tag:blogger.com,1999:blog-1346045313195961352.post8307487124432724521..comments2019-03-05T04:03:32.081-08:00Comments on MatlabTrading: FAS vs FAZ - inverse etf behaviorUnknownnoreply@blogger.comBlogger3125tag:blogger.com,1999:blog-1346045313195961352.post-65291779792660331242011-12-18T00:33:45.222-08:002011-12-18T00:33:45.222-08:00Have you read this paper:
http://www.docstoc.com/d...Have you read this paper:<br />http://www.docstoc.com/docs/5577389/The-Dynamics-of-Leveraged-and-InverseExchange-Traded-Funds<br />They basically show that a daily-rebalanced ETF decays at a speed proportional to abs(2X-1) where X is the leverage (3 and -3) in your case. That explains why FAZ is so "bad". FAS should be only as bad as SKF: abs(2*3-1) = abs(2*(-2)-1) = 5<br /><br />Not sure if the paper contradicts your statement of no decay in leveraged ETFs under iid assumptions.iggyhttps://www.blogger.com/profile/03466293569222318388noreply@blogger.comtag:blogger.com,1999:blog-1346045313195961352.post-62142427754204098602011-10-22T00:38:40.511-07:002011-10-22T00:38:40.511-07:00@Pete: you're right. Some time after writing t...@Pete: you're right. Some time after writing this post I realized there is an error in my reasoning. This has been resolved in a later 'Leveraged etfs don't decay' post.sjevhttps://www.blogger.com/profile/17452562180989360928noreply@blogger.comtag:blogger.com,1999:blog-1346045313195961352.post-80412175887185197732011-10-21T18:40:45.505-07:002011-10-21T18:40:45.505-07:00Your use of log returns is incorrect.
The 3x bull...Your use of log returns is incorrect.<br /><br />The 3x bull fund has an exposure of 300% to the underlying. That means a $100 position will be worth $103 after a single-day move of 1% in the underlying.<br /><br />Similarly, the 3x bear fund has an exposure of -300% to the same underlying. Given the same 1% move, the $100 initial position would now be worth $97.<br /><br />These funds invest in the stocks themselves and swaps, I believe. There's no reason the returns shouldn't be a linear function of the underlying return, excluding management fees, transaction fees, slippage, etc. They do not invest in an imaginary derivative based on log returns.petehttps://www.blogger.com/profile/09617945987779093613noreply@blogger.com