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

Henryk Gurgul,Milena Suliga

doi:10.1007/s10100-018-00606-9

Henryk Gurgul, Milena Suliga

Open Access

https://doi.org/10.1007/s10100-018-00606-9

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Abstract

Based on high-frequency data, this study is concerned with the effects of stock futures expirations on the spot market on the Warsaw Stock Exchange. The typical effects of futures expirations include the impact on the trading volume of the underlying asset, abnormally high volatility of the returns on expiration day, and price reversal after expiration. In line with observations of the effects for other markets, it can also be noticed that futures expiration is a source of rises in trading volume for the WSE. There is an observed significant abnormal trading volume and turnover of stocks that are underlying assets of futures as well as an increased volatility of these stocks’ returns on expiration day. An additional analysis conducted during three sub-periods (around April 15, 2013, and May 31, 2015) checks whether the implementation of a new transaction system on the WSE and the changes in short-selling rules influenced the expiration-day effects. The results suggest that the implementation of a new regulation by the EU on the WSE concerning short selling in trading on stock exchanges had a significant impact on expiration-day effects.

Highlights

There are two types of derivatives: commodity derivatives and financial derivatives
Based on high-frequency data, this study is concerned with the effects of stock futures expirations on the spot market on the Warsaw Stock Exchange
The results suggest that the implementation of a new regulation by the EU on the WSE concerning short selling in trading on stock exchanges had a significant impact on expiration-day effects

Summary

Introduction

There are two types of derivatives: commodity derivatives and financial derivatives. In our contribution, we are concerned with those financial derivatives whose values are derived from the prices (or price indices) of underlying securities. The important feature of these instruments is their settlement on expiration day. The time of the cash settlement of financial derivatives has an impact on the market itself. This is a source of price pressure with respect to the underlying assets. The impact of the expiration day of financial derivatives like stock or index futures contracts on the price, volatility, and volume of the underlying stocks has always been of special interest to academicians, investors, and regulators. The price, volatility, and trading volume are frequently distorted at a time close to the expiration moment due to speculative or arbitrage strategies on the stock and index futures

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