Liquidity and Volatility Effects of Introducing Exchange-traded Funds in the Egyptian Exchange

Abstract

This paper tests the effects of introducing the first ETF in the Egyptian exchange. We apply econometric models to examine the effects of daily ETF trading activity on both liquidity and volatility of the benchmarked (EGX30) index over the period 2008 – 2022. The current paper applies a multiple regression model to examine the impact of ETF trading activity on market liquidity and finds that ETF has a weak positive impact. Moreover, it uses the GARCH model to investigate the impact of ETF trading activity on index volatility and documents that ETF has a weak negative impact. We associate the weak relations with the infrequent trading on ETF units. Arguably, this paper suggests three possible explanations for the low ETF trading activity in the Egyptian exchange, including lower expected return on ETF trading, less financial knowledge of investors about ETF characteristics, and less incentive for brokers to encourage investors to invest more in ETF units