Exchange-traded Funds and Financial Stability

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Baumann, Michael Heinrich ; Baumann, Michaela ; Herz, Bernhard:
Exchange-traded Funds and Financial Stability.
Bayreuth , 2017 . - 40 S.

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Abstract

Exchange-traded Funds (ETFs) are easy to understand, cost-efficient ways of investing in asset markets that have become very popular for both institutional and retail investors. Investing in an index of assets via an ETF can generate quite complex and sometimes counterintuitive investment behaviors on the level of individual assets. These dynamics depend among others on the kind of market index, the shares of different types of traders in the market, price trends in individual stocks and the overall market, as well as situations of over- or undervaluation of individual stocks and the index. Based on a heterogeneous agent model we reproduce several stylized facts concerning ETFs. We find that the the availability of ETFs per se affects financial stability much less than the role of increased trading, for example, caused by lower assumed risk.