An interaction between a leveraged ETF and futures in a crash investigated by an agent-based model

Abstract

From 2010's, investors that invest leveraged exchanged-traded funds (L-ETFs) are increasing. L-ETFs is listed funds try to track amplified returns of a stock index prices, e.g., S&P 500 index. L-ETFs are listed themselves, however, it has not enough been investigated how sharply falling of L-ETFs affects futures contracts tracking the stock index (following we just call ``futures'') markets. In this study, the artificial market model (an agent-based model for financial market) was built by adding a market in which a L-ETF itself is traded and adding a erroneous orders leading turmoil implemented to the prior model. We investigated that sharply falling of the L-ETF affects the futures and effects of rebalancing trades of the L-ETF. In the result, the erroneous orders to the L-ETF leads that market prices of the L-ETF fall, but the arbitrage-trades reduce the fall. Liquidity of the futures is consumed to prevent the fall of the L-ETF. This means that liquidity of the futures is used as hidden liquidity of the L-ETF. We also found the rebalance-trades make enlarge the fall of market prices.