Modeling The Re Balancing Slippage Of Leveraged Exchange Traded Funds
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Modeling The Re Balancing Slippage Of Leveraged Exchange Traded Funds
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Author : Lakshithe Wagalath
language : en
Publisher:
Release Date : 2013
Modeling The Re Balancing Slippage Of Leveraged Exchange Traded Funds written by Lakshithe Wagalath and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.
Leveraged exchange-traded funds are designed to track a multiple of the daily return of an underlying benchmark index. In order to keep a fixed exposure to the benchmark index, leveraged ETFs have to re-balance their positions everyday, generating a structural 're-balancing slippage' which has been documented in several empirical studies.This paper quantifies the re-balancing slippage of leveraged ETFs by developing a tractable model for the dynamics of leveraged funds, which takes into account the impact of active management by leveraged ETFs. We characterize the re-balancing strategy of the leveraged fund and its impact on the value of the leveraged ETF and we model its dynamics in discrete-time. We show that the re-balancing impact systematically diminishes the daily return of the leveraged ETF and that, over a holding period of more than one day, leveraged ETFs develop a tracking-error which can be decomposed between a compounding deviation - that has already been documented and quantified in previous studies - and a re-balancing deviation. The study of the continuous-time limit of the multi-period model allows us to obtain analytical formulas for the re-balancing slippage and the tracking-error of the leveraged ETF. Our theoretical results are consistent with empirical studies which find that tracking-error and re-balancing impact are larger in periods of high volatility and for leveraged ETFs with negative leverage ratios.
Leveraged Exchange Traded Funds
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Author : Peter Miu
language : en
Publisher: Springer
Release Date : 2016-04-29
Leveraged Exchange Traded Funds written by Peter Miu and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-04-29 with Business & Economics categories.
Leveraged Exchange-Traded Funds (LETFs) are publicly-traded funds that promise to provide daily returns that are in a multiple (positive or negative) of the returns on an index. To meet that promise, the funds use leverage, which is typically obtained through derivatives such as futures contracts, forward contracts, and total-return swaps. As of the end of 2012, there were over 250 LETFs in North America with total assets of approximately $32.24 billion. While the amount of assets held by these funds is still small, their popularity continues to grow as their trading volume is significantly larger and much more dynamic than traditional, non-leveraged ETFs. This comprehensive guide to LETFs provides high-level practitioners and researchers with a detailed reference tool for navigating the market and making informed investment decisions. Written from a measured analytical perspective, Miu and Charupat use clear and concise explanations of all important aspects of LETFs, focusing on such key elements as structure, pricing, performance, regulations, taxation, and trading strategies. The first two chapters set the stage for the book by identifying exactly what LETFs are and how they are regulated. The following chapters then look to bridge theory with practice to dive deep into the mechanics, portfolio rebalancing techniques, and daily compounding effects that make investing in these funds so lucrative.
Leveraged Exchange Traded Funds
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Author : Tim Leung
language : en
Publisher: Springer
Release Date : 2016-02-24
Leveraged Exchange Traded Funds written by Tim Leung and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-02-24 with Mathematics categories.
This book provides an analysis, under both discrete-time and continuous-time frameworks, on the price dynamics of leveraged exchange-traded funds (LETFs), with emphasis on the roles of leverage ratio, realized volatility, investment horizon, and tracking errors. This study provides new insights on the risks associated with LETFs. It also leads to the discussion of new risk management concepts, such as admissible leverage ratios and admissible risk horizon, as well as the mathematical and empirical analyses of several trading strategies, including static portfolios, pairs trading, and stop-loss strategies involving ETFs and LETFs. The final part of the book addresses the pricing of options written on LETFs. Since different LETFs are designed to track the same reference index, these funds and their associated options share very similar sources of randomness. The authors provide a no-arbitrage pricing approach that consistently value options on LETFs with different leverage ratios with stochastic volatility and jumps in the reference index. Their results are useful for market making of these options, and for identifying price discrepancies across the LETF options markets. As the market of leveraged exchange-traded products become a sizeable connected part of the financial market, it is crucial to better understand its feedback effect and broader market impact. This is important not only for individual and institutional investors, but also for regulators.
Path Dependence Of Leveraged Etf Returns
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Author : Marco Avellaneda
language : en
Publisher:
Release Date : 2009
Path Dependence Of Leveraged Etf Returns written by Marco Avellaneda and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
It is well-known that leveraged exchange-traded funds (LETFs) don't reproduce the corresponding multiple of index returns over extended (quarterly or annual) investment horizons. In 2008, most leveraged ETFs underperformed the corresponding static strategies. In this paper, we study this phenomenon in detail. We give an exact formula linking the return of a leveraged fund with the corresponding multiple of the return of the unleveraged fund and its realized variance. This formula is tested empirically over quarterly horizons for 56 leveraged funds (44 double-leveraged, 12 triple-leveraged) using daily prices since January 2008 or since inception, according to the fund considered. The results indicate excellent agreement between the formula and the empirical data. The study also shows that leveraged funds can be used to replicate the returns of the underlying index, provided we use a dynamic rebalancing strategy. Empirically, we find that rebalancing frequencies required to achieve this goal are moderate, on the order of one week between rebalancings. Nevertheless, this need for dynamic rebalancing leads to the conclusion that leveraged ETFs as currently designed may be unsuitable for buy-and-hold investors.
Indices Index Funds And Etfs
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Author : Michael I. C. Nwogugu
language : en
Publisher: Springer
Release Date : 2019-03-09
Indices Index Funds And Etfs written by Michael I. C. Nwogugu and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-03-09 with Business & Economics categories.
Indices, index funds and ETFs are grossly inaccurate and inefficient and affect more than €120 trillion worth of securities, debts and commodities worldwide. This book analyzes the mathematical/statistical biases, misrepresentations, recursiveness, nonlinear risk and homomorphisms inherent in equity, debt, risk-adjusted, options-based, CDS and commodity indices – and by extension, associated index funds and ETFs. The book characterizes the “Popular-Index Ecosystems,” a phenomenon that provides artificial price-support for financial instruments, and can cause systemic risk, financial instability, earnings management and inflation. The book explains why indices and strategic alliances invalidate Third-Generation Prospect Theory (PT3), related approaches and most theories of Intertemporal Asset Pricing. This book introduces three new decision models, and some new types of indices that are more efficient than existing stock/bond indices. The book explains why the Mean-Variance framework, the Put-Call Parity theorem, ICAPM/CAPM, the Sharpe Ratio, Treynor Ratio, Jensen’s Alpha, the Information Ratio, and DEA-Based Performance Measures are wrong. Leveraged/inverse ETFs and synthetic ETFs are misleading and inaccurate and non-legislative methods that reduce index arbitrage and ETF arbitrage are introduced.
Are Concerns About Leveraged Etfs Overblown
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Author : Ivan T. Ivanov
language : en
Publisher:
Release Date : 2014
Are Concerns About Leveraged Etfs Overblown written by Ivan T. Ivanov and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
Are Leveraged And Inverse Etfs The New Portfolio Insurers
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Author : Tugkan Tuzun
language : en
Publisher:
Release Date : 2013
Are Leveraged And Inverse Etfs The New Portfolio Insurers written by Tugkan Tuzun and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.
Liquidity Provision To Leveraged Etfs And Equity Options Rebalancing Flows
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Author : Andrea Barbon
language : en
Publisher:
Release Date : 2022
Liquidity Provision To Leveraged Etfs And Equity Options Rebalancing Flows written by Andrea Barbon and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2022 with categories.
Accounting For Volatility Decay In Time Series Models For Leveraged Exchange Traded Funds
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Author : Ahmed Abdou
language : en
Publisher:
Release Date : 2017
Accounting For Volatility Decay In Time Series Models For Leveraged Exchange Traded Funds written by Ahmed Abdou and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
Leverage Exchange Traded Funds (LETF's) returns tend to deviate from their underlying assets' multiple returns as their holding period increase, a phenomenon known as volatility decay. Algebraically, it is shown that volatility decay is intensified for inverse leveraged funds and as the leverage multiplier increases. The paper uses a novel approach to account for volatility decay. The ARIMA model ability to forecast future returns is tested for three major indexes and is shown to provide more accurate estimates for S&P500. The returns of S&P500 and its corresponding LETFs are fitted to an Autoregressive Integrated Moving Average (ARIMA) model. Theoretically, the constant of the ARIMA model and the variance of their Gaussian errors captures the volatility decay effect. Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models provide more flexibility in modeling conditional variance that is non-stationary. The theoretical results are verified empirically, and the constant of the fitted model captures the intensity of the decay and its direction.
The Performance Of Leveraged And Inverse Leveraged Exchange Traded Funds
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Author : Brian J. Henderson
language : en
Publisher:
Release Date : 2014
The Performance Of Leveraged And Inverse Leveraged Exchange Traded Funds written by Brian J. Henderson and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
We document significant abnormal daily returns to leveraged and inverse leveraged exchange-traded funds (ETFs). Abnormal returns are positive for leveraged funds and negative to inverse leveraged funds, and the magnitude increases in the absolute value of the leverage multiple. We propose and test a model linking the abnormal return performance to transactions costs associated with the frequent (daily) rebalancing necessary to maintain target exposures as well as other costs including the swap financing costs and the cost to borrow in the lending market. In the full cross-section, the results suggest funding costs associated with achieving leverage impact returns negatively (positively) for leveraged (inverse leveraged) funds. Capitalizing on a key institutional feature, analysis of pairs of mirror funds reveals transactions costs associated with the maintenance of daily leverage multiples meaningfully impact fund returns. The results are also consistent with inverse leveraged funds bearing the cost-to-borrow to the benefit of the leveraged (long) funds.