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July 1, 2021

Central Bank Research Hub

Passive funds affect prices: evidence from the most ETF-dominated asset classes

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Originally published on by Bank of International Settlements . Link to original report

This paper studies exchange-traded funds' (ETFs) price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a modelindependent approach to replicate the VIX futures contract. This allows me to isolate a non-fundamental component in VIX futures prices that is strongly related to the rebalancing of ETFs. To understand the source of that component, I decompose trading demand from ETFs into three parts: leverage rebalancing, calendar rebalancing, and flow rebalancing. Leverage rebalancing has the largest effects. Itamplifies price changes and exposes ETF counterparties negatively to variance.

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Bank for International Settlements BIS Working Papers by Karamfil Todorov

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