Trading Strategies of a Leveraged ETF in a Continuous Double Auction Market Using an Agent-Based Simulation

TL;DR

This paper investigates how different trading strategies of leveraged ETFs affect market volatility in a simulated continuous double auction environment, aiming to identify methods to minimize volatility increases.

Contribution

It introduces a trading model for leveraged ETFs and compares strategies to suppress market volatility, providing insights into optimal rebalancing trade practices.

Findings

Increasing minimum order numbers reduces market impact

Rebalancing strategies influence price stability

Simulation results guide better ETF trading practices

Abstract

A leveraged ETF is a fund aimed at achieving a rate of return several times greater than that of the underlying asset such as Nikkei 225 futures. Recently, it has been suggested that rebalancing trades of a leveraged ETF may destabilize the financial markets. An empirical study using an agent-based simulation indicated that a rebalancing trade strategy could affect the price formation of an underlying asset market. However, no leveraged ETF trading method for suppressing the increase in volatility as much as possible has yet been proposed. In this paper, we compare different strategies of trading for a proposed trading model and report the results of our investigation regarding how best to suppress an increase in market volatility. As a result, it was found that as the minimum number of orders in a rebalancing trade increases, the impact on the market price formation decreases.