Gearing the gravity of gamma: Utilizing gamma positioning of dynamic hedgers to improve market quality

34 Pages Posted: 19 May 2022

See all articles by Boyd Buis

Boyd Buis

ABN AMRO - ABN-Amro Bank, The Netherlands

Mary Pieterse-Bloem

Erasmus Research Institute of Management (ERIM)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute

Date Written: May 13, 2022

Abstract

In this paper, we study the effect of gamma positioning of dynamic hedgers on market quality through simulations. We find that increases in the net gamma positioning of dynamic hedgers reduces volatility and increases market stability, whereas a negative gamma positioning increases volatility and makes the market more prone to fail. Price discovery typically worsens when dynamic hedgers become more prevalent, regardless of the sign of their positioning. Our findings imply that gearing the gravity of gamma among dynamic hedgers can be considered a policy instrument to improve market quality, especially for instruments with low liquidity and low traded volume.

Keywords: feedback effect; simulation; market quality; market liquidity; dynamic hedging

JEL Classification: C15, D40, G23

Suggested Citation

Buis, Boyd and Pieterse-Bloem, Mary and Verschoor, Willem F. C. and Zwinkels, Remco C.J., Gearing the gravity of gamma: Utilizing gamma positioning of dynamic hedgers to improve market quality (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=4109301 or http://dx.doi.org/10.2139/ssrn.4109301

Boyd Buis

ABN AMRO - ABN-Amro Bank, The Netherlands ( email )

NL-1000 EA Amsterdam
Netherlands

Mary Pieterse-Bloem

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NH 1081 HV
Netherlands
+31205985220 (Phone)

HOME PAGE: http://https://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://https://tinbergen.nl/person/1574/remco-zwinkels

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