Does geopolitical risk matter for ETF flows in emerging markets?
Purpose: This study investigates the effect of geopolitical risk on ETF flows in emerging markets.
Design/Methodology/Approach: ETFs trading in eight emerging markets (Brazil, Chile, China, Egypt, India, Philippines, South Africa, and Taiwan) are surveyed from July 2013 to June 2023 using Vector Autoregressive (VAR) models and their associated impulse response functions and granger causality tests.
Findings: The results indicate that geopolitical risk has a significant, positive effect on ETF flows in emerging markets, except for Philippines where the effect is significantly negative. Further analysis reveals that geopolitical risk has a significant, positive effect on ETF liquidity in emerging markets except for Egypt and Philippines.
Practical Implications: Firstly, investors and fund managers need to carefully consider the impact of geopolitical risks on the ETFs in their portfolios. Secondly, for policymakers and regulators, these findings indicate that geopolitical risks serve as important sources of growth and liquidity in ETF markets. Thirdly, for academics and researchers, these findings indicate that geopolitical risk are significant determinants of ETF flows and liquidity and should be considered when developing asset pricing models which compensate investors for size and liquidity factors.
Originality/Value: At its core, this is the first study to explore the effect of geopolitical risk on ETF flows. Therefore, this study provides insight into the effect of geopolitical risk on ETF markets. In addition, this study concentrates on emerging markets in which the ETF market conditions and geopolitical risks are fundamentally different from their developed counterparts. Furthermore, this study uses a disaggregated approach to explore the individual country-specific effects while most studies on emerging countries use a panel approach.
Keywords: Emerging market; Exchange traded fund; Fund flow; Geopolitical risk.
Paper Type: Research Paper
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