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Passive funds affect prices: evidence from the most ETF-dominated asset classes

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  • Karamfil Todorov

Abstract

This paper studies exchange-traded funds’ (ETFs) price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a modelindependent approach to replicate the VIX futures contract. This allows me to isolate a non-fundamental component in VIX futures prices that is strongly related to the rebalancing of ETFs. To understand the source of that component, I decompose trading demand from ETFs into three parts: leverage rebalancing, calendar rebalancing, and flow rebalancing. Leverage rebalancing has the largest effects. It amplifies price changes and exposes ETF counterparties negatively to variance.

Suggested Citation

  • Karamfil Todorov, 2021. "Passive funds affect prices: evidence from the most ETF-dominated asset classes," BIS Working Papers 952, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:952
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    References listed on IDEAS

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    Cited by:

    1. Sirio Aramonte & Andreas Schrimpf & Hyun Song Shin, 2023. "Non-bank financial intermediaries and financial stability," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 7, pages 147-170, Edward Elgar Publishing.
    2. John J Shim & Karamfil Todorov, 2021. "ETFs, illiquid assets, and fire sales," BIS Working Papers 975, Bank for International Settlements.

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    More about this item

    Keywords

    ETF; leverage; commoditization; VIX; futures;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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