Liquidity Provision to Leveraged ETFs and Equity Options Rebalancing Flows: Evidence from End-of-Day Stock Prices

Andrea Barbon, Heiner Beckmeyer, Andrea Buraschi and Mathis Moerke
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Andrea Barbon: University of St. Gallen
Andrea Buraschi: Imperial College Business School; Centre for Economic Policy Research (CEPR)
Mathis Moerke: University of St. Gallen - Swiss Institute of Banking and Finance

No 22-40, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Rebalancing of leveraged ETFs (LETFs) and delta-hedging of equity options by intermediaries are two distinct and economically significant sources of liquidity demands. We show that they induce end-of-day momentum and mean-reversion in returns. While gamma effects are persistent throughout our sample, LETFs effects have decreased over time. We empirically study these effects and their potential drivers. We find that LETF flows attract more liquidity provision and their effects on prices are shorter-lived. Intermediaries can strategically decide the timing of their delta-hedging, resulting in less predictable flows. This shows the benefits of information disclosure on market liquidity and price distortion.

Keywords: Liquidity Provision; Gamma Exposure; Option Delta-Hedging; Leveraged ETF; End-of-Day Momentum (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 G23 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2022-05
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2240

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