Front-running Leveraged ETFs at the End of the Day?
Posted in Volatility Effects
November 19, 2012
Does predictable end-of-day rebalancing behavior of leveraged exchange-traded funds (ETF) present trading opportunities? In their October 2012 paper entitled “Intraday Share Price Volatility and Leveraged ETF Rebalancing”, Arthur Rodier, Edgar Haryanto, Pauline Shum and Walid Hejazi examine: (1) the effects of leveraged ETF rebalancing activities on late-day market volatility; and, (2) the profitability of trading strategies designed to anticipate these rebalancing activities. For the former, they measure the average intraday volatility of 346 large-capitalization stocks within indexes tracked by many leveraged ETFs. For the latter, they consider intraday trades of ProShares Ultra S&P500 (SSO) and ProShares UltraShort S&P500 (SDS) according to whether anticipated late-day rebalancing pressure is likely to be bullish or bearish, respectively. Using intraday returns for the S&P 500 Index, 346 individual S&P 500 stocks, SSO and SDS during late June 2006 through mid-July 2011, they find that: (more…)