Liquidity Provision to Leveraged ETFs and Equity Options Rebalancing Flows: Evidence from End-of-Day Stock Prices

65 Pages Posted: 21 Sep 2021 Last revised: 23 May 2022

See all articles by Andrea Barbon

Andrea Barbon

University of St. Gallen; University of St.Gallen

Heiner Beckmeyer

University of Muenster - Finance Center Muenster

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Mathis Moerke

University of St. Gallen - Swiss Institute of Banking and Finance

Date Written: September 17, 2021

Abstract

Rebalancing of leveraged ETFs (LETFs) and delta-hedging of equity options by intermediaries are two distinct and economically significant sources of liquidity demands. We show that they induce end-of-day momentum and mean-reversion in returns. While gamma effects are persistent throughout our sample, LETFs effects have decreased over time. We empirically study these effects and their potential drivers. We find that LETF flows attract more liquidity provision and their effects on prices are shorter-lived. Intermediaries can strategically decide the timing of their delta-hedging, resulting in less predictable flows. This shows the benefits of information disclosure on market liquidity and price distortion.

Keywords: Liquidity Provision, Gamma Exposure, Option Delta-Hedging, Leveraged ETF, End-of-Day Momentum

JEL Classification: G12, G13, G14, G23

Suggested Citation

Barbon, Andrea and Beckmeyer, Heiner and Buraschi, Andrea and Moerke, Mathis, Liquidity Provision to Leveraged ETFs and Equity Options Rebalancing Flows: Evidence from End-of-Day Stock Prices (September 17, 2021). Swiss Finance Institute Research Paper No. 22-40, Available at SSRN: https://ssrn.com/abstract=3925725 or http://dx.doi.org/10.2139/ssrn.3925725

Andrea Barbon (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

HOME PAGE: http://www.abarbon.com

University of St.Gallen ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.abarbon.com

Heiner Beckmeyer

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster, 48143
Germany

Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mathis Moerke

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

HOME PAGE: http://www.mathismoerke.com

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