Abstract
This paper explores price effects caused by the expiration of derivatives in the cryptocurrency market. Applying different statistical tests (ANOVA, Mann–Whitney, and t-tests) and econometric methods (the modified cumulative abnormal return approach, regression analysis with dummy variables, and the trading simulation approach) to daily and weekly Bitcoin data over the period 2018–2021, the following hypotheses are tested: (H1) Expiration days create patterns in price behavior in the cryptocurrency market; and (H2) Price patterns can be exploited to generate abnormal profits from trading. The results suggest that expiration effects are only nominally present in the cryptocurrency market. There are differences in returns between expiration-related periods and average returns, but these differences are statistically insignificant. The only case in which an anomaly was detected was related to abnormally high returns during the week of expiration: returns during such weeks were positive in 65% of cases, and were on average 5 times higher than during usual weeks. Trading strategies based on this fact were able to generate results different from those of random trading, with a Sharpe ratio above 1. This is evidence in favor of the existence of a real price anomaly, which contradicts the efficient market hypothesis, and this could be implemented in the practice of traders and investors by creating trading strategies based on detected price effects or special technical analysis indicators to generate trading signals. For academics, these results might provide an opportunity to improve time series forecasting analysis in the case of Bitcoin.
Highlights
Expiration of derivatives is a rather routine procedure in financial markets
There is a lot of empirical evidence in favor of so-called expiration day effects: abnormally high trading volumes and volatility on these days and during the week prior to the expiration date, as well as patterns in price behavior (Stoll and Whaley 1991)
The MCAR approach confirms the presence of an anomaly if the trend model based on cumulative abnormal returns data has high multiple R, passes the F test, and the regression coefficients are statistically significant (p-value < 0.05)
Summary
Expiration of derivatives is a rather routine procedure in financial markets (a lot of contracts expire on a monthly basis). The expiration effect is based on the idea that market participants adjust their positions around the expiration of options and futures contracts. Arbitrageurs liquidate their stock positions around these days and create the order imbalances that arise from unwinding cash positions when futures contracts expire (Stoll and Whaley 1987). Another rationale is stock price manipulation: market participants with large positions in derivative contracts may have incentives to push the underlying market in a certain direction to affect the value of their contracts before they expire (Chow et al 2003).
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