Impact of the QQQ on liquidity and risk of the underlying stocks

We test the impact of QQQ creation on the liquidity and risk of the component securities, particularly whether the liquidity effect is asymmetric depending on the QQQ component weight. We find that liquidity of the underlying stocks improves following creation of the QQQ and that the improvement is more pronounced for less heavily weighted stocks. We also find that systematic risk of the underlying stocks declines relative to a control sample. The findings are consistent with Merton's (Merton, R., 1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42, 483–510) Investor Recognition Theory and may offer implications about the effects of continued ETF creation on the market microstructure for underlying stocks.