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Measuring the Liquidity of ETFs:
An Application to the European Market

Thierry Roncalli and Ban Zheng
The Journal of Trading Summer 2014, 9 (3) 79-108; DOI: https://doi.org/10.3905/jot.2014.9.3.079
Thierry Roncalli
is the head of quantitative research at Lyxor Asset Management in Paris, France.
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  • For correspondence: thierry.roncalli@lyxor.com
Ban Zheng
is a quantitative researcher at Lyxor Asset Management in Paris, France.
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  • For correspondence: ban.zheng@lyxor.com
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Abstract

The liquidity of exchange-traded funds (ETFs) is of utmost importance for regulators, investors, and providers. However, the study of liquidity is still in its infancy. This article shows some stylized facts of liquidity statistics (daily/intraday spread, trading volume, etc.). The authors propose a new liquidity measure combining these statistics. In this case, liquidity is a power function of the spread where the parameters are determined by actual trading volumes. They also study the relationship between the liquidity of ETFs and the liquidity of the underlying index and demonstrate that they are correlated on a daily basis, but not in terms of intraday frequency. Finally, the authors define a measure of liquidity improvement and apply it to the EURO STOXX 50 index.

TOPICS: Exchange-traded funds and applications, statistical methods

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The Journal of Trading: 9 (3)
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Measuring the Liquidity of ETFs:
An Application to the European Market
Thierry Roncalli, Ban Zheng
The Journal of Trading Jun 2014, 9 (3) 79-108; DOI: 10.3905/jot.2014.9.3.079

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Measuring the Liquidity of ETFs:
An Application to the European Market
Thierry Roncalli, Ban Zheng
The Journal of Trading Jun 2014, 9 (3) 79-108; DOI: 10.3905/jot.2014.9.3.079
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  • Article
    • Abstract
    • UNDERSTANDING THE LIMIT ORDER BOOK
    • MEASURING THE ABSOLUTE LIQUIDITY OF ETFS
    • MEASURING THE RELATIVE LIQUIDITY OF ETFS
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • ENDNOTES
    • REFERENCES
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