The Sources of Expiration-Day Effects

Abstract

This paper proposes whether expiration-day phenomenon exhibits an intraday seasonality and spillover effects on return volatility and liquidity in cash index market. This analysis employs one-minute data and divides the sample days into three categories－ settlement, expiration and regular days and then each category is split into three intervals of a day－ the opening interval, the closing interval and the rest of a trading day. The main focus of this study tests whether volatility and liquidity at expiration of index derivatives is driven by a certain settlement procedures conducted in Taiwan financial market and whether settlement procedures help explain intraday seasonality and spillover effect. Finally, I calculate a signal-to-noise ratio to explore the efficiency of the opening price, detect which settlement procedure creates higher efficiency of the opening price and whether the stock exchange authority in Taiwan is smart to respond to the decrease in efficiency.