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

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  • Yang Liu

    (Department of Economics, Towson University, Towson, MD 21252, USA
    These authors contributed equally to this work.)

  • Yongchen Zhao

    (Department of Economics, Towson University, Towson, MD 21252, USA
    These authors contributed equally to this work.)

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.

Suggested Citation

  • Yang Liu & Yongchen Zhao, 2024. "Liquidity Spillover between Exchange-Traded Funds: Variations across News Regimes," JRFM, MDPI, vol. 17(9), pages 1-18, September.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:9:p:391-:d:1470937
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    References listed on IDEAS

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