"Liquidity Illusion" in European ETFs

A derivative may present higher liquidity than the underlying asset in relatively stable markets but become very illiquid in periods of high volatility or in a falling market. This concept is called “liquidity illusion” and not taking it into account may cause major losses for people who hold or trade such derivative. Although this issue has been brought up for fixed income ETFs, it remains severely under-examined and is often neglected for equity ETFs. There are reasons to believe, however, that “liquidity illusion” may be present in equity ETFs, too. In this work, I try to find “liquidity illusion” in 6 European equity ETFs. I use liquidity mismatch persistence between the ETF and the underlying assets basket and degree of dependence of the mismatch on several explanatory variables to detect it. The results are controversial. For most ETFs, the “liquidity illusion” is trackable. For others, the situation is less certain. This may be a result of calculation error or some omitted variable.