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

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.