Predicting ETF Liquidity

Abstract

A substantial amount is incurred in ETF transaction costs each year. This paper examines a vector autoregressive (VAR) model's performance and other trading schedules to time trades in a large sample of 1,350 ETFs over the 2011 to 2017 period. We find varied spread savings for large and retail ETF traders by timing transactions. A large ETF trader can save 7.40% of ETF spread costs, whereas trading at the market closing time would be optimal for a retail ETF trader to reduce spread costs. The spread savings for large ETF traders are diverse across ETF sectors and depend on the spread volatility.

Keywords: ETFs, Liquidity, Bid-Ask Spread, Forecasting

JEL Classification: G11, G23