Expiration‐day effects—An Asian twist

Abstract

This study examines the intraday trading activities of index stocks on the common expiration day of index derivatives. In Hong Kong, index futures and index options use an Asian-style settlement procedure. All contracts are settled against the estimated average settlement price, an arithmetic average of the underlying cash index taken every five minutes on the expiration day. Trading volume and total trade count on the expiration day are both found to be higher than normal. Most important, trading intensifies in terms of volume and frequency close to the five-minute time marks. The study does not find significant price reversal and price compression patterns. Although significant order imbalance pattern is found on some expiration days, the results show no association between order imbalance pattern and the next-day return.

Expiration‐Day Effects and the Impact of Short Trading Breaks on Intraday Volatility: Evidence from the Indian Market

“…The Hong Kong market also uses Asian-style settlement procedure, where the contracts are settled against the estimated average settlement price, which was the arithmetic average of the underlying cash index taken every 5 minutes on the expiration day. Fung and Yung (2009) found that though the trading was higher on the expiration day and was concentrated around 5-minute marks, there was no evidence of price reversal on the following day. They concluded that the use of "Asian-style settlement procedure reduces the market pressure at contract expiration dates by spreading index-related trades over a period of time."…”

Impact of futures expiration on underlying stocks: intraday analysis for Warsaw Stock Exchange

“…The comparison between the conclusions obtained by Chow et al (2003) and Fung and Jung (2009) revealed that the results of the analysis of expiration-day effects can vary depending on both the period under study and the method of the research. Alkebäck and Hagelin (2004) suggested that the daily data may be unable to properly reflect the effects and, thus, the conclusions based on high-frequency data should be perceived as more reliable.…”

“…Volume effects have been investigated on several markets and also mostly confirmed on the spot markets of Germany (Schlag 1996), Sweden (Alkebäck and Hagelin 2004), India (Vipul 2005;Debasish 2010;Tripathy 2010;Narang and Vij 2013;Mahalwala 2016), Poland (Morawska 2007), China (Fung and Jung 2009), Spain (Illueca and Lafuente 2006), and Taiwan (Chow et al 2013).…”

“…The authors suggested that this difference might be attributable to the long settlement period of these contracts. However, after studying the expirations of futures on the Hang Seng index but during a different period of time (from May 1996 through May 2000) and with the use of high-frequency data, Fung and Jung (2009) came to the opposite conclusion: the trading volume and total trade counts were both higher than normal on expiration days. Moreover, they found that trading intensified around the 5-min time marks.…”

“…The expiration-day effects of futures contracts have been detected in studies on stock markets, including those of the U.S., Canada, Germany, Sweden, Japan, India, and Australia (see, for example, Karolyi 1996;Schlag 1996;Stoll and Whaley 1997;Alkebäck and Hagelin 2004;Vipul 2005;Debasish 2010;Tripathy 2010;Narang and Vij 2013;Fung and Jung 2009;Illueca and Lafuente 2006;Chow et al 2013;Mahalwala 2016).…”