The Counterparty Risk Exposure of ETF Investors
49 Pages Posted: 6 Jul 2014 Last revised: 16 Mar 2019
Date Written: March 12, 2019
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: Suggested Citation