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

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