Effect of multiple index derivative expiry on volatility, volume, and connectedness: a tale of two stock indices in India

Last year, the National Stock Exchange of India announced a change in the expiration day (from existing Thursday to Wednesday) for the weekly and monthly Bank Nifty Index futures and options contracts respectively. This change in the expiration schedule provides an interesting opportunity to study and analyze its impact on the volatility, volume, and volatility connectedness between the benchmark index and the Bank Nifty index. We utilize 1 min high-frequency data from India’s most traded equity index derivative to establish volatility connectedness. Using mcsGARCH and Diebold and Yilmaz's (2012) spillover index, this study finds that connectedness between two indices is reduced after the change in weekly and monthly expiry of one index. This reduction in connectedness is further intensified in the triple witching hour. The results on volume and volatility of both indices suggest that both have increased after the change in expiry day, which suggests the investors are actively trading on the expiry date due to the expiry day anomaly. This result contrasts the exchange view, which tweaked the expiry to curtail the expiration day volatility on the overall market. Results of this study are valuable for traders to make their position in the market, especially around expiry. Further, the results of this study are useful for policy maker to understand the dynamics between two index derivatives that has common underlying assets but different expiry period.