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Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India

  • Sumon Bhaumik

    ()

  • Suchismita Bose

    ()

The 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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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp863.pdf
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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp863.

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Length: pages
Date of creation: 01 Mar 2007
Date of revision:
Handle: RePEc:wdi:papers:2007-863
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  1. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
  2. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  4. Granger, Clive W. J. & King, Maxwell L. & White, Halbert, 1995. "Comments on testing economic theories and the use of model selection criteria," Journal of Econometrics, Elsevier, vol. 67(1), pages 173-187, May.
  5. Per Alkeback & Niclas Hagelin, 2004. "Expiration day effects of index futures and options: evidence from a market with a long settlement period," Applied Financial Economics, Taylor & Francis Journals, vol. 14(6), pages 385-396.
  6. Christian Schlag, 1996. "Expiration day effects of stock index derivatives in Germany," European Financial Management, European Financial Management Association, vol. 2(1), pages 69-95.
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