Shorting Leveraged ETF Pairs

24 Pages Posted: 15 Feb 2018 Last revised: 27 Feb 2018

Christopher Hessel

City University of New York

Jouahn Nam

Pace University - Lubin School of Business

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Xing Cunyu

Southwestern University of Finance and Economics (SWUFE)

Ge Zhang

William Paterson University - Cotsakos College of Business

Date Written: December 20, 2017

Abstract

We study the strategy of shorting a pair of leveraged ETF and inverse leveraged ETF of the same index. The profitability of this strategy does not depend on the direction of the underlying benchmark. We derive an approximation formula to show that the expected return is high when the weighted sum of various orders of autocorrelations is negative and the volatility of underlying index is high. We then study the trading strategy in six markets and show that it can generate mean monthly returns of over 1% in four markets. The returns can be further enhanced if we exploit the persistence of the volatility and start the shorting pair strategy when the observed volatility is high.

Keywords: Leveraged ETFs, Dynamic Trading

JEL Classification: G1

Suggested Citation

Hessel, Christopher and Nam, Jouahn and Wang, Jun and Cunyu, Xing and Zhang, Ge, Shorting Leveraged ETF Pairs (December 20, 2017). Journal of Trading, Spring 2018; Baruch College Zicklin School of Business Research Paper No. 2018-02-05. Available at SSRN: https://ssrn.com/abstract=3117624

Christopher Hessel

City University of New York ( email )

17 Lexington Avenue
New York, NY 10021
United States

Jouahn Nam

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212-346-1818 (Phone)
212-346-1573 (Fax)

Jun Wang (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Xing Cunyu

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Ge Zhang

William Paterson University - Cotsakos College of Business ( email )

1600 Valley Road
Wayne, NJ 07470
United States

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