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
Date Written: September 17, 2021
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: Suggested Citation