Expiration day effects of index futures and options: evidence from a market with a long settlement period

Abstract

This study examines index futures and options expiration day effects on the Swedish market. While the results for the period 1988-1998 indicate that trading volumes on the cash market were significantly higher on expiration days than on other days, no evidence suggesting that price distortions occurred is found. This could be due to the longer settlement period on the Swedish market, compared with that on the Canadian, German, and the US markets, where price distortions have been documented. However, some price distortion may have been experienced for the first half of the sample period, a finding which the cause for is discussed.

Price reversal as potential expiration day effect of stock and index futures: evidence from Warsaw Stock Exchange

“…A slightly different regression model (but one that also describes the relationship between the returns on the expiration day and on the following day) was employed by Alkebäck and Hagelin (2004). They study futures on the OMX index and do not find a statistically significant reversal of the index returns after expiration.…”

“…In the first model, this is represented by the logarithmic rate of return on the day following the event day, while in the second model, R i,1 is defined as the overnight return; that is, the natural logarithm of the ratio of return on the opening on the day after the expiration (or control) day to return at the close on the event day. Second, the three measures of price reversal used by Alkebäck and Hagelin (2004) and taken from Stoll and Whaley (1987) and Chamberlain et al (1989) are calculated for the expiration and control days.…”

“…In the literature, potential anomalies of expiration days on the main market are divided into price effects and volume effects. Alkebäck and Hagelin (2004) described the possible sources of these effects. The first one is the activity of arbitragers who unwind their positions on the stock market.…”

“…Since then, research on expiration effects has been extended to other markets. As a result, the increased trading volume of underlying assets on the day of a derivative's expiration was detected on the markets of Japan (Karolyi [1996]), Germany (Schlag [1996]), Australia (Stoll and Whaley [1997]), Sweden (Alkebäck and Hagelin [2004]), Poland (Morawska [2007]), China (Fung and Jung [2009]), Spain (Illueca and Lafuente [2006]), and India (Narang and Vij [2013]), among others.…”

“…The second source of expiration effects specified by Alkebäck and Hagelin (2004) arises from the activity of speculators. Investors who have naked positions in expiring contracts can try to manipulate its settlement price by the appropriate transactions on the equity market.…”