How ETFs Amplify the Global Financial Cycle in Emerging Markets

Author
Nathan Converse, Eduardo Levy Yeyati, Tomas Williams
Content Type
Working Paper
Institution
The John F. Kennedy School of Government at Harvard University
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 financial conditions for equity (bond) ETFs is 2.5 (2.25) 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 financial conditions. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the global financial cycle in emerging markets.
Topic
Emerging Markets, International Trade and Finance, Global Political Economy, Capital Flows, Mutual Funds
Political Geography
Global Focus, Global Markets