The Effect of ETFs on Stock Liquidity
Sophia J. W. Hamm
Ohio State University (OSU) - Fisher College of Business
November 29, 2013
I examine whether markets for individual stocks lose liquidity and ETF markets gain liquidity when uninformed investors opt for exchange-traded funds (ETFs) to avoid trading against informed investors. I find a positive association between the percentage of firm shares being held by ETFs and illiquidity in the market for the underlying stocks. Stocks held by highly diversified ETFs show a more pronounced liquidity deprivation than do those held by less diversified ETFs.
Number of Pages in PDF File: 53
Keywords: ETF, liquidity, information asymmetry, adverse selection, index trading
JEL Classification: G11, G12, G14working papers series
Date posted: October 8, 2010 ; Last revised: November 29, 2013
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