Do leveraged ETFs really amplify late-day returns and volatility?

Ivan T. Ivanov and Stephen L. Lenkey

Journal of Financial Markets, 2018, vol. 41, issue C, 36-56

Abstract: The design of leveraged and inverse exchange-traded funds (ETFs) has raised concerns that they may exacerbate volatility in financial markets by mechanically rebalancing their portfolios in the same direction as contemporaneous returns. We show theoretically, however, that capital flows can lower ETF rebalancing demand and completely eliminate it in the limit. Using a sample of U.S. equity-based ETFs from 2006 to 2014, we find that capital flows substantially reduce ETF rebalancing demand, even during periods of severe market stress. After accounting for capital flows and standard risk factors, we find that the impact of ETF rebalancing on late-day returns and volatility is economically insignificant.

Keywords: Leveraged ETFs; Capital flows; Late-day returns; Volatility (search for similar items in EconPapers)
JEL-codes: G12 G23 G28 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:41:y:2018:i:c:p:36-56

DOI: 10.1016/j.finmar.2018.09.001

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