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How ETFs Amplify the Global Financial Cycle in Emerging Markets

Author

Listed:
  • Tomas Williams

    (George Washington University)

  • Nathan Converse

    (Federal Reserve Board)

  • Eduardo Levy-Yeyati

    (Universidad Torcuato di Tella)

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 fundlevel 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

  • Tomas Williams & Nathan Converse & Eduardo Levy-Yeyati, "undated". "How ETFs Amplify the Global Financial Cycle in Emerging Markets," Working Papers 2018-1, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2018-1
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    File URL: http://www2.gwu.edu/~iiep/assets/docs/papers/2018WP/WilliamsIIEP2018-1.pdf
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    References listed on IDEAS

    as
    1. Forbes, Kristin & Fratzscher, Marcel & Kostka, Thomas & Straub, Roland, 2016. "Bubble thy neighbour: Portfolio effects and externalities from capital controls," Journal of International Economics, Elsevier, vol. 99(C), pages 85-104.
    2. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
    3. Kaminsky, Graciela & Lyons, Richard K. & Schmukler, Sergio L., 2004. "Managers, investors, and crises: mutual fund strategies in emerging markets," Journal of International Economics, Elsevier, vol. 64(1), pages 113-134, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    exchange-traded funds; mutual funds; global financial cycle; global risk; push and pull factors; 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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