The counterparty risk exposure of ETF investors

Christophe Hurlin, Grégoire Iseli, Christophe Pérignon and Stanley Yeung
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Grégoire Iseli: HEC Paris - Ecole des Hautes Etudes Commerciales
Christophe Pérignon: HEC Paris - Ecole des Hautes Etudes Commerciales
Stanley Yeung: HEC Paris - Ecole des Hautes Etudes Commerciales

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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.

Date: 2019-05
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Published in Journal of banking & finance = Journal of banking and finance, 2019, 102, pp.215-230. ⟨10.1016/j.jbankfin.2019.03.014⟩

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Related works:
Journal Article: The counterparty risk exposure of ETF investors (2019)
Working Paper: The Counterparty Risk Exposure of ETF Investors (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03579305

DOI: 10.1016/j.jbankfin.2019.03.014

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