The Effect of ETFs on Stock Liquidity
51 Pages Posted: 8 Oct 2010 Last revised: 23 Apr 2014
Date Written: April 23, 2014
Abstract
This paper investigates whether markets for individual stocks lose liquidity when uninformed investors are given options to avoid trading against informed investors. I find a positive association between the percentage of firm shares being held by exchange-traded funds (ETFs) and illiquidity in the market for the underlying stocks. This liquidity deprivation is mitigated for stocks with high quality earnings. These results imply that investors with an informational disadvantage migrate after weighing the cost and benefits of trading portfolios versus the underlying stocks. I further examine how portfolio-level liquidity relates to diversification when liquidity dynamically flows between a portfolio and its underlying stocks.
Keywords: ETF, liquidity, adverse selection, earnings quality, diversification
JEL Classification: G11, G12, G14, M41
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Unchecked Intermediaries: Price Manipulation in an Emerging Stock Market
By Atif R. Mian and Asim Ijaz Khwaja
-
Market Manipulation: A Comprehensive Study of Stock Pools
By Guolin Jiang, Paul G. Mahoney, ...
-
Market Manipulation: A Comprehensive Study of Stock Pools
By Guolin Jiang, Paul G. Mahoney, ...
-
Market Manipulation: A Comprehensive Study of Stock Pools
By Guolin Jiang, Paul G. Mahoney, ...
-
By Chunsheng Zhou and Jianping Mei
-
Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners
By Franklin Allen, Lubomir P. Litov, ...
-
Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners
By Franklin Allen, Lubomir P. Litov, ...