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Liquidity Provision to Leveraged ETFs and Equity Options Rebalancing Flows: Evidence from End-of-Day Stock Prices

Author

Listed:
  • Andrea Barbon

    (University of St. Gallen)

  • Heiner Beckmeyer

    (University of Muenster - Finance Center Muenster)

  • Andrea Buraschi

    (Imperial College Business School; Centre for Economic Policy Research (CEPR))

  • Mathis Moerke

    (University of St. Gallen - Swiss Institute of Banking and Finance)

Abstract

Rebalancing of leveraged ETFs (LETFs) and delta-hedging of equity options by intermediaries are two distinct and economically significant sources of liquidity demands. We show that they induce end-of-day momentum and mean-reversion in returns. While gamma effects are persistent throughout our sample, LETFs effects have decreased over time. We empirically study these effects and their potential drivers. We find that LETF flows attract more liquidity provision and their effects on prices are shorter-lived. Intermediaries can strategically decide the timing of their delta-hedging, resulting in less predictable flows. This shows the benefits of information disclosure on market liquidity and price distortion.

Suggested Citation

  • Andrea Barbon & Heiner Beckmeyer & Andrea Buraschi & Mathis Moerke, 2022. "Liquidity Provision to Leveraged ETFs and Equity Options Rebalancing Flows: Evidence from End-of-Day Stock Prices," Swiss Finance Institute Research Paper Series 22-40, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2240
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    More about this item

    Keywords

    Liquidity Provision; Gamma Exposure; Option Delta-Hedging; Leveraged ETF; End-of-Day Momentum;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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