The market impact of leveraged ETFs: A Survey of the literature

Stephen L. Lenkey; Stephen L. Lenkey

doi:10.3934/QFE.2024031

Quantitative Finance and Economics

2024, Volume 8, Issue 4: 815-840. doi: 10.3934/QFE.2024031

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Review

The market impact of leveraged ETFs: A Survey of the literature

Stephen L. Lenkey ^,

Smeal College of Business, Pennsylvania State University, University Park, PA, 16802, USA

Received: 24 September 2024 Revised: 06 December 2024 Accepted: 17 December 2024 Published: 23 December 2024
JEL Codes: G12, G23, G28

I survey the literature related to the potential for leveraged and inverse ETFs to influence late-day asset prices. The literature consistently reports statistically significant associations between ETF rebalancing demand and late-day returns and volatility. However, most of the available papers suffer from potentially serious methodological errors, and the economic associations appear to be insignificant. Moreover, the broader literature suggests that the market provides enough liquidity to satisfy LETF rebalancing demand with an insignificant degradation of market quality. Despite the potential for LETF rebalancing to affect late-day market conditions, concerns raised by policymakers and others are not supported by the overall empirical evidence.
- leveraged ETFs,
- late-day returns,
- volatility,
- price impact,
- trading volume
Citation: Stephen L. Lenkey. The market impact of leveraged ETFs: A Survey of the literature[J]. Quantitative Finance and Economics, 2024, 8(4): 815-840. doi: 10.3934/QFE.2024031

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Abstract

I survey the literature related to the potential for leveraged and inverse ETFs to influence late-day asset prices. The literature consistently reports statistically significant associations between ETF rebalancing demand and late-day returns and volatility. However, most of the available papers suffer from potentially serious methodological errors, and the economic associations appear to be insignificant. Moreover, the broader literature suggests that the market provides enough liquidity to satisfy LETF rebalancing demand with an insignificant degradation of market quality. Despite the potential for LETF rebalancing to affect late-day market conditions, concerns raised by policymakers and others are not supported by the overall empirical evidence.

References

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