Relative Liquidity, Fund Flows and Short-Term Demand: Evidence from Exchange-Traded Funds

Markus S. Broman, Pauline Shum

Research output: Contribution to journalArticlepeer-review

30 Scopus citations

Abstract

We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele among institutional investors: (i) relative liquidity is significantly more important for short- than for long-term investors; and (ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. These two findings provide evidence that relative liquidity encourages short-term demand.

Original languageEnglish (US)
Pages (from-to)87-115
Number of pages29
JournalFinancial Review
Volume53
Issue number1
DOIs
StatePublished - Feb 1 2018

Keywords

  • ETF
  • G10
  • G14
  • G23
  • institutional investors
  • liquidity clientele
  • short-term trading

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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