Equivalent Volume and Comovement
52 Pages Posted: 2 Nov 2014 Last revised: 25 Oct 2017
Date Written: October 20, 2017
Abstract
We introduce a new indicator of relative liquidity, equivalent volume (EV), based on the amount of a stock traded indirectly through its inclusion in ETFs. We hypothesize that the EV of an ETF component stock is related to its comovement with other component stocks through the relative liquidity channel under trading caused by arbitrage. Using daily ETF holdings and several comovement estimators, we find that a one unit increase in daily equivalent volume is associated with increase in comovement ranging from 1.1% to 27.6%. Our findings contribute to the literature on trading volume, liquidity and comovement by relating arbitrage-induced trading pressure to the underlying stock comovement.
Keywords: ETF, arbitrage, comovement, trading volume, asset basket
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation
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