Recent Developments in Leveraged Investment Funds

Kota Okabe, Fuminori Niwa, Takao Sasaki and Teppei Nagano
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Kota Okabe: Bank of Japan
Fuminori Niwa: Bank of Japan
Takao Sasaki: Bank of Japan
Teppei Nagano: Bank of Japan

No 16-E-1, Bank of Japan Review Series from Bank of Japan

Abstract: In Japan, households have been rapidly increasing their stock investments using leveraged investment funds (leveraged exchanged traded funds [ETFs] and mutual funds). Some market participants are concerned that (1) the associated rebalancing demand may amplify the volatility in stock markets and that (2) the liquidity in the leveraged investment funds market may decline as capital flows regarding the process for creating and redeeming ETF shares become large, which creates stress on the entire stock market. Up until now, empirical evidence suggests otherwise, as the impact of rebalancing demand is curbed by capital flows on contrarian investors' fund demand, and market liquidity is maintained at a sufficiently high level. Yet, it is necessary to pay close attention to developments in leveraged investment funds, particularly their impact on financial markets during times of stress. In addition, paying such close attention would be beneficial for grasping households' risk-taking stance.

Date: 2016-05-27
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