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"Expiration hour effect of futures and options markets on stock market" -- A case study on NSE (National Stock Exchange of India)

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  • Maniar, Hiren M.
  • Bhatt, Rajesh
  • Maniyar, Dharmesh M.

Abstract

This paper studies the effect of expiration day of the Index futures and Options on the trading volume, variance and price of the underlying shares. The impact of derivatives trading on the underlying stock market has been widely documented in the Finance literature. In particular, significant differences in the statistical properties of asset returns (for instance, mean and variance) during expiration and non-expiration days have been advanced as an evidence for the destabilization effect (or lack there of) of derivative instruments. The earlier studies have, however, drawn their conclusions without rigorously modelling the underlying stochastic data generation process. Given that the statistical properties mentioned before are merely traits of the asset returns, this approach can lead to spurious results if analyzed in isolation of the underlying process. We propose to address this crucial shortcoming by examining the expiration day effect from a GARCH (Generalized Auto Regressive Conditional Heteroskedastic) framework. We use both daily and high frequency (5Â min and 10Â min) data on S&P CNX Nifty Index. Our central finding using intra-day data is that while there is no pressure - downward or upward - on index returns, the volatility is indeed significantly affected by the expiration of contracts. This effect, however, doesn't show up in daily data.

Suggested Citation

  • Maniar, Hiren M. & Bhatt, Rajesh & Maniyar, Dharmesh M., 2009. ""Expiration hour effect of futures and options markets on stock market" -- A case study on NSE (National Stock Exchange of India)," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 381-391, June.
  • Handle: RePEc:eee:reveco:v:18:y:2009:i:3:p:381-391
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    References listed on IDEAS

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    1. G. D. Hancock, 1991. "Futures option expirations and volatility in the stock index futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(3), pages 319-330, June.
    2. 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, March.
    3. Engle, Robert F & Ng, Victor K, 1993. "Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Chao Chen & James Williams, 1994. "Triple‐witching hour, the change in expiration timing, and stock market reaction," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(3), pages 275-292, May.
    6. Hans R. Stoll & Robert E. Whaley, 1997. "Expiration†Day Effects of the All Ordinaries Share Price Index Futures: Empirical Evidence and Alternative Settlement Procedures," Australian Journal of Management, Australian School of Business, vol. 22(2), pages 139-174, December.
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    Cited by:

    1. Cotter, John & Dowd, Kevin, 2010. "Intra-day seasonality in foreign exchange market transactions," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 287-294, April.
    2. Matthew Clifton, 2010. "Liquidity and Efficiency During Unusual Market Conditions: An Analysis of Short Selling Restrictions and Expiration-Day Procedures on the London Stock Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 14, July-Dece.
    3. Emily Lin & Carl R. Chen, 2019. "Settlement procedures and stock market efficiency," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(2), pages 164-185, February.
    4. Rachna Mahalwala, 2016. "A Study of Expiration-day Effects of Index Derivatives Trading in India," Metamorphosis: A Journal of Management Research, , vol. 15(1), pages 10-19, June.

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