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How ETFs Amplify the Global Financial Cycle in Emerging Markets

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  • Eduardo Levy-Yeyati

    ()

  • Nathan Converse
  • Tomas Williams

Abstract

Since the early 2000s exchange-traded funds (ETFs) have grown to become an important in- vestment 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 mar- ket 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

  • Eduardo Levy-Yeyati & Nathan Converse & Tomas Williams, 2017. "How ETFs Amplify the Global Financial Cycle in Emerging Markets," School of Government Working Papers 2017-12, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpgobi:2017-12
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    References listed on IDEAS

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    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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