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The market impact of predictable flows: Evidence from leveraged VIX products

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  • Brøgger, Søren Bundgaard

Abstract

What is the market impact of predictable order flow? Leveraged exchange-traded products are useful for answering this question because they generate daily rebalancing flows whose size, sign and timing are predictable. This paper presents new evidence from the market for leveraged volatility products. While the daily rebalancing imposes an implicit cost on investors by putting pressure on closing prices, there is no evidence that the cost is driven by predatory trading. On the contrary, I show that larger and more predictable flows have smaller price impact coefficients, and that there are no excess profits from trading ahead of rebalancing flows during the sample period.

Suggested Citation

  • Brøgger, Søren Bundgaard, 2021. "The market impact of predictable flows: Evidence from leveraged VIX products," Journal of Banking & Finance, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:jbfina:v:133:y:2021:i:c:s0378426621002363
    DOI: 10.1016/j.jbankfin.2021.106280
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    More about this item

    Keywords

    Strategic trading; Trading costs; Sunshine trading; Closing prices; Leveraged products; ETFs; VIX;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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