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

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