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Intraday Share Price Volatility and Leveraged ETF Rebalancing

Author

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  • Pauline Shum
  • Walid Hejazi
  • Edgar Haryanto
  • Arthur Rodier

Abstract

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.

Suggested Citation

  • Pauline Shum & Walid Hejazi & Edgar Haryanto & Arthur Rodier, 2016. "Intraday Share Price Volatility and Leveraged ETF Rebalancing," Review of Finance, European Finance Association, vol. 20(6), pages 2379-2409.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:6:p:2379-2409.
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    Cited by:

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    2. Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2016. "Exchange Traded Funds (ETFs)," Swiss Finance Institute Research Paper Series 16-64, Swiss Finance Institute.
    3. Pagano, Marco & Sánchez Serrano, Antonio & Zechner, Jozef, 2019. "Can ETFs contribute to systemic risk?," Report of the Advisory Scientific Committee 9, European Systemic Risk Board.
    4. Lakshithe Wagalath, 2016. "Feedback effects and endogenous risk in financial markets," Finance, Presses universitaires de Grenoble, vol. 37(2), pages 39-74.
    5. Bogousslavsky, Vincent & Muravyev, Dmitriy, 2023. "Who trades at the close? Implications for price discovery and liquidity," Journal of Financial Markets, Elsevier, vol. 66(C).
    6. Peter B. Lerner, 2023. "A New Entropic Measure for the Causality of the Financial Time Series," JRFM, MDPI, vol. 16(7), pages 1-17, July.
    7. Son D Pham & Ben R Marshall & Nhut H Nguyen & Nuttawat Visaltanachoti, 2024. "Predicting ETF liquidity," Australian Journal of Management, Australian School of Business, vol. 49(3), pages 478-508, August.
    8. Anders Merrild Posselt, 2022. "Dynamics in the VIX complex," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1665-1687, September.
    9. Sebastiano Michele Zema & Francesco Cordoni, 2023. "A non-Normal framework for price discovery: The independent component based information shares measure," LEM Papers Series 2023/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    10. Ivanov, Ivan T. & Lenkey, Stephen L., 2018. "Do leveraged ETFs really amplify late-day returns and volatility?," Journal of Financial Markets, Elsevier, vol. 41(C), pages 36-56.
    11. Brøgger, Søren Bundgaard, 2021. "The market impact of predictable flows: Evidence from leveraged VIX products," Journal of Banking & Finance, Elsevier, vol. 133(C).
    12. Lee, Kyuseok & Kim, Soo-Hyun, 2018. "Do Leveraged/Inverse Etfs Wag The Underlying Market? : Evidence From The Korean Stock Market," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 59(2), pages 83-94, December.
    13. DeVault, Luke & Turtle, H.J. & Wang, Kainan, 2021. "Blessing or curse? Institutional investment in leveraged ETFs," Journal of Banking & Finance, Elsevier, vol. 129(C).
    14. Isa E. Hafalir & Serkan Imisiker, 2022. "Call Auctions with Contingent Orders," Games, MDPI, vol. 13(5), pages 1-8, September.
    15. Shen, Yiwen & Shi, Meiqi, 2024. "Intraday variation in cross-sectional stock comovement and impact of index-based strategies," Journal of Financial Markets, Elsevier, vol. 68(C).

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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