Liquidity spillover between ETFs and their constituents

D. Pham Son, Ben R. Marshall, Nhut H. Nguyen and Nuttawat Visaltanachoti

International Review of Economics & Finance, 2023, vol. 88, issue C, 723-747

Abstract: ETF sponsors promote ETFs as having superior liquidity than their constituents because they possess two layers of liquidity-the market liquidity of ETFs and the underlying stocks' liquidity. We find a liquidity connection between the ETF and its underlying stocks, suggesting the potential simultaneous liquidity dry-up in both markets. Liquidity spillovers increase during the market crisis, and economic downturns and are positively related to market volatility and funding constraints. Besides, a stock with high volatility and low trading activity exhibits higher liquidity spillover. Finally, liquidity spillover varies proportionally with ETF arbitrage activity and tends to be lower when short sales constraints exist.

Keywords: ETFs; Portfolio liquidity; Spillover; Arbitrage; Short sale constraints (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:88:y:2023:i:c:p:723-747

DOI: 10.1016/j.iref.2023.07.009

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