Intraday Share Price Volatility and Leveraged ETF Rebalancing
Pauline M. Shum
York University - Schulich School of Business
University of Toronto - Rotman School of Management
March 18, 2014
Regulators and market participants are concerned about leveraged ETFs' role in driving up end-of-day volatility through their daily hedging activities. Leveraged ETF providers and analysts counter that the net asset value of the funds are too small for the rebalancing activities to make a meaningful volatility impact. Using a variety of measures for the period 2006 to 2011, we show that while the impact was positively correlated with the ratio of potential rebalancing trades to total trading volume at the end of the trading session. While these effects were statistically significant, they were economically significant only during days with the highest expected rebalancing volume. Given the predictable pattern of leveraged ETF hedging demands, we also explore the implications for predatory trading.
Number of Pages in PDF File: 49
Keywords: Leveraged ETF, ETF, Intraday volatility, Swap counterparties, market volatility, market microstructure
JEL Classification: G10working papers series
Date posted: October 13, 2012 ; Last revised: April 2, 2014
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