Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India
AbstractThe impact of expiration of derivatives contracts on the underlying cash market – on trading volumes, returns and volatility of returns – has been studied in various contexts. We use an AR-GARCH model to analyse the impact of expiration of derivatives contracts on the cash market at the largest stock exchange in India, an important emerging capital market. Our results indicate that trading volumes were significantly higher on expiration days and during the five days leading up to expiration days (“expiration weeks”), compared with nonexpiration days (weeks). We also find significant expiration day effects on daily returns to the market index, and on the volatility of these returns. Finally, our analysis indicates that it might be prudent to undertake analysis of expiration day effects (or other events) using methodologies that model the underlying data generating process, rather than depend on comparison of mean and median alone.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp863.
Date of creation: 01 Mar 2007
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derivatives contracts; expiration day effect; India;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-21 (All new papers)
- NEP-CWA-2007-04-21 (Central & Western Asia)
- NEP-MST-2007-04-21 (Market Microstructure)
- NEP-RMG-2007-04-21 (Risk Management)
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