How ETFs Amplify the Global Financial Cycle in Emerging Markets

Levy-Yeyati, Eduardo Levy; Converse, Nathan; Williams, Tomás

doi:10.1093/rfs/hhad014

Cited by 24 publications

(6 citation statements)

References 49 publications

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“…In this way, the ETFs effectively become a carrier of volatility shocks between overseas and local markets. These findings are in consensus with those of Converse et al. (2020) who opine that ETFs increase the sensitivity of emerging markets to global economic shocks.…”

Section: Resultssupporting

confidence: 90%

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Impact of foreign and domestic ETFs on the volatility and pricing-efficiency of constituents during turbulent and tranquil times: Indian evidence

Tripathi

Sethi

2022

IJOEM

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PurposeThe purpose of this study is to ascertain how foreign and domestic Exchange Traded Funds (ETFs) investing in Indian equities affect their return volatility and pricing efficiency. Further, we investigate how the difference in market timings affect the impact of ETFs on their constituents. Lastly, we examine how these effects vary during tranquil and turmoil periods in the ETF markets.Design/methodology/approachThe study is based on quarterly data for stocks comprising the CNX Nifty 50 Index from 2009Q1 to 2019Q3. The data on holdings of 45 domestic and 196 foreign ETFs in the sample stocks were obtained from Thomson Reuters' Eikon. The paper employs a panel-regression methodology with stock and time fixed effects and robust standard errors.FindingsForeign ETFs from North America and the Asia Pacific largely have an adverse impact on stocks' return volatility. In times of turmoil, stocks with higher coverage of European, North American and Domestic funds are susceptible to volatility shocks emanating from these regions. European and Asia Pacific ETFs are associated with improved price discovery while North American funds impound a mean-reverting component in stock prices. However, in turbulent markets, both positive and negative impacts of ETFs on pricing efficiency coexist.Originality/valueTo the best of the authors' knowledge, this is the first study that examines the impact of domestic as well as foreign ETFs on the equities of an emerging market. Furthermore, the study is unique as we investigate how the effects of ETFs vary in turbulent and tranquil markets. Moreover, the paper examines the role of asynchronous market timings in determining the ETF impact. The paper adds to the growing literature on the unintended consequences of index-linked products.

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Section: Resultssupporting

confidence: 90%

“…For domestic ETFs, Ben-David et al. (2018) and Wang and Xu (2019) found the continuous arbitrage activities between ETFs and stocks to be the primary culprit while Converse et al. (2020) show that sensitivity to global financial shocks is the main mechanism through which foreign ETFs exacerbate volatility.…”

Section: Literature Reviewmentioning

confidence: 99%

Impact of foreign and domestic ETFs on the volatility and pricing-efficiency of constituents during turbulent and tranquil times: Indian evidence

Tripathi

Sethi

2022

IJOEM

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“…These findings reinforce the importance of accounting for the heterogeneity of non-bank financial institutions and the types of mutual fund flows Chari, Stedman and Lundblad (2022). show extensive heterogeneity across bond and equity funds, and across institutional funds versus retail funds, in response to risk levels and risk aversion, with distinctions sorting along passive versus active funds and along the composition of these funds Converse, Levy-Yeyati and Williams (2020). show that exchange traded fund (ETF) flows exhibit greater sensitivity to global financial conditions, and also appeal to a different clientele than traditional mutual funds.…”

supporting

confidence: 61%

Global Liquidity: Drivers, Volatility and Toolkits

Goldberg

2023

SSRN Journal

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“…As highlighted in the literature (e.g. Arslanalp et al, 2020;Converse et al, 2023;Cormier and Naqvi, 2023;Lau et al, 2020;Petry et al, 2021;Raddatz et al, 2017), AM, more than other financial investors, use indices to inform their investment decisions. The predominance of index trading, however, makes financial flows more sensitive to changes in the index that AM follow as benchmarks (Raddatz et al, 2017).…”

Section: Reduced Threat Of Exit and Financial Stabilitymentioning

confidence: 99%

International financial subordination in the age of asset manager capitalism

Bonizzi,

Kaltenbrunner

2024

Environ Plan A

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The rise of asset managers as key nodes of financial intermediation has been one of the most fundamental changes in the global economy over recent years. An emerging literature on asset manager capitalism (AMC) discusses these changes and its implications, though largely in the context of corporate governance in advanced capitalist economies. This paper expands the remit of the AMC literature to spaces outside the global capitalist core, and assesses its implications, based on quantitative data on asset manager allocations and flows, and qualitative data from semi-structured interviews. We find that despite the growth of asset managers’ investments into emerging markets, their presence remains limited and that the threat of exit remains present but increasingly tied with global conditions and the composition of benchmark indices. We also find that asset managers’ investments are increasingly focussing on bonds, and are heavily concentrated in a few companies and sectors, revealing a marginal rather than broad-based presence. Finally, we find very limited evidence that asset managers use their voice to influence corporate governance and macroeconomic policy. Overall, asset managers do not seem to fundamentally reshape the characteristics of financial subordination of emerging markets, and the characteristics of AMCs remain, for now, specific to advanced economies.

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How ETFs Amplify the Global Financial Cycle in Emerging Markets

Cited by 24 publications

References 49 publications

Impact of foreign and domestic ETFs on the volatility and pricing-efficiency of constituents during turbulent and tranquil times: Indian evidence

Impact of foreign and domestic ETFs on the volatility and pricing-efficiency of constituents during turbulent and tranquil times: Indian evidence

Global Liquidity: Drivers, Volatility and Toolkits

International financial subordination in the age of asset manager capitalism

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