Gearing the gravity of gamma: Utilizing gamma positioning of dynamic hedgers to improve market quality
34 Pages Posted: 19 May 2022
Date Written: May 13, 2022
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: Suggested Citation