Article ID Journal Published Year Pages File Type
5084867 International Review of Financial Analysis 2014 54 Pages PDF
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.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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