We examine if liquidity risk is priced in ETF equity returns and ETF equity premiums. We also show if these relationships hold in extreme market situations, which includes pre-and post-Covid periods. We find that liquidity risk is an important determinant of ETF equity valuation, and equity premiums are sensitive to liquidity levels. The equity premium tends to increase at the higher levels of bid-ask spread in the pre and post-Covid periods indicating that the information is not fully available to the public or to investors. Our results are robust across different sub-groups categorized based on the characteristics (age and size) of the ETFs. Our results have implications for asset pricing and price discovery and show that investors hold ETFs with high equity premiums even when the liquidity risk is high. A positive liquidity premium exists in Artificial Intelligence ETF markets and has implications for price discovery.



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