Report

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

Table of Contents

This paper studies exchange-traded funds’ (ETFs) price impact in the most ETF dominated asset classes: volatility (VIX) and commodities. I propose a model-independent 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. It amplifies price changes and exposes ETF counterparties negatively to variance.

Subscribe to receive more by Bank of International Settlements

Let's get started...

Speevr Logo

Share this page

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

This paper studies exchange-traded funds’ (ETFs) price impact in the most ETF dominated asset classes: volatility (VIX) and commodities. I propose a model-independent approach