Do ETFs Increase Liquidity?

54 Pages Posted: 17 Mar 2018 Last revised: 25 Sep 2020

See all articles by Mehmet Saglam

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Tugkan Tuzun

Board of Governors of the Federal Reserve System

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: April 9, 2019

Abstract

This paper investigates the impact of exchange-traded funds (ETFs) on the liquidity of their underlying stockholdings. Using a difference-in-differences methodology for large changes in the index weights of stocks in the S&P 500 and NASDAQ 100 indexes, we find that increases in ETF ownership are associated with increases in commonly used measures of liquidity. Stocks with high ETF ownership have higher price resilience and lower adverse selection costs. However, ETFs are linked to higher liquidation costs during the 2011 U.S. debt-ceiling crisis, suggesting that stocks with high ETF ownership may experience impaired liquidity during major market stress events.

Keywords: ETFs, Liquidity

JEL Classification: G12, G14

Suggested Citation

Saglam, Mehmet and Tuzun, Tugkan and Wermers, Russell R., Do ETFs Increase Liquidity? (April 9, 2019). Available at SSRN: https://ssrn.com/abstract=3142081 or http://dx.doi.org/10.2139/ssrn.3142081

Mehmet Saglam (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner College of Business
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)

HOME PAGE: http://homepages.uc.edu/~saglammt/

Tugkan Tuzun

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://terpconnect.umd.edu/~wermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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