Gamma Fragility

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 01 Dec 2020 10:07
URI: https://www.alexandria.unisg.ch/publications/261487

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Citation

Barbon, Andrea & Buraschi, Andrea: Gamma Fragility. School of Finance Working Paper, 2020, 05.

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https://www.alexandria.unisg.ch/id/eprint/261487
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