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Intraday Share Price Volatility and Leveraged ETF Rebalancing

49 Pages Posted: 13 Oct 2012 Last revised: 7 Jan 2016

Pauline M. Shum

York University - Schulich School of Business

Walid Hejazi

University of Toronto - Rotman School of Management

Edgar Haryanto

Independent

Arthur Rodier

Independent

Date Written: October 19, 2015

Abstract

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.

Keywords: Leveraged ETF, ETF, Intraday volatility, Swap counterparties, market volatility, market microstructure

JEL Classification: G10

Suggested Citation

Shum, Pauline M. and Hejazi, Walid and Haryanto, Edgar and Rodier, Arthur, Intraday Share Price Volatility and Leveraged ETF Rebalancing (October 19, 2015). Available at SSRN: https://ssrn.com/abstract=2161057 or http://dx.doi.org/10.2139/ssrn.2161057

Pauline Shum (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Walid Hejazi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 287-7318 (Phone)

Edgar Haryanto

Independent

No Address Available

Arthur Rodier

Independent

No Address Available

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