Journal of Economics and Financial Analysis, 7 (2), pp. 45-64, [2023]
URI: https://ojs.tripaledu.com/jefa/article/view/86/96

The Role of Investor Attention in ETF Liquidity


North-West University, South Africa


DOI: http://dx.doi.org/10.1991/jefa.v7i2.a62

Abstract

ETFs have gained increasing popularity due to their numerous benefits, including their higher liquidity relative to their counterparts. However, the influence of this increasing attention on their liquidity remains unexplored. Therefore, this study investigates the effect of investor attention on ETF liquidity. To achieve this objective, 80 South African ETFs are examined from January 2018 till December 2022 using a panel regression approach. The findings of this study suggest that an increase in investor attention increases the price impact but reduces the cost of trading, ultimately, leading to an improvement in ETF liquidity. Further analysis reveals that investor attention has a greater impact on ETFs tracking domestic benchmarks, and impacts only ETFs tracking equities, bonds, and property. The analyses also reveal that the effect of investor attention is only significant in the short-run and is eliminated in the long-run, and these effects have been intensified by the COVID-19 pandemic. Global investor attention, however, has an opposing effect on ETF liquidity. These findings are important for investors trading in ETF markets and regulators controlling these markets.

Keywords

Exchange Traded Fund; Google Search Volume Index; Investor Attention; Liquidity.

JEL Classification

G11, G12, G40.

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