Liquidity Spillover between Exchange-Traded Funds: Variations across News Regimes

Yang Liu and Yongchen Zhao ()
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Yang Liu: Department of Economics, Towson University, Towson, MD 21252, USA
Yongchen Zhao: Department of Economics, Towson University, Towson, MD 21252, USA

JRFM, 2024, vol. 17, issue 9, 1-18

Abstract: Understanding liquidity and liquidity risk is essential for effective risk management. We investigate liquidity spillover effects among ETFs that track the S&P sectors. In particular, using COVID-related news shocks as a natural experiment, we estimate the direction and magnitude of two-way net spillovers and their asymmetry across good and bad news regimes, where liquidity is measured by the daily quoted bid–ask spread and the Amihud illiquidity ratio. Our results confirm the liquidity links amongst ETFs and suggest that liquidity spillovers are more pronounced during bad news periods compared to good news periods. In addition, we document the variations in the results obtained using the bid–ask spread and the Amihud ratio, which provide insights into different dimensions of liquidity and liquidity risk, including volatility and trading volume.

Keywords: daily quoted bid–ask spread; Amihud illiquidity ratio; liquidity spillover effect; ETFs (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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