Liquidity and Risk Sharing Benefits from Opening an ETF Market with Liquidity Providers: Evidence from the CAC 40 Index

Rudy De Winne, Carole Gresse () and Isabelle Platten
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Carole Gresse: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Isabelle Platten: Louvain School of Management - UCL - Université Catholique de Louvain = Catholic University of Louvain

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Abstract: This article examines how the introduction of an ETF replicating a stock index impacts on the liquidity of the underlying stocks when the ETF market involves liquidity providers (LPs). We find that index stock spreads decline, relative to those of non-index stocks, after the introduction of the ETF but this liquidity improvement is not driven by changes in adverse selection costs or recognition effects. By contrast, we show that it is mainly explained by a decrease in order processing and order imbalance costs. This most probably results from additional risk sharing capacities provided by increased cross-market trading and LPs' liquidity provision in low-liquidity times.

Keywords: Exchange-traded fund (ETF); index trading; transaction costs; liquidity; risk sharing (search for similar items in EconPapers)
Date: 2014-12-31
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Citations: View citations in EconPapers (2)

Published in International Review of Financial Analysis, 2014, 34, pp.31-43. ⟨10.1016/j.irfa.2014.04.003⟩

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Related works:
Journal Article: Liquidity and risk sharing benefits from opening an ETF market with liquidity providers: Evidence from the CAC 40 index (2014)
Working Paper: Liquidity and risk sharing benefits from opening an ETF market with liquidity providers: Evidence from the CAC 40 index (2014)
Working Paper: Liquidity and Risk Sharing Benefits from Opening an ETF Market with Liquidity Providers: Evidence from the CAC 40 Index (2009)
Working Paper: Liquidity and Risk Sharing Benefits from Opening an ETF Market with Liquidity Providers: Evidence from the CAC 40 Index (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00997859

DOI: 10.1016/j.irfa.2014.04.003

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