Exchange-traded funds and FX volatility: Evidence from Turkey

Özet

Exchange-Traded Funds (ETFs) have become one of the most popular passive investment instrumentssince they bring together the advantages of stocks and mutual funds. As passive investors are more riskaverse and sensitive to possible adverse market developments, ETF’s fund flows can provide distinctinformation in certain periods in comparison with active funds. This study looks at ETF fund flows inforeign exchange uncertainty by using EGARCH models, together with added control variables. The mainresults are that the large inflows of ETFs increases exchange rate volatility for contemporaneous andlagged effect models, yet large outflows have a negative and statistically significant effect on the exchange rate volatility in lagged variance equation. These findings suggest an asymmetric behavior asoutflows of ETFs are followed by an exchange rate depreciation with less exchange rate FX uncertainty,while significantly large inflows of ETFs lead to higher FX uncertainty.