Leverage Corrections to Price Discovery Measures with an Application to Leveraged Exchange-Traded Funds

This study introduces novel leverage-robust measures to examine the price discovery
relationship among tradable products with leveraged returns. Structural analysis reveals
that most existing price discovery measures exhibit significant leverage bias, a tendency to
misidentify products with higher leverage ratios as the price leader. The proposed measures
correct this bias by incorporating long-run responses to the permanent shock. A simulation
study demonstrates the superiority of these new measures. Further empirical study examines
price leadership among leveraged and regular ETFs tracking the S&P 500 index and shows
that the regular ETF dominates the price discovery process.