Liquidity in European Equity ETFs: What Really Matters?

Anna Calamia, Laurent Deville and Fabrice Riva ()

No 2013-10, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: Despite the importance ETFs have recently gained, little is known about their liquidity. The conventional view on ETF liquidity is that what really matters is not the size of the ETF or its trading volume but the liquidity of its benchmark index. We argue that while creation/redemption effectively creates a tight link between the ETF and the index liquidity, other factors are likely to affect the former. The aim of our paper is to provide empirical evidence of the determinants of the spreads in the European equity ETF markets from their inception in 2000 to the end of 2011. We find that, while the liquidity of ETFs effectively depends on the liquidity of their benchmark index, size also matters: larger and more heavily traded ETFs display tighter spreads. We also find that synthetic ETFs exhibit lower spreads than physical ETFs but that this effect becomes insignificant when competition is accounted for. Finally, market fragmentation also affects spreads but does so differently in physical and synthetic ETFs, which may be explained by the degree of fragmentation these ETFs really face.

Keywords: ETFs; liquidity; bid-ask spread; competition; fragmentation; synthetic replication; physical replication (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013-04
New Economics Papers: this item is included in nep-eec and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Bankers, Markets & Investors, 2013, vol. 124, pp. 60-73.

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Related works:
Working Paper: Liquidity in European equity ETFs: What really matters? (2013)
Working Paper: Liquidity in European Equity ETFs: What Really Matters? (2013)
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