Finance Seminar: Professor Russ Wermers

Do ETF’s Increase Liquidity

This paper investigates the impact of exchange-traded funds (ETFs) on the liquidity of their underlying stockholdings. Using a difference-in-differences methodology for large changes in the index weights of stocks in the S&P 500 and NASDAQ 100 indexes, we find that increases in ETF ownership decrease the transaction costs of stocks for institutional investors, driven by lower price impact costs. High-ETF ownership stocks have high price resilience and high market depth. However, ETFs are linked to higher liquidation costs during the 2011 U.S. debt-ceiling crisis, suggesting that stocks having high-ETF ownership may experience impaired liquidity during major market stress events.

Professor Russ Wermers

Russ Wermers is Bank of America Professor of Finance and Director, Center for Financial Policy at the Smith School of Business, University of Maryland at College Park, where he won a campus-wide teaching award during 2005 and a Krowe Teaching Award (within the Smith Business School) during 2013.  His main research interests include studies of the efficiency of securities markets, as well as the role of institutional investors in setting stock prices. In addition, he studies and teaches quantitative equity strategies, and is currently researching microfinance institutions in Thailand.  Most notably, his past research has developed new approaches to measuring and attributing the performance of mutual funds, pension funds, and hedge funds, as well as devising winning strategies for investing in these funds. Professor Wermers also studies the investment behavior of these asset managers, as well as the impact of their trades on stock markets.  His papers have been published in leading scholarly journals, such as The American Economic Review, The Review of Financial Studies, The Journal of Financial Economics, and The Journal of Finance.  His article on mutual fund “herding” and stock prices (Journal of Finance, 1999) won the NYSE Award for the Best Paper on Equity Trading in 1995. His coauthored article on mutual fund performance was a finalist for the Smith-Breeden Award for the Best Paper in the Journal of Finance during 2006/2007. Professor Wermers consults for the hedge fund, pension fund, and mutual fund industries. He is coauthor of a book on the latest scientific approaches to performance evaluation and attribution of professional fund managers, written for academics and practitioners (published in December 2012). He received his Ph.D. from the University of California, Los Angeles, in December 1995.