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: 25 Apr 2019
Date Written: April 17, 2015
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: Suggested Citation