Price Dynamics and Liquidity of Exchange-Traded Funds

Journal Of Investment Management, Vol. 14, No. 2, (2016), pp. 1–17

26 Pages Posted: 27 Apr 2014 Last revised: 15 Nov 2016

Ananth Madhavan

BlackRock, Inc.

Aleksander Sobczyk

BlackRock, Inc

Date Written: April 17, 2015

Abstract

Exchange traded funds (ETFs) have grown substantially in diversity and size in recent years, reflecting a broader shift towards passive, index investing. As a consequence, there is increased interest by practitioners in the pricing and liquidity of ETFs. This paper develops and estimates a model of ETF price dynamics emphasizing the creation/redemption mechanism unique to ETFs. We use the framework to analyze a number of questions concerning price discovery, the dynamics of premiums and discounts, return autocorrelations, performance and tracking relative to benchmark, and transaction costs. We estimate the model for all US-domiciled ETFs in the period 2005-2014, and apply the results to practical issues concerning price efficiency and intrinsic value.

Keywords: ETFs, premiums, discounts, price discovery

JEL Classification: G20

Suggested Citation

Madhavan, Ananth and Sobczyk, Aleksander, Price Dynamics and Liquidity of Exchange-Traded Funds (April 17, 2015). Journal Of Investment Management, Vol. 14, No. 2, (2016), pp. 1–17. Available at SSRN: https://ssrn.com/abstract=2429509 or http://dx.doi.org/10.2139/ssrn.2429509

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

Aleksander Sobczyk

BlackRock, Inc ( email )

400 Howard Street
San Francisco, CA 94105
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,676
rank
8,828
Abstract Views
5,399
PlumX