Price inefficiency and stock-loan rates of leveraged ETFs

Price inefficiency and stock-loan rates of leveraged ETFs

cutting-edge-pic-5

Leveraged exchange-traded funds (ETFs) have attracted considerable attention from investors, market commentators and academics. For investors, the leveraged ETF offers the possibility of increased leverage and shorting through inverse funds. Among market commentators, leveraged ETFs are a popular topic, both to articulate bullish or bearish views on a particular sector, or to consider their performances relative to the benchmarks. Mathematicians and quants have also been active in research on leveraged ETFs, based on the fact that constant leverage implies negative convexity (that is, a negative Gamma exposure to the underlying asset).

The knowledge we have about leveraged ETFs has increased significantly. But with this better understanding comes the possibility that there may be a reaction from market participants. Is negative convexity priced in? If leveraged ETFs underperform their benchmarks in volatile markets–a well-documented fact – does this affect shorting costs for these products? This article will review some of the issues involved in leveraged ETFs, based on a study of one-day returns of leveraged exchange-traded funds and their borrowing costs in the period from June 26, 2009 to July 8, 2011.

Read the article in PDF format.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here