Do ETFs Increase Liquidity?

63 Pages Posted: 17 Mar 2018 Last revised: 22 Apr 2019

See all articles by Mehmet Saglam

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Tugkan Tuzun

Federal Reserve Board

Russ Wermers

University of Maryland - Robert H. Smith School of Business

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 decrease the transaction costs of stocks for institutional investors, driven by lower price impact costs. High-ETF ownership stocks have high price resilience and high market depth. However, ETFs are linked to higher liquidation costs during the 2011 U.S. debt-ceiling crisis, suggesting that stocks having 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

Federal Reserve Board ( email )

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://www.rhsmith.umd.edu/finance/rwermers/

Register to save articles to
your library

Register

Paper statistics

Downloads
157
rank
185,030
Abstract Views
998
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information