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The counterparty risk exposure of ETF investors

Author

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  • Hurlin, Christophe
  • Iseli, Grégoire
  • Pérignon, Christophe
  • Yeung, Stanley

Abstract

As most Exchange-Traded Funds (ETFs) engage in securities lending or are based on total return swaps, they expose their investors to counterparty risk. In this paper, we estimate empirically such risk exposures for a sample of physical and swap-based funds. We find that counterparty risk exposure is higher for swap-based ETFs, but that investors are compensated for bearing this risk. Using a difference-in-differences specification, we uncover that ETF flows respond significantly to changes in counterparty risk. Finally, we show that switching to an optimal collateral portfolio leads to substantial reduction in counterparty risk exposure.

Suggested Citation

  • Hurlin, Christophe & Iseli, Grégoire & Pérignon, Christophe & Yeung, Stanley, 2019. "The counterparty risk exposure of ETF investors," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 215-230.
  • Handle: RePEc:eee:jbfina:v:102:y:2019:i:c:p:215-230
    DOI: 10.1016/j.jbankfin.2019.03.014
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    References listed on IDEAS

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    Cited by:

    1. Jean†Edouard Colliard & Peter Hoffmann, 2017. "Financial Transaction Taxes, Market Composition, and Liquidity," Journal of Finance, American Finance Association, vol. 72(6), pages 2685-2716, December.

    More about this item

    Keywords

    Asset management; Collateral; Derivatives; Regulatory arbitrage; Systemic risk;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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