Abstract
This study investigates the expiration effects of stock index futures before and after the introduction Bank Nifty weekly options from April 2013 to June 2019. To check for the expiration effects, the volume and mean returns for expiration groups is compared with non-expiration groups or comparison groups. We had a total of 74 expiration dates; 37 expiration dates are before the introduction Bank Nifty weekly option and 37 are after the introduction Bank Nifty weekly options. The current study used t-test, pooled t- test, and Wilcoxon rank sum test to investigate if the mean return and volume for expiration were significantly different from the comparison group. We also check day of the week and if there is significant difference in nifty futures returns based on different expiration dates using Kruskal-Wallis test. The finding of the study found trading volume for the expiration groups is significantly different from the comparison. There was evidence of high return, low volatility and decrease in volume after the introduction of Bank Nifty weekly option.
Highlights
The introduction of financial derivatives has been the most significant event in the financial world in recent times
The standard deviation is calculated and used as a measure of volatility for NIFTY FUTURES for both expiration and comparison groups. t-test, Pooled t-test, and Wilcoxon rank-sum test are applied to find whether the mean return, trading volume, and volatility change significantly for expiration day, expiration week, and expiration month compared to the comparison groups
Looking at the mean return, we find high returns for expiration group (Week and Day) as against the comparison group post the introduction of Bank Nifty weekly options
Summary
The introduction of financial derivatives has been the most significant event in the financial world in recent times. The expiration effect is the effect on stock prices and liquidity in the spot market as market participants adjust their positions around the expiration of options and futures contracts. Previous studies have found abnormal returns with great volatility (Arago and Fernandez, 2000), abnormal trading volume (Stoll and Whaley, 1997; Vipul, 2005), or evidence of price reversal (Stoll and Whaley, 1997) in the spot market as we move closer to the expiration day. Index and stock derivatives are traded in monthly series, and the expiration date for each series is the last trading Thursday of every month. We investigate the expiration day effect for Nifty Futures before and after the introduction of Bank Nifty weekly options.
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