Our paper, however, is significantly different from theirs in several aspects. First, our paper focuses on liquidity spillover while focusing on volatility spillover. Second, Krause et al. (2014) study only the volatility spillover from an ETF to its largest component stocks. By contrast, we provide an entire perspective of the liquidity spillover as we consider the spillover effect of all underlying stocks. This approach allows us to simultaneously account for the spillover effect between liquidity, volatility, and return.
An ETF or an Exchange Traded Fund, is a type of security that tracks an index, sector, commodity, or other asset, which can be sold on the stock exchange. It can track either the price of a commodity or bonds or track specific strategic investments. By daily trading volume, the S&P 500 SPDR (SPY), Invesco QQQ (QQQ), and Financial Select SPDR (XLF) tend to be among the most active ETFs. The profiles of these two similar ETFs can lead to different relative levels of liquidity. Investors might find it easier and more cost-effective to trade shares of Alpha ETF than Beta ETF, despite both ETFs tracking the same index. NAV provides a gauge of what an ETF or mutual fund’s share is worth intrinsically, making it a fundamental metric for fund investors.
Stock liquidity and default risk
This evaporation of liquidity across markets can be caused by the co-movement of liquidity (e.g., liquidity commonality) or the propagation of liquidity shocks (e.g., liquidity spillover) (Cespa & Foucault, 2014). They are among the first who directly study the liquidity spillover in financial markets. We expand the empirical analysis of liquidity spillover into ETF and underlying markets https://www.xcritical.in/ and contribute to the literature by providing a direct measure of liquidity spillover and a comprehensive analysis of its determinants. We also examine the effect of ETF illiquidity on ETF tracking errors depending on how ETFs are structured. Our empirical analysis shows that tracking errors of the in-kind type of ETFs are less sensitive to ETF illiquidity than other types of ETFs are.
