Passive Funds Affect Prices: Evidence from the Most ETF-dominated Asset Classes
64 Pages Posted: 24 Jan 2020 Last revised: 10 Jun 2021
Date Written: November 14, 2019
This paper studies exchange-traded funds’ (ETFs) price impact in the most ETF-dominated
asset classes: volatility (VIX) and commodities. I propose a model-independent approach to replicate the VIX futures contract. This allows me to isolate a non-fundamental component in VIX futures prices that is strongly related to the rebalancing of ETFs. To understand the source of that component, I decompose trading demand from ETFs into three parts: leverage rebalancing, calendar rebalancing, and flow rebalancing. Leverage rebalancing has the largest effects. It amplifies price changes and exposes ETF counterparties negatively to variance.
Keywords: ETF, leverage, commoditization, VIX, futures
JEL Classification: G11, G13, G23
Suggested Citation: Suggested Citation