Delta-hedging demand and intraday momentum: Evidence from China

Abstract

This paper reveals that the rest-of-day return has positively significant prediction on the last 30-min return in the Chinese SSE 50 exchange-traded fund market. Its predictive power is economically significant and will decay in the next three days. Moreover, it reveals the relationship between intraday return prediction and short gamma hedging demand from option market makers, demonstrating that intraday hedging could be postponed till the end of a trading day. Intraday momentum caused by rebalancing traders and information investors cannot be completely offset by option market makers on days with positive net gamma exposure. Our results are robust to alternative exchange-traded fund index option and its underlying asset.