Liquidity provision in ETF markets: The basket and beyond
Anna Calamia,
Laurent Deville and
Fabrice Riva
Additional contact information
Anna Calamia: Toulouse Business School - Toulouse Business School
Fabrice Riva: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Post-Print from HAL
Abstract:
We provide a theory and empirical evidence showing that the liquidity (quoted spread) of an ETF is strongly determined by inventory-risk related variables. We consider a risk averse market maker who optimally chooses to either manage her ETF position through trading, or resort to the ETF creation/redemption mechanism to exchange her residual inventory for the underlying basket. The trade-off between the ETF price concession and the cost of trading the basket is key in explaining liquidity provision in ETFs. Using data on European equity ETFs, we provide supporting evidence that ETF spreads depend on the risks and costs of inventory management. We also find that the ETF liquidity is linked with the basket liquidity only when market conditions make on-exchange inventory management unsuitable.
Keywords: inventory management; bid-ask spreads; market design; exchange traded funds (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:
Published in Finance, 2019, 40 (1)
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
Related works:
Journal Article: Liquidity provision in ETF markets: The basket and beyond (2019) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02277671
Access Statistics for this paper
More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().