Liquidity spillover between ETFs and their constituents

Son Pham; Ben R. Marshall; Nhut H. Nguyen; Nuttawat Visaltanachoti

doi:10.1016/j.iref.2023.07.009

Liquidity spillover between ETFs and their constituents

Son Pham, Ben R. Marshall^* (Corresponding Author), Nhut H. Nguyen, Nuttawat Visaltanachoti

^*Corresponding author for this work

Accountancy & Finance, Finance

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	723-747
Number of pages	25
Journal	International Review of Economics & Finance
Volume	88
Early online date	21 Jul 2023
DOIs	https://doi.org/10.1016/j.iref.2023.07.009
Publication status	E-pub ahead of print - 21 Jul 2023

Data Availability Statement

The authors do not have permission to share data.

Keywords

ETFs; Portfolio liquidity; Spillover; Arbitrage; Short Sale Constraints

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10.1016/j.iref.2023.07.009Licence: Unspecified

Pham_etal_IREF_Liquidity_Spillover_Between_AAM
In compliance with the University of Aberdeen's Research Publications and Copyright Policy, this accepted manuscript has been made open access under a Creative-Commons Attribution licence https://creativecommons.org/licenses/by/4.0/ The final published version is available at https://doi.org/10.1016/j.iref.2023.07.009
Accepted author manuscript, 1.36 MBLicence: CC BY

Cite this

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title = "Liquidity spillover between ETFs and their constituents",

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.",

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author = "Son Pham and Marshall, {Ben R.} and Nguyen, {Nhut H.} and Nuttawat Visaltanachoti",

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doi = "10.1016/j.iref.2023.07.009",

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AU - Pham, Son

AU - Marshall, Ben R.

AU - Nguyen, Nhut H.

AU - Visaltanachoti, Nuttawat

PY - 2023/7/21

Y1 - 2023/7/21

N2 - 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.

AB - 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.

KW - ETFs; Portfolio liquidity; Spillover; Arbitrage; Short Sale Constraints

U2 - 10.1016/j.iref.2023.07.009

DO - 10.1016/j.iref.2023.07.009

M3 - Article

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VL - 88

SP - 723

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JO - International Review of Economics & Finance

JF - International Review of Economics & Finance

ER -

Liquidity spillover between ETFs and their constituents

Abstract

Data Availability Statement

Keywords

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Cite this