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How ETFs Amplify the Global Financial Cycle in Emerging Markets

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  • Nathan Converse

    ()

  • Eduardo Levy-Yeyati

    ()

  • Tomas Williams

    ()

Abstract

Since the early 2000s exchange-traded funds (ETFs) have grown to become an important investment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fund level data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging market funds, we find that the sensitivity of investor flows to global risk factors for equity (bond) ETFs is 1.5 (1.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global risk factors. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the incidence of the global financial cycle in emerging markets.

Suggested Citation

  • Nathan Converse & Eduardo Levy-Yeyati & Tomas Williams, 2018. "How ETFs Amplify the Global Financial Cycle in Emerging Markets," Documentos de Trabajo LACEA 016200, The Latin American and Caribbean Economic Association - LACEA.
    • Handle: RePEc:col:000518:016200
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Graciela L. Kaminsky, 2019. "Boom-Bust Capital Flow Cycles," NBER Working Papers 25890, National Bureau of Economic Research, Inc.
    2. Akdi, Yilmaz & Varlik, Serdar & Berument, M. Hakan, 2020. "Duration of Global Financial Cycles," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 549(C).
    3. Bozhechkova, A.V. (Божечкова, А.В.) & Sinelnikova-Muryleva, Elena Vladimirovna (Синельникова-Мурылева, Елена Владимировна), 2016. "The Impact of Higher Interest Rates on Loans to the Economic Growth of the Russian Federation in the Current Environment
      [Влияние Высоких Процентных Ставок По Заимствованиям На Экономический Рост Р      ," Working Papers 21310, Russian Presidential Academy of National Economy and Public Administration.

    More about this item

    Keywords

    Exchange-traded funds; mutual funds; global financial cycle; global risk; push and pullfactors; capital flows; emerging markets;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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