Gamma Fragility

48 Pages Posted: 16 Nov 2020 Last revised: 18 Mar 2021

See all articles by Andrea Barbon

Andrea Barbon

University of St. Gallen

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Date Written: November 5, 2020


We document a link between large aggregate dealers' gamma imbalances and intraday momentum/reversal of stock returns,
arising from the potential feedback effects of delta-hedging in derivative markets on the underlying market.
This channel relies on limited liquidity of the underlying market, but it is distinct from information frictions (adverse selection and private information) and funding liquidity frictions (margin requirement shocks).
We test our joint hypothesis using a large panel of equity options that we use to compute a proxy of stock-level gamma imbalance.
We find supporting evidence that intra-day momentum (reversal) is explained by the interaction of negative (positive) ex-ante gamma imbalance and and illiquidity.
The effect is stronger for the least liquid underlying securities.
Our results help to explain both intra-day volatility and autocorrelation of returns.
Moreover, we find that gamma imbalance is related to the frequency and the magnitude of flash crash events.

Keywords: Frictions, Momentum, Option Markets, Risk Management, Gamma Imbalance, Flash Crashes, Liquidity

Suggested Citation

Barbon, Andrea and Buraschi, Andrea, Gamma Fragility (November 5, 2020). University of St.Gallen, School of Finance Research Paper No. 2020/05, Available at SSRN: or

Andrea Barbon (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 8
St.Gallen, 9000


Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom


Centre for Economic Policy Research (CEPR)

United Kingdom

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