Liquidity risk and exchange-traded fund returns, variances, and tracking errors

Bae, Kyounghun; Kim, Daejin

doi:10.1016/j.jfineco.2019.02.012

Cited by 31 publications

(7 citation statements)

References 46 publications

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“…The price efficiency of ETFs continues to be a major concern for investors and financial regulators, yet the literature on the market impact and determinants of ETF price efficiency is limited, particularly in emerging markets. We find that ETF liquidity and factors that influence liquidity, such as arbitrage and ownership structure, are strongly related to price efficiency, complementing findings for the US market (Bae & Kim, 2020). To address endogeneity concerns that could confound findings, we employ two exogenous shocks unique to the Chinese market: (1) the introduction of liquidity service providers as market makers to provide liquidity and new creation and (2) redemption rules on the SZSE that relaxed cross‐market arbitrage restrictions.…”

Section: Introductionsupporting

confidence: 78%

“…Several papers have studied the impact of liquidity on price efficiency in the context of US equity ETFs and demonstrated that lack of ETF liquidity (Cespa & Foucault, 2014; Madhavan & Sobczyk, 2016; Petajisto, 2017) or a large liquidity mismatch between the ETF and its underlying portfolio (Pan & Zeng, 2019) discourages arbitrage and leads to more persistent mispricing. Bae and Kim (2020) highlight the impact of liquidity on price efficiency, showing that ETFs have large tracking errors when underlying assets are less liquid. However, it is unclear whether these findings translate to the Chinese ETF market, with its unique trading process and market structure and ETFs that are less liquid than their underlying portfolios.…”

Section: Introductionmentioning

confidence: 99%

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The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs

Fang

Jiang

2023

J of Financial Research

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We study the potential factors that determine the large and persistent price deviations in Chinese equity exchange‐traded funds (ETFs). Our results suggest that ETF liquidity and arbitrage activity are positively correlated with ETF price efficiency, and the relation is more pronounced with higher institutional ownership. We also evaluate the effect of two exogenous shocks in the Chinese market. Using a policy change that added market makers to ETFs on the Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE), we find that market makers improve price efficiency and that the impact is stronger for ETFs with lower liquidity. We also exploit a change in trading rules on the SZSE and show that the relaxation of arbitrage restrictions improves price efficiency. Altogether, these findings provide evidence that lack of liquidity, due to the unique market structure and regulations of the Chinese market, contributes to price inefficiency of Chinese ETFs.

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Section: Introductionsupporting

confidence: 78%

Section: Introductionmentioning

confidence: 99%

The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs

Fang

Jiang

2023

J of Financial Research

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“…However, this list of explanatory variables is not exhaustive. For instance, Piccotti (2018) and Bae and Kim (2020) suggest that ETF tracking errors are significantly related to ETF liquidity. As such, future research may explore the impact of ETF tracking errors as a possible driver of the interconnectedness between ETF and underlying liquidity.…”

Section: Discussionmentioning

confidence: 99%

Liquidity spillover between ETFs and their constituents

Son

Marshall

Nguyen

et al. 2023

International Review of Economics & Finance

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“…On the risk side, investing in both EGX30 index and ETF units has a similar risk level where the standard deviation of the daily returns is 1.5%. However, the return on ETFs may deviate from the underlying index (as shown in the figure) due to the illiquidity of ETF trading (Bae & Kim, 2020).…”

Section: Introductionmentioning

confidence: 99%

Liquidity and Volatility Effects of Introducing Exchange-traded Funds in the Egyptian Exchange

Otaify

2023

مجلة الدراسات السياسية والاقتصادية

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This paper tests the effects of introducing the first ETF in the Egyptian exchange. We apply econometric models to examine the effects of daily ETF trading activity on both liquidity and volatility of the benchmarked (EGX30) index over the period 2008 -2022. The current paper applies a multiple regression model to examine the impact of ETF trading activity on market liquidity and finds that ETF has a weak positive impact. Moreover, it uses the GARCH model to investigate the impact of ETF trading activity on index volatility and documents that ETF has a weak negative impact. We associate the weak relations with the infrequent trading on ETF units. Arguably, this paper suggests three possible explanations for the low ETF trading activity in the Egyptian exchange, including lower expected return on ETF trading, less financial knowledge of investors about ETF characteristics, and less incentive for brokers to encourage investors to invest more in ETF units.

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Liquidity risk and exchange-traded fund returns, variances, and tracking errors

Cited by 31 publications

References 46 publications

The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs

The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs

Liquidity spillover between ETFs and their constituents

Liquidity and Volatility Effects of Introducing Exchange-traded Funds in the Egyptian Exchange

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