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Are leveraged and inverse etfs the new portfolio insurers? (2012).
| Content Provider | CiteSeerX |
|---|---|
| Author | Tuzun, Tugkan |
| Abstract | This paper studies Leveraged and Inverse Exchange Traded Funds (LETFs) from a financial stability perspective and emphasizes their similarities with portfolio insurers of the 1980s. Mechanical positive-feedback rebalancing of LETFs resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987 (Brady Report, 1988). I show that a 1 % increase in broad stock-market indexes induces LETFs to originate rebalancing flows equivalent to $1.04 billion worth of stock. Price-insensitive rebalancing of LETFs results in price reaction and extra volatility in underlying stocks. Although LETFs are not as large as portfolio insurers of the 1980s and have not been proven to disrupt stock market activity, implied price impact calculations suggest that their effect could reach a tipping point after a large market move in periods of high volatility. Tugkan Tuzun |
| File Format | |
| Publisher Date | 2012-01-01 |
| Access Restriction | Open |
| Subject Keyword | Inverse Etf New Portfolio Insurer Portfolio Insurer Implied Price Impact Calculation Price Reaction Tipping Point Mechanical Positive-feedback Rebalancing Large Market Move Financial Stability Perspective Price-insensitive Rebalancing Extra Volatility Stock Market Activity Inverse Exchange Traded Fund Broad Stock-market Index Induces Letfs Brady Report Stock Market Crash Paper Study Leveraged Letfs Result High Volatility Portfolio Insurance Strategy |
| Content Type | Text |
| Resource Type | Article |
