| Item Type |
Monograph
(Working Paper)
|
| Abstract |
We build on a growing literature that studies the impact of market frictions on the dynamics of stock markets, such as momentum, price spirals, excess volatility, and investigate the potential feedback effects of delta-hedging in derivative markets on the underlying market. We document a link between large aggregate dealers' gamma imbalances in illiquid markets and intraday momentum/reversal and market fragility. This link is distinct from information frictions (adverse selection and private information) and funding liquidity frictions (margin requirement). We test our joint hypothesis using a large panel of index and equity options that we use to compute a proxy of aggregate gamma imbalance. We find supporting evidence that intra-day momentum (reversal) is explained by the interaction of negative (positive) aggregate gamma imbalance and market illiquidity. The effect is stronger for the least liquid underlying securities. The result helps to explain both intra-day volatility and autocorrelation of returns. |
| Authors |
Barbon, Andrea & Buraschi, Andrea |
| Language |
English |
| Keywords |
Frictions, Momentum, Option Markets, Risk Management, Gamma Imbalance, Flash Crashes, Liquidity |
| Subjects |
finance |
| HSG Classification |
contribution to scientific community |
| HSG Profile Area |
SOF - System-wide Risk in the Financial System |
| Date |
5 November 2020 |
| Publisher |
SoF HSG |
| Series Name |
School of Finance Working Paper |
| Volume |
2020 |
| Number |
05 |
| Official URL |
https://papers.ssrn.com/sol3/papers.cfm?abstract_i... |
| Depositing User |
Christina Ihasz
|
| Date Deposited |
17 Nov 2020 09:25 |
| Last Modified |
10 Mar 2022 01:25 |
| URI: |
https://www.alexandria.unisg.ch/publications/261487 |
Gamma Fragility
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