The Counterparty Risk Exposure of ETF Investors

49 Pages Posted: 6 Jul 2014 Last revised: 16 Mar 2019

See all articles by Christophe Hurlin

Christophe Hurlin

University of Orleans

Grégoire Iseli

University of Geneva

Christophe Perignon

HEC Paris - Finance Department

Stanley Yeung

HEC Paris

Date Written: March 12, 2019

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 counterparty risk. Finally, we show that switching to an optimal collateral portfolio leads to substantial reduction in counterparty risk exposure.

Keywords: Asset management, passive investment, derivatives, optimal collateral portfolio, systemic risk

JEL Classification: G20, G23

Suggested Citation

Hurlin, Christophe and Iseli, Grégoire and Perignon, Christophe and Yeung, Stanley, The Counterparty Risk Exposure of ETF Investors (March 12, 2019). HEC Paris Research Paper No. FIN-2014-1050. Available at SSRN: https://ssrn.com/abstract=2462747 or http://dx.doi.org/10.2139/ssrn.2462747

Christophe Hurlin

University of Orleans ( email )

Université d'Orléans
Rue de Blois B.P. 6739 45
France

Grégoire Iseli

University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Christophe Perignon (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Stanley Yeung

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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