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Analysis of ETF bid-ask spread components

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  • Ivanov, Stoyu I.

Abstract

In this study we examine on intradaily basis (milliseconds) the largest 100 ETFs’ bid-ask spread components in the period March 21, 2014 to April 17, 2014. We document that ETFs have lower proportion of adverse selection in the bid-ask spread relative to stocks, which also means that the order processing cost component is higher in ETFs. This suggests that uninformed investors prefer to trade ETFs relative to individual stocks. The data in our study also suggests a U-shaped form of the adverse selection component across four categories of ETF trading volume and not a monotone decreasing relation from lowest to highest trading volume ETFs. Fixed-income ETFs have the highest adverse selection component coefficient whereas real estate ETFs have the lowest. Additionally, mutual fund structured ETFs have lower adverse selection component coefficient than the trust structured ETFs. We also document that ETFs with more quotes have lower adverse selection; whereas ETFs with higher average bid price, higher expense ratio and trust structuring of the ETF have higher adverse selection component of the bid-ask spread.

Suggested Citation

  • Ivanov, Stoyu I., 2016. "Analysis of ETF bid-ask spread components," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 249-259.
    • Handle: RePEc:eee:quaeco:v:61:y:2016:i:c:p:249-259
    DOI: 10.1016/j.qref.2016.02.004
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    More about this item

    Keywords

    Exchange traded funds; ETF; Bid-ask spread; Adverse selection;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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