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

43 Pages Posted: 19 Dec 2019 Last revised: 6 Apr 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 while the daily rebalancing has a substantial influence on late-day futures pricing, there is no evidence that the market impact is driven by predatory trading or (harmful) front-running. On the contrary, I provide evidence for increased liquidity provision ahead of predictable rebalancing flows, consistent with theories of sunshine trading.

Keywords: Trading costs, predatory trading, sunshine trading, 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://www.cbs.dk/en/research/departments-and-centres/department-of-finance/staff/sbbfi

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