Leveraged Exchange-Traded Funds

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This book analyzes the price dynamics of leveraged exchange-traded funds (LETFs) within discrete-time and continuous-time frameworks, focusing on leverage ratio, realized volatility, investment horizon, and tracking errors. It offers new insights into the risks associated with LETFs and introduces concepts such as admissible leverage ratios and risk horizons. The study includes mathematical and empirical analyses of various trading strategies, including static portfolios, pairs trading, and stop-loss strategies involving ETFs and LETFs. Additionally, the book discusses the pricing of options on LETFs, noting that different LETFs tracking the same index share similar sources of randomness. The authors present a no-arbitrage pricing approach to value options on LETFs with varying leverage ratios, incorporating stochastic volatility and jumps in the reference index. Their findings aid in market making for these options and help identify price discrepancies in the LETF options markets. As leveraged exchange-traded products grow in significance within the financial market, understanding their feedback effects and broader market impacts becomes essential for individual and institutional investors, as well as regulators.