Intraday Share Price Volatility and Leveraged ETF Rebalancing
Pauline M. Shum
York University - Schulich School of Business
University of Toronto - Rotman School of Management
April 14, 2013
Market watchers and regulators have been concerned about leveraged ETFs' role in driving up end-of-day volatility through their daily hedging activities. Leveraged ETF providers and analysts have countered that the funds are too small to make an impact. We investigate the merits of both claims. Using trade data for a balanced panel of U.S. blue-chip equities from 2006 to 2011, we show that while the impact was statistically significant, it was economically significant only during volatile periods. The empirical evidence supports this finding whether we split the sample by daily price movements or by the ratio of potential rebalancing trades to total dollar volume at the end of the trading session, or whether we exclude stocks that have active option trading. Given the predictable pattern of leveraged ETF hedging demands, we also explore the implications for predatory trading and for leveraged ETF tracking errors.
Number of Pages in PDF File: 48
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 16, 2013
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