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Hedging demand and market intraday momentum

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  • Baltussen, Guido
  • Da, Zhi
  • Lammers, Sten
  • Martens, Martin

Abstract

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 find 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.

Suggested Citation

  • Baltussen, Guido & Da, Zhi & Lammers, Sten & Martens, Martin, 2021. "Hedging demand and market intraday momentum," Journal of Financial Economics, Elsevier, vol. 142(1), pages 377-403.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:1:p:377-403
    DOI: 10.1016/j.jfineco.2021.04.029
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    More about this item

    Keywords

    Return momentum; Futures trading; Hedging demand; Return predictability; Indexing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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