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51 PagesPosted: 2 Oct 2014Last revised: 25 Jul 2017
See all articles by Ivan Ivanov
Ivan Ivanov
Federal Reserve Bank of Chicago
Stephen Lenkey
Pennsylvania State University
There are 2 versions of this paper
Do Leveraged ETFs Really Amplify Late-Day Returns and Volatility?
Number of pages: 51Posted: 02 Oct 2014Last Revised: 25 Jul 2017
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Are Concerns About Leveraged ETFs Overblown?
FEDS Working Paper No. 2014-106
Number of pages: 37Posted: 09 Jan 2015
Downloads 185
Date Written: July 10, 2017
Abstract
The design of leveraged and inverse exchange-traded funds (ETFs) has raised concerns that they may exacerbate volatility in financial markets by mechanically rebalancing their portfolios in the same direction as contemporaneous returns. We show theoretically, however, that capital flows can lower ETF rebalancing demand and completely eliminate it in the limit. Empirically, we find that capital flows substantially reduce ETF rebalancing demand, even during periods of severe market stress. After accounting for capital flows and standard risk factors, we find that the impact of ETF rebalancing on late-day returns and volatility is economically insignificant.
Suggested Citation:Suggested Citation
Ivanov, Ivan and Lenkey, Stephen, Do Leveraged ETFs Really Amplify Late-Day Returns and Volatility? (July 10, 2017). Available at SSRN: https://ssrn.com/abstract=2504012 or http://dx.doi.org/10.2139/ssrn.2504012
Ivan Ivanov
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
HOME PAGE: http://ivantivanov.com
Stephen Lenkey (Contact Author)
Pennsylvania State University ( email )
Smeal College of Business
University Park, PA 16802
United States
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