The Role of Leveraged ETFs and Option Market Imbalances on End-of-Day Price Dynamics

77 Pages Posted: 21 Sep 2021 Last revised: 15 Oct 2021

See all articles by Andrea Barbon

Andrea Barbon

University of St. Gallen

Heiner Beckmeyer

University of Muenster - Finance Center Muenster

Andrea Buraschi

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

Mathis Moerke

University of St. Gallen - Swiss Institute of Banking and Finance

Date Written: September 17, 2021

Abstract


Leveraged ETFs and market makers who are active in option markets must adjust imbalances arising from market movements. Establishing delta-neutrality may cause either return momentum or reversal depending on the sign and size of the imbalance vis-a-vis market prevailing liquidity. We find that a large and negative (positive) aggregated gamma imbalance, relative to the average dollar volume, gives rise to an economically and statistically significant end-of-day momentum (reversal). We compare this channel to the rebalancing of leveraged ETFs and find that the effect generated by leveraged ETFs is economically larger. Consistent with the notion of temporary price pressure, the documented effects quickly revert at the next day’s open. Information-based explanations are unlikely to cause the results, suggesting a non-informational channel through which leveraged ETFs and option markets affect underlying stocks towards the market close.

Keywords: Intraday Momentum, Cross-Sectional Momentum, Gamma Exposure, Option Market Maker, Leveraged ETF

JEL Classification: G12, G13, G14, G23

Suggested Citation

Barbon, Andrea and Beckmeyer, Heiner and Buraschi, Andrea and Moerke, Mathis, The Role of Leveraged ETFs and Option Market Imbalances on End-of-Day Price Dynamics (September 17, 2021). Available at SSRN: https://ssrn.com/abstract=3925725

Andrea Barbon (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

HOME PAGE: http://www.abarbon.com

Heiner Beckmeyer

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster, 48143
Germany

Andrea Buraschi

Imperial College Business School ( email )

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

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mathis Moerke

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

HOME PAGE: http://www.mathismoerke.com

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