Download or read book Modeling the Re Balancing Slippage of Leveraged Exchange Traded Funds written by Lakshithe Wagalath and published by . This book was released on 2013 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Leveraged Exchange Traded Funds written by Peter Miu and published by Springer. This book was released on 2016-04-29 with total page 174 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Leveraged Exchange Traded Funds written by Tim Leung and published by Springer. This book was released on 2016-02-24 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Indices Index Funds And ETFs written by Michael I. C. Nwogugu and published by Springer. This book was released on 2019-03-09 with total page 696 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Path Dependence of Leveraged ETF Returns written by Marco Avellaneda and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Are Concerns about Leveraged ETFs Overblown written by Ivan T. Ivanov and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Accounting for Volatility Decay in Time Series Models for Leveraged Exchange Traded Funds written by Ahmed Abdou and published by . This book was released on 2017 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Liquidity Provision to Leveraged ETFs and Equity Options Rebalancing Flows written by Andrea Barbon and published by . This book was released on 2022 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Regime switching Advantage in Statistical Arbitrage Strategies Conditioned on Time Series Momentum and Volatility in Leveraged Exchange Traded Funds written by Nisheeth Saini and published by . This book was released on 2019 with total page 95 pages. Available in PDF, EPUB and Kindle. Book excerpt: The phenomena of volatility decay (also known as time decay) and path dependence in leveraged exchange traded funds (ETF) markets have been documented in the literature. This dissertation examined whether it is possible to exploit these market conditions for leveraged ETF (LETF) trading using statistical arbitrage (StatArb) strategies. The study proposed a regime switching model tailored for LETF markets to predict volatility and time-series momentum in the behavior of the underlying indexes of the LETFs. The study then used this model to test short pair trading strategies on a varied set of commodity LETFs to see if theoretical intuitions informed by these analyses were empirically supported by data. The study also introduced the concept of lag relative expected volatility (LREV) based on inductive learning in a binary classification framework to model upward shocks in expected volatility on any given trading day. The results of this study showed that an active short pair trading strategy in commodity LETFs, conditioned on momentum and volatility, outperforms an unconditioned and passive sell-and-hold StatArb trading strategy on a risk-adjusted basis. This outperformance was, however, found to be present in Sortino ratios only. The study did not find any evidence of outperformance for the active trading strategy in either Sharpe ratios or absolute returns. The results also provided further evidence that LETFs tracking equity indexes are poor candidates for active StatArb trading strategies due to low volatility. Further, the results also indicated that any incremental deterioration in the efficiency of LETF products in rapidly fluctuating markets appears to be mostly attributable to systemic jumps in the implied volatility and less due to any incremental inefficiency in their daily rebalancing process. This finding may be of interest to the regulators. Lastly, the study also provided evidence from the LETF markets for an inverse relationship between volatility and momentum, as established in some recent studies.

Download or read book The Performance of Leveraged and Inverse Leveraged Exchange Traded Funds written by Brian J. Henderson and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Are Leveraged and Inverse ETFs the New Portfolio Insurers written by Tugkan Tuzun and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Mean Variance Portfolio Efficiency Under Leverage Aversion and Trading Impact written by Chanaka Edirisinghe and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper addresses the optimal rebalancing problem of a long-short portfolio with high net asset value under trading impact losses. The fund manager may employ leveraging as a tool to increase portfolio returns. However, to mitigate potential leverage risks, frequent rebalancing may become necessary, which leads to significant slippage losses that dampen portfolio performance ex-post. We consider the problem in an integrated framework by incorporating trading impact and leverage restrictions ex-ante within a mean-variance framework, where leverage control is imposed using a chance-constraint. The resulting mean-variance-leverage optimization model (MVL) is non-convex, and we develop an efficient scheme to obtain the optimal portfolio. We investigate how portfolio leverage modifies the MV efficient frontier in the presence of trading impact, and highlight the significant outperformance of the proposed model relative to the standard mean-variance model. Increased target means require less restrictions on leverage, which result in higher rates of slippage losses. Our analysis supports the notion that leverage restrictions contribute to choosing high beta assets even in the presence of trading impact.

Download or read book Analysis of Proper Investment Strategy in Leveraged Exchange Traded Funds written by Scott M. Horowitz and published by . This book was released on 2009 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Levered Returns and Capital Structure Imbalances written by Filippo Ippolito and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We revisit the relation between equity returns and financial leverage through the lens of a dynamic trade-off model with costly capital structure rebalancing. The model predicts that expected equity returns depend on whether a firm's leverage is above or below its target leverage. We provide empirical evidence in support of the model predictions. Controlling for leverage, overlevered (underlevered) firms earn higher (lower) returns. A quantitative version of our model reproduces key facts about capital structure rebalancing and equity returns for U.S. corporations. Overall, our results indicate that financial flexibility crucially affects the link between leverage and equity returns.

Download or read book Leveraged Trading written by Robert Carver and published by Harriman House Limited. This book was released on 2019-10-29 with total page 277 pages. Available in PDF, EPUB and Kindle. Book excerpt: With the right broker, and just a few hundred dollars or pounds, anyone can become a leveraged trader. The products and tools needed are accessible to all: FX, a margin account, CFDs, spread-bets and futures. But this level playing field comes with great risks. Trading with leverage is inherently dangerous. With leverage, losses and costs – the two great killers for traders – are magnified. This does not mean leverage must be avoided altogether, but it does mean that it needs to be used safely. In Leveraged Trading, Robert Carver shows you how to do exactly that, by using a trading system. A trading system can be employed to tackle those twin dangers of serious losses and high costs. The trading systems introduced in this book are simple and carefully designed to use the correct amount of leverage and trade at a suitable frequency. Robert shows how to trade a simple Starter System on its own, on a single instrument and with a single rule for opening positions. He then moves on to show how the Starter System can be adapted, as you gain experience and confidence. The system can be diversified into multiple instruments and new trading rules can be added. For those who wish to go further still, advice on making more complex improvements is included: how to develop your own trading systems, and how to combine a system with your own human judgement, using an approach Robert calls Semi-Automatic Trading. For those trading with leverage, looking for a way to take a controlled approach and manage risk, a properly designed trading system is the answer. Pick up Leveraged Trading and learn how.

Download or read book A Comprehensive Guide to Exchange Traded Funds ETFs written by Joanne M. Hill and published by CFA Institute Research Foundation. This book was released on 2015-05 with total page 202 pages. Available in PDF, EPUB and Kindle. Book excerpt: Exchange-traded funds (ETFs) have become in their 25-year history one of the fastest growing segments of the investment management business. These funds provide liquid access to virtually every financial market and allow large and small investors to build institutional-caliber portfolios. Yet, their management fees are significantly lower than those typical of mutual funds. High levels of transparency in ETFs for holdings and investment strategy help investors evaluate an ETF’s potential returns and risks. This book covers the evolution of ETFs as products and in their uses in investment strategies. It details how ETFs work, their unique investment and trading features, their regulatory structure, how they are used in tactical and strategic portfolio management in a broad range of asset classes, and how to evaluate them individually.

Download or read book Following the Trend written by Andreas F. Clenow and published by John Wiley & Sons. This book was released on 2013-01-14 with total page 309 pages. Available in PDF, EPUB and Kindle. Book excerpt: During bull and bear markets, there is a group of hedge funds and professional traders which have been consistently outperforming traditional investment strategies for the past 30 odd years. They have shown remarkable uncorrelated performance and in the great bear market of 2008 they had record gains. These traders are highly secretive about their proprietary trading algorithms and often employ top PhDs in their research teams. Yet, it is possible to replicate their trading performance with relatively simplistic models. These traders are trend following cross asset futures managers, also known as CTAs. Many books are written about them but none explain their strategies in such detail as to enable the reader to emulate their success and create their own trend following trading business, until now. Following the Trend explains why most hopefuls fail by focusing on the wrong things, such as buy and sell rules, and teaches the truly important parts of trend following. Trading everything from the Nasdaq index and T-bills to currency crosses, platinum and live hogs, there are large gains to be made regardless of the state of the economy or stock markets. By analysing year by year trend following performance and attribution the reader will be able to build a deep understanding of what it is like to trade futures in large scale and where the real problems and opportunities lay. Written by experienced hedge fund manager Andreas Clenow, this book provides a comprehensive insight into the strategies behind the booming trend following futures industry from the perspective of a market participant. The strategies behind the success of this industry are explained in great detail, including complete trading rules and instructions for how to replicate the performance of successful hedge funds. You are in for a potentially highly profitable roller coaster ride with this hard and honest look at the positive as well as the negative sides of trend following.