Intraday Share Price Volatility and Leveraged ETF Rebalancing
Pauline M. Shum
York University - Schulich School of Business
University of Toronto - Rotman School of Management
January 31, 2015
Regulators and market participants are concerned about leveraged ETFs' role in driving up end-of-day volatility through their daily hedging activities near the market’s close. Leveraged ETF providers and analysts counter that the funds are too small to make a meaningful impact on volatility. For the period 2006 to 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. However, the impact was economically significant only during the most volatile days. Given the predictable pattern of leveraged ETF hedging demands, we also explore the implications for predatory trading.
Number of Pages in PDF File: 45
Keywords: Leveraged ETF, ETF, Intraday volatility, Swap counterparties, market volatility, market microstructure
JEL Classification: G10
Date posted: October 13, 2012 ; Last revised: March 26, 2015
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