Passive Funds Affect Prices: Evidence from the Most ETF-dominated Asset Classes

64 Pages Posted: 24 Jan 2020 Last revised: 10 Jun 2021

See all articles by Karamfil Todorov

Karamfil Todorov

London School of Economics & Political Science, Department of Finance; Bank for International Settlements

Date Written: November 14, 2019

Abstract

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

Todorov, Karamfil, Passive Funds Affect Prices: Evidence from the Most ETF-dominated Asset Classes (November 14, 2019). Available at SSRN: https://ssrn.com/abstract=3504016 or http://dx.doi.org/10.2139/ssrn.3504016

Karamfil Todorov (Contact Author)

London School of Economics & Political Science, Department of Finance ( email )

London
Great Britain

HOME PAGE: http://ktodorov.com

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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