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Relative Liquidity, Fund Flows and Short‐Term Demand: Evidence from Exchange‐Traded Funds
Author(s) -
Broman Markus S.,
Shum Pauline
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.12159
Subject(s) - market liquidity , monetary economics , business , liquidity risk , accounting liquidity , liquidity premium , institutional investor , liquidity crisis , term (time) , financial system , economics , finance , corporate governance , physics , quantum mechanics
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.