Hedging demand and market intraday momentum
Hedging short gamma exposure requires trading in the direction of price movements, thereby creating price momentum. Using intraday returns on over 60 futures on equities, bonds, commodities, and currencies between 1974 and 2020, we document strong “market intraday momentum” everywhere. The return during the last 30 minutes before the market close is positively predicted by the return during the rest of the day (from previous market close to the last 30 minutes). The predictive power is economically and statistically highly significant, and reverts over the next days. We provide novel evidence that links market intraday momentum to the gamma hedging demand from market participants such as market makers of options and leveraged ETFs.
|Return momentum, Futures trading, Hedging demand, Return Predictability, Indexing.|
|Asset Pricing (jel G12), International Financial Markets (jel G15), Behavioral Finance, General (jel G40), Commodity Markets (jel Q02)|
|Journal of Financial Economics|
|Organisation||Department of Business Economics|
Baltussen, G, Da, Z., Lammers, S., & Martens, M.P.E. (2020). Hedging demand and market intraday momentum. Journal of Financial Economics. Retrieved from http://hdl.handle.net/1765/131621