Relative Liquidity, Fund Flows and Short-term Demand: Evidence from Exchange-Traded Funds

38 Pages Posted: 1 Dec 2013 Last revised: 24 Nov 2017

See all articles by Markus S. Broman

Markus S. Broman

Syracuse University - Whitman School of Management

Pauline Shum Nolan

York University - Schulich School of Business

Date Written: November 22, 2017

Abstract

We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele amongst institutional investors: i) relative liquidity is significantly more important for short- than for long-term investors; and ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. These two findings provide evidence that relative liquidity encourages short-term demand.

Keywords: ETF, liquidity clientele, institutional investors, short-term trading

JEL Classification: G10, G14, G23

Suggested Citation

Broman, Markus S. and Shum Nolan, Pauline, Relative Liquidity, Fund Flows and Short-term Demand: Evidence from Exchange-Traded Funds (November 22, 2017). Available at SSRN: https://ssrn.com/abstract=2361514. or http://dx.doi.org/10.2139/ssrn.2361514

Markus S. Broman (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

HOME PAGE: http://www.markusbroman.com

Pauline Shum Nolan

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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