Measuring the Liquidity of ETFs: An Application to the European Market

34 Pages Posted: 5 Mar 2014 Last revised: 6 Mar 2014

See all articles by Thierry Roncalli

Thierry Roncalli

Amundi Asset Management; University of Evry

Ban Zheng

Ecole Polytechnique; Lyxor Asset Management

Date Written: February 15, 2014

Abstract

The liquidity of exchange traded funds is of utmost importance for regulators, investors and providers. However, the study of liquidity is still in its infancy. In this work, we show some stylised facts of liquidity statistics (daily/intraday spread, trading volume, etc.). We also propose a new liquidity measure combining these statistics. In this case, liquidity is a power function of the spread where the parameters are determined by actual trading volumes. We also study the relationship between the liquidity of ETFs and the liquidity of the underlying index. We show that they are correlated on a daily basis, but not in terms of intraday frequency. We also define a measure of liquidity improvement and apply it to the EURO STOXX 50 index.

Keywords: Exchange traded fund, liquidity, spread, trading volume, order book, liquidity improvement

JEL Classification: G11, G14

Suggested Citation

Roncalli, Thierry and Zheng, Ban, Measuring the Liquidity of ETFs: An Application to the European Market (February 15, 2014). Available at SSRN: https://ssrn.com/abstract=2404313 or http://dx.doi.org/10.2139/ssrn.2404313

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Ban Zheng

Ecole Polytechnique ( email )

Route de Saclay
Palaiseau, 91 91128
France

Lyxor Asset Management ( email )

17 Cours Valmy
Paris La Défense, 92987
France

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