An Investigation of Daily Rebalancing Mechanism of Leveraged and Inverse ETFs
Date Issued
2016
Date
2016
Author(s)
Hsu, Hui-Chao
Abstract
This paper mainly examines the daily rebalancing mechanism of six leveraged and inverse ETF which all focus on China market and are listed on Taiwan Stock Exchange. Affected by the volatile market, leveraged and inverse ETF is highly possible to deviate from its required leveraged ratio. Therefore, when the market tracked by leveraged and inverse ETF is close to the end of day, fund managers have to adjust their portfolios by buying or selling future contracts to reach enough risk exposure. This mechanism is called daily rebalancing. The paper is composed of two parts. The first part of the paper examines whether daily rebalancing of six leveraged and inverse ETF drives up FTSE China A50 Index Future ‘s end-day-volatility. At 1% level of significance, the result shows daily rebalancing amounts have a positive impact on the end-day rate of return. That is, when daily rebalancing amount is positive, it enlarges the positive rate of return near the market’s close. The second part of the paper constructs different front-running strategies based on the direction of expected trades associated with the rebalancing activities of leveraged ETFs and suggests the best timing to enter the future market by analyzing each net rate of return. The best strategy turns out to be entering the future market at 2:30 PM when the market return rises beyond 0.2% or falls below -0.2%.
Subjects
leveraged ETF
inverse ETF
daily rebalancing
FTSE China A50 Index Future
Type
thesis
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