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Gamma positioning and market quality

Author

Listed:
  • Buis, Boyd
  • Pieterse-Bloem, Mary
  • Verschoor, Willem F.C.
  • Zwinkels, Remco C.J.

Abstract

In this paper, we study the effect of the gamma positioning of dynamic hedgers on market quality through simulations. In our zero-intelligence model, the presence of dynamic hedgers enhances market liquidity under normal conditions. However, positive gamma helps sustain liquidity in stressed scenarios, while negative gamma depletes it. We find that an increase 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 failure. Price discovery typically worsens when dynamic hedgers become more prevalent, regardless of the sign of their positioning. Our findings imply that steering 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.

Suggested Citation

  • Buis, Boyd & Pieterse-Bloem, Mary & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2024. "Gamma positioning and market quality," Journal of Economic Dynamics and Control, Elsevier, vol. 164(C).
    • Handle: RePEc:eee:dyncon:v:164:y:2024:i:c:s0165188924000721
    DOI: 10.1016/j.jedc.2024.104880
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic hedging; Feedback effect; Market liquidity; Market quality; Simulation;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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