The market liquidity of DIAMONDS,Q's,and their underlying stocks |
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| Institution: | 1. Energy and Sustainable Development (ESD), Montpellier Business School, Montpellier, France;2. Department of Finance and Accounting, University of Tunis El Manar, Tunis, Tunisia;3. Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman;4. Lebow College of Business, Drexel University, Philadelphia, United States;5. Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (SZABIST), Islamabad, Pakistan |
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| Abstract: | We investigate the market liquidity effects of the introduction of index-tracking stocks for the Dow Jones Industrial Average (DIAMONDS) and the NASDAQ 100 index (Q's). Our main finding is liquidity of the underlying DJIA 30 index stocks improves after the introduction of the exchange-traded fund, largely because of a decline in the cost of informed trading. Further, we find the DIAMONDS has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks, again primarily because of lower adverse selection costs. Finally, we find weaker but qualitatively similar results for the Q's. |
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