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Recent Developments in Leveraged Investment Funds

Author

Listed:
  • Kota Okabe

    (Bank of Japan)

  • Fuminori Niwa

    (Bank of Japan)

  • Takao Sasaki

    (Bank of Japan)

  • Teppei Nagano

    (Bank of Japan)

Abstract

In Japan, households have been rapidly increasing their stock investments using leveraged investment funds (leveraged exchanged traded funds [ETFs] and mutual funds). Some market participants are concerned that (1) the associated rebalancing demand may amplify the volatility in stock markets and that (2) the liquidity in the leveraged investment funds market may decline as capital flows regarding the process for creating and redeeming ETF shares become large, which creates stress on the entire stock market. Up until now, empirical evidence suggests otherwise, as the impact of rebalancing demand is curbed by capital flows on contrarian investors' fund demand, and market liquidity is maintained at a sufficiently high level. Yet, it is necessary to pay close attention to developments in leveraged investment funds, particularly their impact on financial markets during times of stress. In addition, paying such close attention would be beneficial for grasping households' risk-taking stance.

Suggested Citation

  • Kota Okabe & Fuminori Niwa & Takao Sasaki & Teppei Nagano, 2016. "Recent Developments in Leveraged Investment Funds," Bank of Japan Review Series 16-E-1, Bank of Japan.
    • Handle: RePEc:boj:bojrev:rev16e01
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    File URL: http://www.boj.or.jp/en/research/wps_rev/rev_2016/data/rev16e01.pdf
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    Cited by:

    1. Igor Kravchuk, 2019. "Management of Investment Funds Financial Fragility," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 15(4), pages 17-32.
    2. Miu, Peter & Yueh, Meng-Lan & Han, Jing, 2021. "Performance of Japanese leveraged ETFs," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).

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