Liquidity in European Equity ETFs: What Really Matters?

Laurent Deville, A. Calamia and Fabrice Riva
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A. Calamia: GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur
Fabrice Riva: LEM - Lille - Economie et Management - Université de Lille, Sciences et Technologies - CNRS - Centre National de la Recherche Scientifique

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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; index; physical replication; synthetic replication (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

Published in Bankers Markets & Investors : an academic & professional review, 2013, 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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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00861646

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