The Market Impact of Predictable Flows: Evidence from Leveraged VIX Products

38 Pages Posted: 19 Dec 2019 Last revised: 7 Jul 2020

Date Written: April 3, 2020

Abstract

What is the market impact of predictable order flow? Leveraged exchange-traded products are useful for answering this question because they generate daily rebalancing flows whose size, sign and timing are predictable. This paper presents new evidence from the market for leveraged volatility (VIX) products. I find that the daily rebalancing imposes a substantial implicit cost on investors, but there is no evidence that the impact is driven by predatory trading. On the contrary, I show that larger and more predictable flows have smaller price impact coeffcients, and that trading ahead of rebalancing flows is not profitable after transaction costs.

Keywords: Strategic trading, trading costs, leveraged products, ETFs, VIX

JEL Classification: G10, G11, G13, G14

Suggested Citation

Brøgger, Søren Bundgaard, The Market Impact of Predictable Flows: Evidence from Leveraged VIX Products (April 3, 2020). Available at SSRN: https://ssrn.com/abstract=3497537 or http://dx.doi.org/10.2139/ssrn.3497537

Søren Bundgaard Brøgger (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

HOME PAGE: http://https://sites.google.com/view/soerenbroegger

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