This study aims to analyze the effect of investor’s sentiment on the Exchange Traded Funds(ETF) liquidity, and to capture the variations of investor’s sentiment, the Volatility Index (VIX) is used to observe the market characteristics as a proxy variable. In addition, our sample data mainly focus on the Asia ETF market. The empirical results show that the degree of market investor sentiment plays an important role in the ETF liquidity within these Asia countries. We employ GARCH model to capture the volatility-clustering effect in the study. The empirical result shows ETF has liquidity and volatility-clustering effect, which is, when in a specific period there is a better or poor liquidity phenomenon. Especially, when the market condition presents different characteristics, namely the difference of trading systems, regulations and so on, the relationship between VIX and ETF liquidity is also significant difference. From the viewpoints of hedging market risk and portfolio investment, this paper also suggests that investor should consider the sentiment factors into their investment decision, and timely readjust the investment weight of ETF product.
Proceeding of the 2015 International Conference in Management Sciences and Decision Making