainty by using EGARCH models, together with added control variables. The main results are that the large inflows of ETFs increases exchange rate volatility for contemporaneous and lagged effect models, yet large outflows have a negative and statistically significant effect on the exchange rate volatility in lagged variance equation. These findings suggest an asymmetric behavior as outflows of ETFs are followed by an exchange rate depreciation with less exchange rate FX uncertainty, while significantly large inflows of ETFs lead to higher FX uncertainty.

Suggested Citation

  • Burchan Sakarya & Aykut Ekinci, 2020. "Exchange-traded funds and FX volatility: Evidence from Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(4), pages 205-211.
    • Handle: RePEc:tcb:cebare:v:20:y:2020:i:4:p:205-211
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    2. Afees A. Salisu & Kingsley Obiora, 2021. "COVID-19 pandemic and the crude oil market risk: hedging options with non-energy financial innovations," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-19, December.
    3. Afees A. Salisu & Abdulsalam Abidemi Sikiru & Philip C. Omoke, 2023. "COVID-19 pandemic and financial innovations," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(4), pages 3885-3904, August.

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