Impact of Leveraged ETF Trading on the Market Quality of Component Stocks

North American Journal of Economics and Finance 28 (2014), p90-108

Posted: 15 Jul 2016

See all articles by Mingsheng Li

Mingsheng Li

Bowling Green State University - College of Business Administration

Xin Zhao

Pennsylvania State University (Erie) - The Behrend College

Date Written: 2014

Abstract

We investigate the effect of leveraged ETF trading on the trading activity and market quality of their component stocks. The results show that both quoted and effective spreads of component stocks increase about 0.2 to 3.0 basis points after the inception of leveraged ETFs, while other liquidity measures do not show significant changes. The trading volume of component stocks is positively and significantly correlated with the trading volume of leveraged ETFs, but the volatility of component stocks is not affected by ETF trading either at the daily level or during the last hour of trading. In addition, the volatility of component stocks decreases slightly after ETF inception. These findings do not support the previous claim that the trading of leveraged ETFs increases price volatility of component stocks.

Keywords: Exchange traded funds; ETFs; Leveraged ETFs; Liquidity; Market Volatility

JEL Classification: G14

Suggested Citation

Li, Mingsheng and Zhao, Xin Jessica, Impact of Leveraged ETF Trading on the Market Quality of Component Stocks (2014). North American Journal of Economics and Finance 28 (2014), p90-108. Available at SSRN: https://ssrn.com/abstract=2809349

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Xin Jessica Zhao

Pennsylvania State University (Erie) - The Behrend College ( email )

286 Burke
Erie, PA 16563-1400
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
276
PlumX Metrics