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

Massey University

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 Hoang 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 )

Private Bag 11-222
Palmerston North, 30974
New Zealand
64 6 350 5799 (Phone)
64 6 350 5651 (Fax)

Nhut Hoang Nguyen

Massey University ( email )

New Zealand

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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