Do Liquidity Proxies Measure Liquidity Accurately in ETFs?

48 Pages Posted: 11 Dec 2015 Last revised: 31 Jul 2017

See all articles by Ben R. Marshall

Ben R. Marshall

Massey University - School of Economics and Finance

Nhut H. Nguyen

Auckland University of Technology

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: April 21, 2017

Abstract

We document the performance of liquidity proxies in ETFs. Most proxies are developed for use in equities. However, ETFs have lower asymmetric information, more algorithmic trading, and an active primary market where units are frequently created and redeemed. Using a comprehensive database of over 600 ETFs, we find that despite the differences between ETF and stock liquidity, proxies such as Daily Spread, High-Low, Close-High-Low, and Amihud all do a good job of capturing changes in effective and quoted spread transaction costs. However, no proxies accurately reflect movements in price impact or the level of actual transaction costs.

Keywords: Liquidity Measurement, Liquidity Proxy, Transaction Costs, Exchange Traded Funds, ETF

JEL Classification: G11, G23

Suggested Citation

Marshall, Ben R. and Nguyen, Nhut H. and Visaltanachoti, Nuttawat, Do Liquidity Proxies Measure Liquidity Accurately in ETFs? (April 21, 2017). 2016 Financial Markets and Corporate Governance, Available at SSRN: https://ssrn.com/abstract=2701608 or http://dx.doi.org/10.2139/ssrn.2701608

Ben R. Marshall (Contact Author)

Massey University - School of Economics and Finance ( email )

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Nhut H. Nguyen

Auckland University of Technology ( email )

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New Zealand
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Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
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Auckland
New Zealand
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64 9 441 8177 (Fax)

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