The Herds of Bulls and Bears in Leveraged ETF Market

Abstract

The authors investigate the unexplored herding behavior of investors in a leveraged exchange-traded funds (LETFs) market by examining U.S.-listed LETFs, which offers both long and short positions with target return multiples (such as +2x) and inverse multiples (e.g., –1x and –2x) of the tracking indices in the form of bull and bear LETFs, respectively. Overall findings reveal the presence of significant herding behavior in LETFs. More specifically, herding is prominent in bear LETFs during daily trading, asymmetric market conditions (e.g., rising/declining market return, trading volume, trading volatility), and the global financial crisis period. Further, herding is found to be spurious during the normal trading days in the LETFs market but during the global financial crisis, herding occurs in response to the non-fundamental factors.

Keywords:

• Herding behavior
• ETFs
• Long and short positions
• Asymmetric effect
• Global financial crisis

Acknowledgment

This article is dedicated in loving memory of our friend and co-author Dr. Haroon Mahmood, who died tragically in the horrific terror attack on the Al Noor and Linwood mosques in Christchurch, New Zealand, on March 15, 2019, while he was offering his Friday prayers. We mourn the sudden loss of our friend and colleague who still had a great deal to offer the field of finance.

Notes

1 http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

2 The results of Equation 8 are presented in Appendix B.