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
Date Written: September 17, 2021
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: Suggested Citation