Relative Liquidity, Fund Flows and Short‐Term Demand: Evidence from Exchange‐Traded Funds. Issue 1 (11th January 2018)

• Record Type: Journal Article
• Authors: Broman, Markus S.; Shum, Pauline
• Is Part Of: Financial review. Volume 53:Issue 1(2018)
• Page Start: 87
• Page End: 115
• Publication Date: 2018-01-11
• Subjects: ETF -- liquidity clientele -- institutional investors -- short‐term trading -- G10 -- G14 -- G23; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1111/fire.12159
• Languages: English
• ISSNs: 0732-8516

Abstract

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.