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I would expect that many traders hedge their exposure before market closing based on their positions. In order to determine the timing of readjustment, there should probably two channels affect the decision:

  1. You want to take as much information as possible into consideration, therefore waiting as long as possible in order to determine delta-neutral positions.
  2. It costs time to readjust especially large portfolio and the costs of immediacy increase the less time is available until the market closes

Combining these two channels would suggest one can optimally choose the rebalancing schedule. However, if we consider that there is a large mass of traders which are themselves affecting the market I suppose, the simple trade-off stated above is somewhat myopic. So, is there some documented evidence that hedging needs affect markets in the afternoon? Is there any evidence on how large institutional investors time their hedging decisions?

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Leveraged ETF rebalancing is one good example, here's a couple of papers on that:

Predictable ETF Order Flow and Market Quality

Intraday Share Price Volatility and Leveraged ETF Rebalancing

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  • $\begingroup$ Thanks a lot! I will read the papers and see whether they help to answer my question! $\endgroup$ – muffin1974 Feb 10 '17 at 8:48

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