Expiration Day Research Articles

Can the Indicative Price System Mitigate Expiration‐Day Effects?

We investigate whether the indicative price system, introduced in the Korean derivatives market on July 1, 2003, has helped mitigate the options and futures expiration‐day effects. Prior to introduction of this system, we find evidence of high trading volume and significant price reversals during the first half hour of trading for the day immediately following the expiration day. These effects decline significantly after July 1, 2003. Our evidence suggests that the indicative price system can mitigate the expiration‐day effects.

Pinning in the S&P 500 futures

We show that Standard & Poor's (S&P) 500 futures are pulled toward the at-the-money strike price on days when serial options on the S&P 500 futures expire (pinning) and are pushed away from the cost-of-carry adjusted at-the-money strike price right before the expiration of options on the S&P 500 index (anti-cross-pinning). These effects are driven by the interplay of market makers' rebalancing of delta hedges due to the time decay of those hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. The associated shift in notional futures value is at least $115 million per expiration day.

The effects of randomizing the opening time on the performance of a stock market under stress

To tackle challenges from derivatives trading and illiquidity, reduce manipulation and improve price discovery, many exchanges have started opening at random times. We investigate how randomization has affected the performance of the Tel Aviv Stock Exchange at trade opening and at the expiration of stock-index derivatives. Randomization has improved price discovery and reduced excess volatility and price distortion, especially on expiration dates. Although preopening prices do not converge to full information values, post-randomization, opening prices on expiration days are at least as accurate as on other days. Spot market trading systems significantly impact the effects of derivatives on spot prices.

The Information Content of Model‐Free Implied Volatility

This study examines the information content of model‐free implied volatility (MFIV) estimates with respect to the options and futures markets in Hong Kong. In this study, the volatility forecasting performance of MFIV is compared, using different prediction horizons, to IV estimates based on Black's futures option pricing model (BIV) and time‐series forecasts based on historical volatility (TS‐HV). The results show that the BIV prediction is unbiased for different horizon forecasts. MFIV outperforms TS‐HV forecasts and, most importantly, BIV subsumes the information content of both MFIV and TS‐HV forecasts. The results are largely maintained for next‐day forecasts but the forecasting quality of the two IV measures declines as expiration day approaches. The information contents of MFIV and TS‐HV forecasts are complementary. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 32:792‐806, 2012

The Sources of Expiration-Day Effects

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.

Extracting Risk-Neutral Density and Its Moments from American Option Prices

Implied volatility is obtained from an option’s observed market price by solving backward through the pricing model to find the volatility that would produce the same value from the model. Unfortunately, this typically leads to the familiar volatility smile: different implied volatilities from different options on the same underlying. But from market prices for the full set of a given stock’s options, one can extract not just volatility, but the entire risk-neutral probability distribution, from which volatility and any other moment can easily be obtained, and the result does not depend on any particular pricing model. One problem, however, is that because the risk-neutral density is over the stock price at expiration day, the options involved need to be European so that exercise can only take place on that date. But exchange-traded options are nearly all American, in the U.S. at least. In this article, Tian shows how to obtain the risk-neutral density from American option prices. The trick is to build an implied lattice model from the American options then use it to find European option prices that would be consistent with the observed American prices in the market. The density can then be extracted from these implied European prices in the standard way. <b>TOPICS:</b>Options, VAR and use of alternative risk measures of trading risk, accounting and ratio analysis

Pinning in the S&amp;P 500 Futures

We show that S&P 500 futures are pulled towards the at-the-money strike price on days when serial options on the S&P 500 futures expire (pinning), and are pushed away from the cost-of-carry adjusted at-the-money strike price right before the expiration of options on the S&P 500 index (anti-cross-pinning). These effects are driven by the interplay of market makers’ rebalancing of delta hedges due to the time-decay of those hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. The associated shift in notional futures value is at least $115 million per expiration day.

Investigating Expiration Day Effects in Stock Index Futures in India

This study attempts to examine whether potential expiration effects exist on the NSE Nifty index by comparing the trading volume and return process at expiration with a comparison group. The period of analysis covers index futures expirations from June 2001 to May 2009. The trading volume and return process on expiration days and during expiration weeks were compared with a set of comparison days and comparison weeks. The current study used the pooled t-test and Wilcoxon rank sum test to investigate whether mean returns, price ranges, and adjusted trading volumes (i.e. time-independent trading volumes) were significantly different at expiration. The procedure as used by Stoll and Whaley (1987) was used to examine if price reversals existed during expiration days and comparison days.The evidence indicates that the trading volume on expiration days and in expiration weeks was significantly larger than on comparison days and during comparison weeks. Further, the results suggest that there were no price distortions on the expiration day or during the expiration week for the complete sample period and the second sub-period. For the first sub-period, however, evidence suggesting that expiration days and weeks experienced higher volatility than normal does exist. No evidence of significantly different mean returns, volatility, or price reversals at expiration was found. This could be due to the longer settlement period in India. However, when the complete sample period was divided into two sub-periods it was found that expiration day (weeks) during the first sub period may have experienced price distortions. The results of this study are crucial to investors, stock exchange officials, and regulators.

Expiration Day Effects and Futures Trading Profits: Evidence from Taiwan

We set out in this study to analyze the expiration effects of index futures on the cash market in Taiwan, and find that both volatility and trading volume are higher on the final settlement days as compared to normal trading days. We also calculate the volume of open interest for final settlement relating to different classes of traders, as well as the profits from the open interest positions of these traders in index futures contracts. We find that proprietary traders exhibit superior performance whereas foreign investors achieve the worst returns. Our empirical results provide strong evidence in support of the view that the expiration effects in the Taiwan futures market are partially attributable to attempts at ‘marking the close’.

Expiration‐day effects on individual stocks and the overall market: Evidence from Taiwan

AbstractOn expiration days of the MSCI‐TW index futures, the Taiwan spot market is associated with abnormally large volume and high index volatility, along with mild index reversal. The effects concentrate only in the last five minutes of expiration days and appear to be strengthened by the adoption a call auction closing procedure by the Taiwan Stock Exchange. Individual index stocks show high volatility and strong tendency of price reversal, with large‐ and small‐cap stocks being affected more than the medium‐sized stocks. The highest‐weighted stocks exhibit excessive volume and volatility, which is disproportionate to the impact on all other index stocks, indicating that the expiration‐day effects may have been amplified by the attempt of price manipulation using large‐cap stocks. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:920–945, 2009

Market Design and the Efficiency of a Stock Market Under Liquidity Stress

Stock exchanges around the world are challenged by extreme liquidity events. We examine how trading design affects the informational efficiency of markets under liquidity stress due to opening of trade and the expiration of stock index derivatives. To give markets time to incorporate overnight and weekend information efficiently, most exchanges open trading using a preopening period followed by a call auction. To further improve their ability to accommodate extreme liquidity events exchanges have switched from fixed to random opening times. We investigate the effects of opening time randomization on informational efficiency of opening and preopening stock prices on stock index options expiration days and other days. Randomization has significantly improved price discovery and reduced transitory volatility and price distortion, especially on index options expiration days. Randomization offers exchanges a simple and effective way to mitigate stressful effects of extreme liquidity events. It also helps traders settle their options positions using prices that are closer to their true values, which improves the hedging effectiveness and price discovery provided by options.

Expiration‐day effects—An Asian twist

AbstractThis study examines the intraday trading activities of index stocks on the common expiration day of index derivatives. In Hong Kong, index futures and index options use an Asian‐style settlement procedure. All contracts are settled against the estimated average settlement price, an arithmetic average of the underlying cash index taken every five minutes on the expiration day. Trading volume and total trade count on the expiration day are both found to be higher than normal. Most important, trading intensifies in terms of volume and frequency close to the five‐minute time marks. The study does not find significant price reversal and price compression patterns. Although significant order imbalance pattern is found on some expiration days, the results show no association between order imbalance pattern and the next‐day return. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 28:430–450, 2009

Molecular analysis of spoilage-related bacteria in pasteurized milk during refrigeration by PCR and denaturing gradient gel electrophoresis.

Bacterial diversity in fluid milk products has been extensively studied in order to improve milk quality. Here, we illustrate the utility of viable counts and PCR-denaturing gradient gel electrophoresis (DGGE) for monitoring the microbial spoilage of pasteurized milk during shelf life. Five pasteurized milk samples stored at 4 degrees C were examined at 10 and 5 days before expiration and on the expiration day. With bacterial DNA extracted directly from the samples, PCR-DGGE analysis indicated that Pseudomonas became dominant in four samples. Meanwhile, the aerobic plate count of these four samples exceeded the regulatory limit of 20,000 CFU/ml at 5 days before expiration, and the rapid psychrotrophic count markedly surpassed the aerobic plate count on the expiration day. Streptococcus and Buttiauxella spp. were detected in several samples. Sequence analysis of DGGE fragments revealed high diversity among Pseudomonas spp. in the milk samples. P. putida and P. migulae grew to high numbers during refrigerated storage. Further identification of Pseudomonas at the species level was facilitated by PCR and multiplex PCR using species-specific primers; consequently, P. fluorescens and P. fragi were observed. These results highlight an important role of Pseudomonas in the shelf life of pasteurized milk.

Impact of Derivatives Trading on Emerging Stock Markets: Some Evidence from India

It is generally accepted that the introduction of financial derivatives that facilitate hedging is an important step in the development of stock markets. However, financial derivatives can potentially increase volatility in the underlying cash market, which might be detrimental to the development of the stock market itself. Using data from India, we examine one possible route through which derivatives trading can increase cash market volatility: expiration day effect. Our results indicate that expiration of equity derivatives contracts does not have any effect on the intra-day volatility of the market index, and it reduces the volatility of inter-day returns to the index.

Has Google Stock Price Been Manipulated?

We present the evidence that the GOOGLE stock, one of the most important stocks in the 21st century, may have been illegally controlled by large Wall Street firms. We identify a group of smart traders, including financial firm proprietary traders and large traders who trade options with large orders. We find that they have advance information about the closing prices on post earning release and option expiration days. These smart traders sell options to the market which would become worthless after the key events, and their high success rate is difficult to be explained by normal trading behavior. Additional evidence from the tape, such as unusually high quoted depth and extremely low narrow quoted spreads during clustering option expiration days, provide direct proof that the GOOGLE stock price may have been manipulated to coordinate the institutional traders' option selling activities.

The determinants of trading volume for cross-listed Euribor futures contracts

This article investigates the determinants of trading volume for the Euribor futures contract traded at both Euronext-LIFFE and Eurex. Granger causality tests suggest that volumes on the two exchanges are interdependent. Hausman tests demonstrate that the volumes are determined simultaneously. Such results are consistent with a scenario of competition for volume between the exchanges. A model of the determinants of volume is then specified to reflect the cross-exchange influences. The study is the first investigation of this type for Euribor and contributes new findings to the literature on cross-listed futures. The article applies an innovative selection of explanatory variables. An illiquidity ratio is found to have a significant inverse relationship with LIFFE volume, but is not significantly related to Eurex volume. Other determinants have very similar effects across the exchanges. Volumes at both exchanges are significantly lower on Mondays and Fridays. There is a significant negative relationship between days to maturity and volume, and volumes are significantly higher on the expiration days of futures contracts. European Central Bank announcements lead to significantly elevated trading volumes.

Derivatives Trading and the Volume-Volatility Link in the Indian Stock Market

This paper investigates the issue of temporal ordering of the range-based volatility and volume in the Indian stock market for the period 1995-2007. We examine the dynamics of the two variables and their respective uncertainties using a bivariate dual long-memory model. We distinguish between volume traded before and after the introduction of futures and options trading. We find that in all three periods the impact of both the number of trades and the value of shares traded on volatility is negative. This result is in line with the theoretical argument that a marketplace with a larger population of liquidity providers will be less volatile than one with a smaller population. We also find that (i) the introduction of futures trading leads to a decrease in spot volatility, (ii) volume decreases after the introduction of option contracts and, (iii) there are significant expiration day effects on both the value of shares traded and volatility series.

The Expiration Effect on the Relationship between the KOSPI 200 Stock Index and its Nearby Futures Markets

This article investigates the abnormal price movement that has an expiration effect on the relationship between the KOSPI 200 stock index and its nearby futures markets in Korean financial markets. Unlike early studies that examined the abnormal price movement around the expiration day of derivatives contracts just separately in each market, the purpose of our study is to verify whether an expiration effect exists on the relationship between the underlying asset and its derivatives markets in Korean financial markets, using the concordance correlation coefficient, which allows us to analyze the agreement between two financial markets. From June 14, 1996 to December 14, 2006, the concordance correlation coefficient increases as the date for expiration of futures contracts comes closer; however, the Pearson correlation coefficient does not explain the expiration effect of futures contracts. This result implies that the expiration effect of futures cannot be captured by the Pearson correlation coefficient, but can be captured by the concordance correlation coefficient between the KOSPI 200 stock index and its futures markets. Our results show that it is desirable to use the concordance correlation coefficient to analyze the expiration effect on the relationship, rather than the Pearson correlation coefficient.

Derivatives Trading and the Volume-Volatility Link in the Indian Stock Market

This paper investigates the issue of temporal ordering of the range-based volatility and volume in the Indian stock market for the period 1995-2007. We examine the dynamics of the two variables and their respective uncertainties using a bivariate dual long-memory model. We distinguish between volume traded before and after the introduction of futures and options trading. We find that in all three periods the impact of both the number of trades and the value of shares traded on volatility is negative. This result is in line with the theoretical argument that a marketplace with a larger population of liquidity providers will be less volatile than one with a smaller population. We also find that (i) the introduction of futures trading leads to a decrease in spot volatility, (ii) volume decreases after the introduction of option contracts and, (iii) there are signifcant expiration day effects on both the value of shares traded and volatility series.

Expiration-Day Effects - An Asian Twist

This is an examination of the intraday trading activities of index stocks on the common expiration day of index derivatives. In Hong Kong, index futures and index options use an Asian-style settlement procedure. All contracts are settled against the estimated average settlement (EAS) price, which is the arithmetic average of the underlying cash index taken every five minutes on the expiration day. Trading volume and total trade count on the expiration day are found to both be higher than normal. Most important, trading intensifies in terms of both volume and frequency at times close to the five-minute time marks. Significant order imbalance and price reversal patterns are not found. That there is no systematic order imbalance pattern explains the absence of a price reversal pattern.