Can ETFs contribute to systemic risk?

Marco Pagano, Antonio Sánchez Serrano and Josef Zechner

No 9, Report of the Advisory Scientific Committee from European Systemic Risk Board

Abstract: Exchange-traded funds (ETFs) are hybrid investment vehicles that track an index or a basket of assets, combine features of open-end and closed-end mutual funds, and are continuously traded on liquid markets. They are one of the most popular financial innovations in recent decades: ETFs have grown greatly in size, diversity, scope, complexity and market significance. Drawing on the growing literature in this area, this report assesses possible channels through which ETFs may affect systemic risk. The increasing availability of ETFs can affect investors’ behaviour, by allowing them to pursue new strategies to seek return, manage risk and access new asset classes. Such changes in investors’ behaviour may in turn impact the functioning of financial markets, particularly in times of market stress. Empirical research has so far identified three effects.

Date: 2019-06
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkasc:20199

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