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Gamma Positioning and Market Quality

36 Pages Posted: 21 Jan 2023 Publication Status: Accepted

See all articles by Boyd Buis

Boyd Buis

Vrije Universiteit Amsterdam

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 - School of Business and Economics; Tinbergen Institute

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 failures. Price discovery typically worsens when dynamic hedgers become more prevalent, regardless of the sign of their positioning. Our findings imply that altering the net gamma position of dynamic hedgers can be considered a policy instrument to improve market quality, especially for instruments with low liquidity or low traded volume.

Keywords: dynamic hedging, feedback effect, market liquidity, market quality, Simulation

Suggested Citation

Buis, Boyd and Pieterse-Bloem, Mary and Verschoor, Willem F. C. and Zwinkels, Remco C.J., Gamma Positioning and Market Quality. Available at SSRN: https://ssrn.com/abstract=4332935 or http://dx.doi.org/10.2139/ssrn.4332935

Boyd Buis

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV

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 - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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

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