The Market Impact of Predictable Flows: Evidence from Leveraged VIX Products

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Abstract

What is the market impact of predictable order flow? Leveraged exchange-traded products are useful for answering this question because they generate daily rebalancing flows whose size, sign and timing are predictable. This paper presents new evidence from the market for leveraged volatility products. While the daily rebalancing imposes an implicit cost on investors by putting pressure on closing prices, there is no evidence that the cost is driven by predatory trading. On the contrary, I show that larger and more predictable flows have smaller price impact coefficients, and that there are no excess profits from trading ahead of rebalancing flows during the sample period.
Original languageEnglish
Article number106280
JournalJournal of Banking & Finance
Volume133
Number of pages14
ISSN0378-4266
DOIs
Publication statusPublished - Dec 2021

Keywords

  • Strategic trading
  • Trading costs
  • Sunshine trading
  • Closing prices
  • Leveraged products
  • ETFs
  • VIX

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