Journal Article

Intraday Share Price Volatility and Leveraged ETF Rebalancing

Pauline Shum, Walid Hejazi, Edgar Haryanto and Arthur Rodier

in Review of Finance

Volume 20, issue 6, pages 2379-2409
Published in print October 2016 | ISSN: 1572-3097
Published online December 2015 | e-ISSN: 1573-692X | DOI: https://dx.doi.org/10.1093/rof/rfv061
Intraday Share Price Volatility and Leveraged ETF Rebalancing

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Regulators and market participants are concerned about leveraged exchange-traded funds (ETFs)’ role in driving up end-of-day volatility through hedging activities near the market’s close. Leveraged ETF providers counter that the funds are too small to make a meaningful impact on volatility. For the period surrounding the financial crisis, 2006–11, we show that end-of-day volatility was positively and statistically significantly correlated with the ratio of potential rebalancing trades to total trading volume. The impacts were not all economically significant, but largest during the most volatile days. Given the predictable pattern of leveraged ETF hedging demands, implications for predatory trading are explored.

Keywords: G10; G12; G14

Journal Article.  12464 words.  Illustrated.

Subjects: Economics

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