Abstract
This study investigates the effect of periodic events, such as the stock index futures and options expiration days and the Morgan Stanley Capital International (MSCI) quarterly index reviews, on the trading volume in the pan-European equity markets. The motivation of this study stems from anecdotal evidence of increased trading volume in the equity markets during the run-up to the index options and futures expiration days and MSCI rebalances. This study investigates this phenomenon in more detail and analyses the trading volumes of seven European stock indices and the MSCI International Pan-Euro Price Index. The analysis features a multi-step ahead volume forecast, which is important for practitioners in order to plan multi-day trades while looking to minimise the market impact. The results confirm higher trading activity on the futures and options expiration days, as well as on the MSCI rebalance day. We report a clear futures and options expiration day effect, which accounts for the Friday effect in terms of larger trading volumes. The MSCI rebalance trading volume is significantly different from the volume of the adjacent months with no MSCI reviews, but they cannot explain the end-of-month effect entirely.
Highlights
This study investigates the increased trading volume associated with recurring special events, namely the stock index futures and options expiration days and the Morgan Stanley Capital International (MSCI) quarterly index reviews; this is known as ‘the expiration day effect’ in the literature
We discriminate between the Friday effect and the stock index options and futures expiration days, and between the end-of-month effect and the MSCI quarterly reviews in order to identify the primary drivers of increased trading activity
Based on the correlation between price and volume that will be introduced we investigate the ‘Friday effect’ in conjunction with the expiration day effect because the stock index futures and options expiration days typically fall on the third Friday of the expiration months, and both effects are associated with increased trading volume
Summary
This study investigates the increased trading volume associated with recurring special events, namely the stock index futures and options expiration days and the MSCI quarterly index reviews; this is known as ‘the expiration day effect’ in the literature. We discriminate between the Friday effect and the stock index options and futures expiration days, and between the end-of-month effect and the MSCI quarterly reviews in order to identify the primary drivers of increased trading activity. This section starts with a survey of some of the relevant calendar effects, in order to understand the seasonal market dynamics that have been empirically identified as potential drivers of volume or price returns. This is followed by a short review of the relation between trading volume and price returns, and an introduction to stock index futures and options, potential mechanisms behind the increased trading volume around the futures and options expiration days, and MSCI index reviews. The following review of calendar effects outlines some of the event-driven irregularities markets experience
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