ETF Premiums and Liquidity Segmentation
Piccotti, Louis R. (2018). ETF premiums and liquidity segmentation, Financial Review 53, 117-152.
50 Pages Posted: 30 Mar 2014 Last revised: 17 Jan 2018
Date Written: June 15, 2017
Exchange traded funds (ETF) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to NAV as well as the life-cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESD) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.
Keywords: ETF premium, Liquidity segmentation, Limits to arbitrage, Tracking error
JEL Classification: G10, G11, G13
Suggested Citation: Suggested Citation