{"title":"ETF arbitrage and international diversification","authors":"Ilias Filippou , Arie Gozluklu , Hari Rozental","doi":"10.1016/j.jbankfin.2024.107274","DOIUrl":null,"url":null,"abstract":"<div><p>We show that investment decisions of country ETF market participants measured by ETF market order imbalances are driven by global shocks rather than local risks. We argue that the ETF price discovery mechanism is one of the key channels through which global shocks propagate to local economies, leading to increased return correlation with the U.S. market and limiting the benefits of international diversification. ETF order imbalance is predictive of the underlying MSCI index returns. The staggered introduction of country ETFs alters return correlations between underlying foreign and U.S. market indices. We find that countries with stronger ETF price discovery have higher comovement with the U.S. market lending further support for the proposed mechanism.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"168 ","pages":"Article 107274"},"PeriodicalIF":3.6000,"publicationDate":"2024-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Banking & Finance","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0378426624001882","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
We show that investment decisions of country ETF market participants measured by ETF market order imbalances are driven by global shocks rather than local risks. We argue that the ETF price discovery mechanism is one of the key channels through which global shocks propagate to local economies, leading to increased return correlation with the U.S. market and limiting the benefits of international diversification. ETF order imbalance is predictive of the underlying MSCI index returns. The staggered introduction of country ETFs alters return correlations between underlying foreign and U.S. market indices. We find that countries with stronger ETF price discovery have higher comovement with the U.S. market lending further support for the proposed mechanism.
期刊介绍：
The Journal of Banking and Finance (JBF) publishes theoretical and empirical research papers spanning all the major research fields in finance and banking. The aim of the Journal of Banking and Finance is to provide an outlet for the increasing flow of scholarly research concerning financial institutions and the money and capital markets within which they function. The Journal''s emphasis is on theoretical developments and their implementation, empirical, applied, and policy-oriented research in banking and other domestic and international financial institutions and markets. The Journal''s purpose is to improve communications between, and within, the academic and other research communities and policymakers and operational decision makers at financial institutions - private and public, national and international, and their regulators. The Journal is one of the largest Finance journals, with approximately 1500 new submissions per year, mainly in the following areas: Asset Management; Asset Pricing; Banking (Efficiency, Regulation, Risk Management, Solvency); Behavioural Finance; Capital Structure; Corporate Finance; Corporate Governance; Derivative Pricing and Hedging; Distribution Forecasting with Financial Applications; Entrepreneurial Finance; Empirical Finance; Financial Economics; Financial Markets (Alternative, Bonds, Currency, Commodity, Derivatives, Equity, Energy, Real Estate); FinTech; Fund Management; General Equilibrium Models; High-Frequency Trading; Intermediation; International Finance; Hedge Funds; Investments; Liquidity; Market Efficiency; Market Microstructure; Mergers and Acquisitions; Networks; Performance Analysis; Political Risk; Portfolio Optimization; Regulation of Financial Markets and Institutions; Risk Management and Analysis; Systemic Risk; Term Structure Models; Venture Capital.
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