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Liquidity spillover between ETFs and their constituents

Author

Listed:
  • Son, D. Pham
  • Marshall, Ben R.
  • Nguyen, Nhut H.
  • Visaltanachoti, Nuttawat

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.

Suggested Citation

  • Son, D. Pham & Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2023. "Liquidity spillover between ETFs and their constituents," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 723-747.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:723-747
    DOI: 10.1016/j.iref.2023.07.009
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    References listed on IDEAS

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    1. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    2. Antonakakis, Nikolaos & Vergos, Konstantinos, 2013. "Sovereign bond yield spillovers in the Euro zone during the financial and debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 258-272.
    3. Markus S. Broman & Pauline Shum, 2018. "Relative Liquidity, Fund Flows and Short†Term Demand: Evidence from Exchange†Traded Funds," The Financial Review, Eastern Finance Association, vol. 53(1), pages 87-115, February.
    4. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2018. "Do liquidity proxies measure liquidity accurately in ETFs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 94-111.
    5. Louis R. Piccotti, 2018. "ETF Premiums and Liquidity Segmentation," The Financial Review, Eastern Finance Association, vol. 53(1), pages 117-152, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Pawan Jain & Mohamed Mekhaimer & Ronald W. Spahr & Mark A. Sunderman, 2024. "Freedom of choice impact on country-specific liquidity commonality," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 265-309, July.
    2. Tunc, Ahmet, 2024. "ETFs amidst the COVID-induced technological transformation: Sectoral insights from time-varying dynamics of tail risk transmissions," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    3. Alomari, Mohammed & Selmi, Refk & Mensi, Walid & Ko, Hee-Un & Kang, Sang Hoon, 2024. "Dynamic spillovers in higher moments and jumps across ETFs and economic and financial uncertainty factors in the context of successive shocks," The Quarterly Review of Economics and Finance, Elsevier, vol. 93(C), pages 210-228.

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    More about this item

    Keywords

    ETFs; Portfolio liquidity; Spillover; Arbitrage; Short sale constraints;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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