The Herds of Bulls and Bears in Leveraged ETF Market

Corporate irresponsibility and stock price crash risk

“…1 According to which prevailing market price reflects all available information about the firm (Bahadar, Mahmood, & Zaman, 2019).…”

Investor overconfidence in the South African exchange traded fund market

“…Whilst the inception of the ETF has led to many improvements to the financial market, there is also growing evidence that this market tends to attract mostly short-term (noise) traders, which indicates that that the trade decisions of ETF investors may not always be rational (Ben-David et al, 2018;Broman, 2016;Da & Shive, 2018;Madura & Richie, 2004). Behavioural studies such as Ma et al (2018) report evidence of the presence of investor overreaction in ETF markets while Bahadar et al (2019) report evidence of the presence of investor herd behaviour in ETF markets. These irrational ETF investment decisions may cause investors to allow their emotions to overrule logic, and subsequently, these investors may trade too aggressively, have bad market timing, or miscalculate the probability of their success (Chen et al, 2007).…”

Exchange traded funds in Europe and the US

“…The above-mentioned differences reveal that there are some risks involved with investing in ETNs which distinguish them from ETFs. According to Hill et al (2015) ETNs have the largest potential counterparty risk of all exchange-traded products and in effect, they are very similar to corporate debt; they are unsecured debt obligations of the institution that issues them and therefore the amount of money an individual invests is not protected, and he may lose all of his investment if the issuer of the ETN declares bankruptcy 23 . If the issuer institution files for bankruptcy, ETN holders will get in line at bankruptcy court with the rest of the debt holders and there is absolutely no guarantee that they will get their money back (Ferri, 2007).…”

“…Wall Street for decades. The ability to list notes on the stock exchange in the form of ETNs provided banks the opportunity to capitalize on the popularity of ETFs, but in a 23 Lehman Brothers had three ETNs on the market in 2008 when the company defaulted. Any investors still holding the ETNs when they stopped trading lost nearly all their money.…”

“…The authors assess the performance of the ETFs over a longer period of time replicating indicative values of the main ETFs back to 2004, and they also explain in detail how ETF issuers hedge their exposure against early redemption risk using VIX futures. In particular, they illustrate how the front-running of this hedging activity led to an incident on23…”