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

21 Pages Posted: 23 May 2007

See all articles by Suchismita Bose

Suchismita Bose

ICRA Ltd

Sumon K. Bhaumik

Aston University - Aston Business School; Institute for the Study of Labor (IZA); University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

Date Written: March 2007

Abstract

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.

Keywords: derivatives contracts, expiration day effect, India

JEL Classification: G14

Suggested Citation

Bose, Suchismita and Bhaumik, Sumon K., Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India (March 2007). William Davidson Institute Working Paper No. 863, Available at SSRN: https://ssrn.com/abstract=988175 or http://dx.doi.org/10.2139/ssrn.988175

Suchismita Bose

ICRA Ltd ( email )

5th Floor, Karumuttu Centre
498 Anna Salai
Chennai, 600 035
India
+91 44 2434 0043 (Phone)
+91 44 2434 3663 (Fax)

Sumon K. Bhaumik (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, West Midlands B47ET
United Kingdom

Institute for the Study of Labor (IZA) ( email )

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

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