Do Leveraged ETFs Really Amplify Late-Day Returns and Volatility?

51 Pages Posted: 2 Oct 2014 Last revised: 25 Jul 2017

See all articles by Ivan Ivanov

Ivan Ivanov

Federal Reserve Bank of Chicago

Stephen Lenkey

Pennsylvania State University

Multiple version iconThere are 2 versions of this paper

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

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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