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The counterparty risk exposure of ETF investors

Author

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  • Christophe Hurlin

    (LEO - Laboratoire d'Économie d'Orleans [FRE2014] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

  • Grégoire Iseli
  • Christophe Pérignon
  • Stanley Yeung

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 counter-party risk. Finally, we show that switching to an optimal collateral portfolio leads to substantial reduction in counterparty risk exposure.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Christophe Hurlin & Grégoire Iseli & Christophe Pérignon & Stanley Yeung, 2019. "The counterparty risk exposure of ETF investors," Post-Print hal-03579305, HAL.
    • Handle: RePEc:hal:journl:hal-03579305
    DOI: 10.1016/j.jbankfin.2019.03.014
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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.
    2. Kim, Jinhwan & Cho, Hoon & Seok, Sangik, 2023. "Liquidity risk, return performance, and tracking error: Synthetic vs. Physical ETFs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    3. Marta, Thomas & Riva, Fabrice, 2025. "Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique," Journal of Banking & Finance, Elsevier, vol. 170(C).
    4. Fabrice Riva & Thomas Marta, 2022. "Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique," Post-Print hal-03969597, HAL.

    More about this item

    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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