Simulation of Leveraged ETF Volatility Using Nonparametric Density Estimation

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dc.citation.firstpage457en_US
dc.citation.journalTitleJournal of Mathematical Financeen_US
dc.citation.lastpage479en_US
dc.citation.volumeNumber5en_US
dc.contributor.authorGinley, Matthewen_US
dc.contributor.authorScott, David W.en_US
dc.contributor.authorEnsor, Katherine B.en_US
dc.date.accessioned2015-12-10T17:03:09Zen_US
dc.date.available2015-12-10T17:03:09Zen_US
dc.date.issued2015en_US
dc.description.abstractLeveraged Exchange Traded Funds (LETFs) are constructed to provide the indicated leverage multiple of the daily total return on an underlying index. LETFs may perform as expected on a daily basis; however, fund issuers state that there is no guarantee of achieving the multiple of the index return over longer time horizons. LETF returns are extremely volatile and funds frequently underperform their target for horizons greater than one month. In this paper, we contribute two nonparametric simulation methods for analyzing LETF return volatility and how this is related to the underlying index. First, to overcome the limited history of LETF returns data, we propose a method for simulating implied LETF tracking errors while still accounting for their dependence on underlying index returns. This allows for the incorporation of the complete history of index returns in an LETF returns model. Second, to isolate the effects of daily, leveraged compounding on LETF volatility, we propose an innovative method for simulating daily index returns with a chosen constraint on the multi-day period return. By controlling for the performance of the underlying index, the range of volatilities observed in a simulated sample can be attributed to compounding with leverage and the presence of tracking errors. Our nonparametric methods are flexible-easily incorporating any chosen number of days, leverage ratios, or period return constraints, and can be used in combination or separately to model any quantity of interest derived from daily LETF returns.en_US
dc.identifier.citationGinley, Matthew, Scott, David W. and Ensor, Katherine B.. "Simulation of Leveraged ETF Volatility Using Nonparametric Density Estimation." <i>Journal of Mathematical Finance,</i> 5, (2015) Scientific Research Publishing: 457-479. http://dx.doi.org/10.4236/jmf.2015.55039.en_US
dc.identifier.doihttp://dx.doi.org/10.4236/jmf.2015.55039en_US
dc.identifier.urihttps://hdl.handle.net/1911/87462en_US
dc.language.isoengen_US
dc.publisherScientific Research Publishingen_US
dc.rightsThis work is licensed under the Creative Commons Attribution International License (CC BY).en_US
dc.rights.urihttp://creativecommons.org/licenses/by/4.0/en_US
dc.subject.keywordnonparametric density estimationen_US
dc.subject.keywordexchange traded funden_US
dc.subject.keywordrealized volatilityen_US
dc.titleSimulation of Leveraged ETF Volatility Using Nonparametric Density Estimationen_US
dc.typeJournal articleen_US
dc.type.dcmiTexten_US
dc.type.publicationpublisher versionen_US
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