Leveraged Funds and the Shadow Cost of Leverage Constraints

60 Pages Posted: 1 Oct 2018 Last revised: 28 Mar 2019

See all articles by Zhongjin Lu

Zhongjin Lu

University of Georgia - Department of Finance

Zhongling Qin

University of Georgia - Department of Finance

Date Written: February 7, 2019

Abstract

Using the most comprehensive dataset of leveraged funds known to the literature, we measure the market-wide shadow cost of leverage constraints and examine its pricing implications. The shadow cost averages 0.51% per annum from 2006 to 2016, spikes upon quarter-ends when financial intermediaries file financial reports, positively predicts future betting-against-beta (BAB) returns, and negatively correlates with contemporaneous BAB returns. Stocks that underperform when the shadow cost increases earn 0.75% more per month. Overall, our shadow cost measure fits the predictions of leverage-constraint based theories better than the widely used TED spread. We demonstrate two natural applications of our shadow cost measure.

Keywords: Leverage Constraints, Shadow Cost, Financial Intermediaries, Leveraged Funds

JEL Classification: G11, G12, G17, G23

Suggested Citation

Lu, Zhongjin and Qin, Zhongling, Leveraged Funds and the Shadow Cost of Leverage Constraints (February 7, 2019). Available at SSRN: https://ssrn.com/abstract=3255652 or http://dx.doi.org/10.2139/ssrn.3255652

Zhongjin Lu (Contact Author)

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6254
United States

Zhongling Qin

University of Georgia - Department of Finance ( email )

GA
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
69
Abstract Views
517
rank
341,821
PlumX Metrics