Intraday Share Price Volatility and Leveraged ETF Rebalancing
Pauline M. Shum
York University - Schulich School of Business
University of Toronto - Rotman School of Management
October 19, 2015
Regulators and market participants are concerned about leveraged ETFs' role in driving up end-of-day volatility through hedging activities near the market's close. Leveraged ETF providers counter that the funds are too small to make a meaningful impact on volatility. For the period surrounding the financial crisis, 2006-2011, we show that end-of-day volatility was positively and statistically significantly correlated with the ratio of potential rebalancing trades to total trading volume. The impacts were not all economically significant, but largest during the most volatile days. Given the predictable pattern of leveraged ETF hedging demands, implications for predatory trading are explored.
Number of Pages in PDF File: 49
Keywords: Leveraged ETF, ETF, Intraday volatility, Swap counterparties, market volatility, market microstructure
JEL Classification: G10
Date posted: October 13, 2012 ; Last revised: January 7, 2016
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