XXVI Edition

14-15-16 December 2017"

Exchange-traded Funds and Financial Stability

Baumann Michael Heinrich, University of Bayreuth
Baumann Michaela, University of Bayreuth
Herz Bernhard, University of Bayreuth

Exchange-traded Funds (ETFs) are easy to understand, cost-efficient ways of investing in asset markets that have become very popular for both retail and institutional 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 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 find that the presence of ETF chartists counterintuitively lowers the likelihood of price bubbles in individual asset markets while at the same time weakening financial stability as measured by asset price volatility and excess kurtosis.

Area: Financial Stability

Keywords: Exchange-traded index funds; ETF; index fund; heterogeneous agent model; bubbles;

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