Exchange-Traded Funds, Heterogeneous Agents, and Financial Stability

Titelangaben

Baumann, Michael Heinrich ; Baumann, Michaela ; Herz, Bernhard:
Exchange-Traded Funds, Heterogeneous Agents, and Financial Stability.
In: Indian Journal of Finance and Economics. Bd. 4 (2023) Heft 1 . - S. 73-120.
ISSN 2582-2217
DOI: https://doi.org/10.47509/IJFE.2023.v04i01.05

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Abstract

Exchange Traded Funds (ETFs), esp. index funds, have seen an enormous growth over the recent decades. We investigate the financial market effects of actively traded ETFs in a heterogeneous agent model which is calibrated to historical data. We consider four types of traders, namely fundamentalists and trend followers who either trade ETFs or the underlying individual assets. We find that the complex interactions of investment strategies and the availability of ETFs generate interesting nonlinearities for typical market metrics such as susceptibility for bubbles, asset price volatility, asset price correlations, and mispricing. Thus, the growing popularity of ETFs as an investment vehicle gives rise to considerable regulatory challenges.