Premium
ETF Premiums and Liquidity Segmentation
Author(s) -
Piccotti Louis R.
Publication year - 2018
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12148
Subject(s) - market liquidity , business , monetary economics , asset (computer security) , segmentation , net asset value , tracking error , liquidity premium , econometrics , liquidity risk , financial economics , economics , finance , computer science , computer security , control (management) , management , artificial intelligence
Exchange traded funds (ETFs) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to net asset value (NAV) as well as the life‐cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations ( TESD s) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.