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Preying on Leveraged ETFs

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  • Yinhong Zhao

Abstract

We argue that the extreme volatility of the Korean market in 2026 was driven by arbitrageurs preying on the closing rebalance of leveraged exchange-traded funds (LETFs). An LETF must trade in the direction of the day's move at a close that also measures it, so its demand rises in price, and arbitrageurs buying ahead of it enlarge the order by trading at the print, then unload into what they manufactured. As predicted, pre-open U.S. news is reversed one day later in Samsung Electronics and SK Hynix once their products list, and in no control group. At measured parameters the loop added forty-seven percentage points of annualized volatility and transferred KRW 4 trillion from retail holders in eight weeks. Dispersing the rebalance through the session, Korea's chosen remedy, moves the order but not the reference that sizes it and can raise the toll. Changing the reference works instead: an average of two prints halves what displacing either can manufacture.

Suggested Citation

  • Yinhong Zhao, 2026. "Preying on Leveraged ETFs," Papers 2608.03703, arXiv.org.
    • Handle: RePEc:arx:papers:2608.03703
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