The Counterparty Risk Exposure of ETF Investors

Christophe Hurlin (1) , Gregoire Iseli (2) , Christophe Pérignon (3) , Stanley Yeung (3)

1 LEO - Laboratoire d'économie d'Orleans [2008-2011]
2 University of Geneva
3 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

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

Mots clés: optimal collateral portfolio; systemic risk; Asset management; derivatives

Domaines: Economies et finances

Christophe Hurlin, Gregoire Iseli, Christophe Pérignon, Stanley Yeung. The Counterparty Risk Exposure of ETF Investors. 2014. ⟨halshs-01023807v3⟩