Liquidity Provision to Leveraged ETFs and Equity Options Rebalancing Flows
Evidence from End-of-Day Stock Prices
Rebalancing of leveraged ETFs and delta-hedging of equity options are two distinct and economically significant sources of order flow and liquidity demands. We show that they induce significant end-of-day momentum and mean-reversion in stock returns, while the effects dissipate within the next trading day. While gamma effects are persistent throughout our sample, those stemming from leveraged ETFs are decreasing significantly over time. We argue that these dynamics arise from different intermediation structures, generating heterogeneous levels of information asymmetry on rebalancing flows. While leveraged ETF providers generate perfectly predictable flows because of their strict mandate, option delta-hedgers have flexibility in deciding the strategic timing of their rebalancing, resulting in less predictable flows. Consistent with this view, we find that leveraged ETF flows attract more liquidity provision and that their effect on prices is shorter-lived. Our findings suggest that information disclosure is beneficial for market liquidity.
Last Revision: 2022-04-29<<< Back