How Etfs Amplify the Global Financial Cycle in Emerging Markets

61 Pages Posted: 12 Jun 2020

See all articles by Nathan Converse

Nathan Converse

Board of Governors of the Federal Reserve System

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Tomas Williams

George Washington University; George Washington University - Elliott School of International Affairs (ESIA)

Date Written: January, 2020

Abstract

This paper examines how the growth of exchange-traded funds (ETFs) has affected the sensitivity of international capital flows to global financial conditions. Using data on individual emerging market funds worldwide, we employ a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. We find that the sensitivity of flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. We then show that our findings have macroeconomic implications. In countries where ETFs hold a larger share of the equity market, total cross-border equity flows and returns are significantly more sensitive to global financial conditions. Our results imply that the increasing role of ETFs as a channel for international capital flows has amplified the global financial cycle in emerging markets.

JEL Classification: F32, G11, G15, G23

Suggested Citation

Converse, Nathan and Levy-Yeyati, Eduardo Levy and Williams, Tomas, How Etfs Amplify the Global Financial Cycle in Emerging Markets (January, 2020). International Finance Discussion Paper No. 1268, Available at SSRN: https://ssrn.com/abstract=3625087 or http://dx.doi.org/10.17016/IFDP.2020.1268

Nathan Converse (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Tomas Williams

George Washington University ( email )

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

HOME PAGE: http://tomas-williams.com/

George Washington University - Elliott School of International Affairs (ESIA) ( email )

2201 G Street, N.W.
Washington, DC 20052
United States

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