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Passive funds affect prices: evidence from the most ETF-dominated asset classes

Karamfil Todorov

No 952, BIS Working Papers from Bank for International Settlements

Abstract: This paper studies exchange-traded funds’ (ETFs) price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a modelindependent approach to replicate the VIX futures contract. This allows me to isolate a non-fundamental component in VIX futures prices that is strongly related to the rebalancing of ETFs. To understand the source of that component, I decompose trading demand from ETFs into three parts: leverage rebalancing, calendar rebalancing, and flow rebalancing. Leverage rebalancing has the largest effects. It amplifies price changes and exposes ETF counterparties negatively to variance.

Keywords: ETF; leverage; commoditization; VIX; futures (search for similar items in EconPapers)
JEL-codes: G11 G13 G23 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021-07
New Economics Papers: this item is included in nep-fmk, nep-mst and nep-ore
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