Description:
The growing reliance on ETFs, especially for those ETFs being redeemed in cash, has raised concerns about their resilience to a market downturn. We show that abrupt redemptions of cash-redeemable ETFs may occur during a market downturn. In particular, an initial redemption shock to ETFs with a low cash buffer level could lead to a downward spiral in fund performance and outflow, which could expand a downturn to the broader financial market. Our results underscore potential financial vulnerability of those ETFs in Europe and emerging market economies, where cash redemption mechanism is popularly adopted by ETFs