Expiration day effects: The case of Hong Kong

Regulators around the world often express concerns about the high volatility of stock markets due to index derivative expirations. Earlier studies of expiration day effects have found large volume effects, abnormal return volatility, and price effects during the last hour of trading on expiration days when the settlement is based on the closing price. This article examines the impact of the expiration of Hang Seng Index (HSI) derivatives on the underlying cash market in Hong Kong for the period from 1990 to 1999. The HSI derivative market is different from most other markets in the sense that the settlement price is computed by taking the average of 5‐minute quotations of the HSI on the last trading day, thus providing an alternative setting for testing expiration day effects. Our empirical findings indicate that expiration days in Hong Kong may be associated with a negative price effect and some return volatility on the underlying stock market, but there is no evidence of abnormal trading volume on the expiration day, or price reversal after expiration. Thus, the existence of expiration day effects cannot be confirmed in the Hong Kong market. [JEL classification: G13; G14; G15]. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:67–86, 2003     

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.     

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

On 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     

Option‐Expiration Effects in Small Markets: The Spanish Stock Exchange

This study analyzes the effect of the expiration of the Ibex‐35 Index derivatives, as well as the first four stock options traded in the Spanish Equity Derivatives Exchange, on the return, conditional volatility, and trading volume of the underlying assets. The analysis covers the period from the introduction of the various derivatives to December 1995. This period has been divided into two subperiods in order to determine if there are changes in the conclusions. The expiration of the Ibex‐35 index derivatives is associated with an increase in the trading volume of the underlying asset, but it has no significant effect on either the underlying asset prices or on the level of volatility on the expiration day. However, the expiration of the stock options has significant impact on their underlying assets. We observed a downward pressure on prices and a reduction of volatility level in the week before the expiration date and a significant increase in trading volume on the expiration day. The absence of futures contracts on individual stocks, among other possible causes, may explain these differences. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:905–928, 2001     

Settlement procedures and stock market efficiency

This study examines why most derivatives markets that settle on the day following expiration choose the opening rather than the closing price as the final settlement price (FSP), whereas most markets that settle on the expiration day select an average rather than a single price as the FSP. Four exogenous changes in the Taiwan Futures Exchange settlement procedures provide an experimental basis for studying the settlement procedures’ impact on underlying assets. Greatest market efficiency is observed when the FSP is determined by a single rather than an average price and hypothesize that manipulation is prevented at the expense of market quality.     

Futures and options expiration‐day effects: The Indian evidence

This study examines the effect of expiration of options and futures on price, volatility, and volume of the underlying shares. The values of these variables 1 day prior to expiration, on the day of expiration, and 1 day subsequent to expiration are compared with those 1 and 2 weeks before and after the corresponding day with the use of the Wilcoxon matched‐pairs signed‐ranks test. The underlying share prices tend to get marginally depressed a day prior to expiration and to strengthen significantly a day after the expiration. The rate of increase of returns on the day after the expiration is abnormally high. An abnormally high volume is also observed on the expiration day; it starts building up a day prior to expiration and continues into the following day for shares with relatively high derivative volumes. These effects can be largely ascribed to arbitrage activities and the restriction on short sales in the Indian cash market. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1045–1065, 2005     

Bid‐ask spreads,volatility, quote revisions,and trades of thinly traded futures contracts

We investigate intraday bid‐ask spreads (BAS), volatility, and trading activity of thinly traded equity index futures contracts on the Singapore Exchange. Contrary to previous findings, we find a rather flat BAS pattern during the trading day. However, consistent with past findings, an increase in risk widens the spread and a higher trading activity reduces it. When trading occurs in a day, spreads are reduced. No significant difference in volatility between days with and without trades was detected. When trades occur, quote revisions increase, and it is positively related to the number of trades. An increase in the number of quote revisions increases the likelihood of a transaction, and when quotes are current, revisions that are accompanied by trades carry new information. We provide evidence that contracts that are thinly traded may possess liquidity attributes as long as their price quotes remain current. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:455–486, 2003     

New evidence on expiration‐day effects using realized volatility: An intraday analysis for the Spanish stock exchange

Additional evidence is provided on expiration effects in the Ibex 35 stock index futures market using realized volatility as proposed by T. G. Andersen, T. Bollerslev, F. X. Diebold, and P. Labys (2003). Findings reveal not only a significant increase in spot trading activity, but also the existence of a significant jump in spot volatility at index futures expiration. Moreover, the importance of the data frequency considered is analyzed. Our research reveals that the use of GARCH methodology from daily data does not have the ability to statistically assess such expiration‐day effect. Additional empirical evidence is provided for the S&P 500 stock index futures market. Neither unconditional nor conditional realized volatility has a significant increase at expiration for the U.S. market, suggesting that this effect is specific for the Spanish market, at least for the period analyzed. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:923–938, 2006     

Order imbalance and the pricing of index futures

This study examines whether the aggregate order imbalance for index stocks can explain the arbitrage spread between index futures and the underlying cash index. The study covers the period of the Asian financial crisis and includes wide variations in order imbalance and the indexfutures basis. The analysis controls for realistic trading costs and actual dividend payments. The results indicate that the arbitrage spread is positively related to the aggregate order imbalance in the underlying index stocks; negative order‐imbalance has a stronger impact than positive order imbalance. Violations of the upper no‐arbitrage bound are related to positive order imbalance; of the lower no‐arbitrage bound to negative order imbalance. Asymmetric response times to negative and positive spreads can be attributed to the difficulty, cost, and risk of short stock arbitrage when the futures are below their no‐arbitrage value. The significant relationship between order imbalance and arbitrage spread confirms that index arbitrageurs are important providers of liquidity in the futures market when the stock market is in disequilibrium. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:697–717, 2007     

Internet Search Intensity and Its Relation with Trading Activity and Stock Returns*

Using Google search volume as a proxy for investor attention, this paper provides evidence on the role attention plays in financial markets. We first show that abnormal Google search volume (ASVI) helps explain cross‐sectional variations in trading activity, even after controlling for its important determinants. Specifically, ASVI is positively related to trading volume, order imbalance and liquidity. When the relation between stock returns and ASVI is examined, we find a strong positive relation in the month after attention shocks and a reversal over a longer holding period. We further conjecture that the attention effect is more pronounced in stocks with higher limits to arbitrage. For this purpose, we construct a limits‐to‐arbitrage index and show that limits to arbitrage play an important role in explaining the attention effect.     

Intraday price‐reversal patterns in the currency futures market: The impact of the introduction of GLOBEX and the euro

This article assesses the intraday price‐reversal patterns of seven major currency futures contracts traded on the Chicago Mercantile Exchange over 1988–2003 after 1‐day returns and opening gaps. Significant intraday price‐reversal patterns are observed in five of the seven currency futures contracts, following large price changes. Additional tests are conducted in three subperiods (1988–1992, 1993–1998, and 1999–2003) to examine the impact of the introduction of electronic trading on GLOBEX in 1992 (to assess how a near 24‐hour trading session might impact the next‐day opening and closing futures prices) and the introduction of the euro in 1999 (to assess its impact on price predictability in other futures markets). It is found that the introduction of the GLOBEX in 1992 significantly reduced pricing errors in currency futures in the second subperiod, making the currency futures markets fairly efficient. However, the introduction of the new currency, the euro, and the disappearance of several European currencies in 1999, resulted in significant price patterns (mostly reversals and some persistence) in most of the currency futures, indicating inefficiencies in the third subperiod. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1089–1130, 2006     

Taxes,Order Imbalance and Abnormal Returns around the ex‐Dividend day

A costly arbitrage model, developed for the Australian imputation tax system, shows that stocks paying dividends with a tax credit are likely targets for ex‐dividend arbitrage. We show that order imbalance, based on the direct observation of buyer and seller initiated trades, is a key factor in price movements around the ex‐dividend day. Buying pressure before the ex‐dividend day aimed at capturing the dividend and tax credit leads to an increase in prices that subsequently reverse in the ex‐dividend period. This effect is concentrated in those stocks distributing a tax credit with their dividend payments. The price pressure resulting from order imbalance is substantially higher around the ex‐dividend day relative to the effect observed outside this period. Our results reject the model of Frank and Jagannathan ( 1998 ) that bid‐ask bounce is responsible for the ex‐day premium and provide support for explanations based on taxes, transaction costs, and incomplete price adjustment on the ex‐day.     

Impact of changes in the CSI 300 Index constituents

We investigate the price and trading volume effects of CSI 300 Index reconstitutions. In contrast to the Standard & Poor's (S&P) 500 Index, whose reconstitutions are carried out irregularly, as required, CSI 300 Index reconstitutions are scheduled semi-annually and performed based on predetermined rules. We find that, on average, prices increase (decrease) significantly for CSI 300 Index additions (deletions) followed by significant post-event price reversals; however, these price changes are less in magnitude than evidenced in extant research for the S&P 500 Index. The trading volume increases significantly for both CSI 300 Index additions and deletions in the short run. The trading volume subsequently reverts to normal levels for index additions but remains higher for index deletions. The findings are consistent with the price pressure hypothesis.     

Information content of extended trading for index futures

The recent extension of trading hours for Hang Seng Index Futures provides an opportunity to examine whether extended futures trading contains useful information about spot returns. Using the weighted price contribution measure, we find that pre‐open futures trades are associated with significant price discovery. We extend the model from T. Hiraki, E. D. Maberly, and N. Takezawa (1995) and adjust for the existence of a pre‐open trading session and the overnight trading of cross‐listed shares in London. Our results indicate that extended trading for index futures contains useful information in explaining subsequent spot returns during the trading day. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:861–886, 2004     

Reversing the lead,or a series of unfortunate events? NYMEX,ICE, and Amaranth

A number of studies compare the efficiency and transparency of floor trading with automated/electronic trading systems in the competition for order flow. Although most of these studies find that electronic systems lead price discovery, a few studies highlight the weaknesses of electronic trading in highly volatile market conditions. A series of unusual events in 2006, sparking extreme volatility in natural gas futures trading, provide an ideal setting to revisit the resilience of trading system price leadership in the face of high volatility. We estimate time‐varying Hasbrouck‐style information shares to investigate the intertemporal and cross‐sectional dynamics in price discovery. The results strongly suggest that the information share is time‐dependent and contract‐dependent. Floor trading dominates price discovery in the less liquid longer‐maturity contracts, whereas electronic trading dominates price discovery in the most liquid spot‐month contract. We find that the floor trading information share increases significantly with realized volatility. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1130–1160, 2009     

Changes in the Nikkei 500: New Evidence for Downward Sloping Demand Curves for Stocks

This study investigates the price and trading volume effects of changes in the Nikkei 500. On average, prices increase (decrease) significantly for stocks added (deleted) with no significant post‐event reversals. Trading volume, on average, increases significantly for both stocks added and deleted in the short run. In the long run, however, trading volume falls (rises) significantly for stocks added (deleted), contrary to previous findings. These results support the hypothesis of downward sloping demand curves for stocks and refute three competing hypotheses. Finally, the Nikkei 500 changes cause considerably less pronounced price changes than do the S&\amp;P 500 changes.     

Examining futures price changes and volatility on the trading day after a limit‐lock day

This paper examines the effect that price limits have on futures prices by testing what happens to price changes and volatility on the trading day following a limit‐lock day. The results show evidence that prices continue to rise on average the day after an up‐limit day. In addition, limits appear to influence price volatility for some but not all of the futures contracts. However, since the findings vary across the different commodity futures contracts, it is likely that limits do not directly impact price volatility. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:445–466, 2000     

基于高频数据的波动率与成交量动态关系研究

传统的价量分析都是从低频数据来分析股票市场上波动率、收益率与成交量之间的关系。基于高频数据,利用分位数回归并结合高频数据的波动率估计方法对高频数据中所呈现出的价量关系进行研究,并分析了股票价格跳跃过程所带来的跳跃方差与成交量之间的关系。实证分析表明：指数及个股收益率与成交量之间的关系并不显著;波动率、跳跃与成交量之间存在着显著相关的关系,个股的波动率与成交量之间的关系显著并呈现出正向相关关系,而指数的波动率与成交量之间呈现出一种负向关系,并且关系比较微弱;个股的成交量的改变会导致股票价格的跳跃方差的减小,而指数的成交量的改变则使得指数的跳跃方差增大。     

Cash trading and index futures price volatility

This study examines the effect of cash market liquidity on the volatility of stock index futures. Two facets of cash market liquidity are considered: (1) the level of liquidity trading proxied by the expected New York Stock Exchange (NYSE) trading volume and (2) the noise composition of trading proxied by the average NYSE trading commission cost. Under the framework of spline–GARCH with a liquidity component, both the quarterly average commission cost and the quarterly expected NYSE volume are negatively associated with the ex ante daily volatility of S&P 500 and NYSE composite index futures. Conversely, liquidity and noise trading in the cash market both dampen futures price volatility, ceteris paribus. This negative association between secular cash trading liquidity and daily futures price volatility is amplified during times of market crisis. These results retain statistical significance and materiality after controlling for bid–ask bounce of futures prices and volume of traded futures contracts. This study establishes empirical evidence to affirm the conventional prediction of a liquidity–volatility relationship: the liquidity effect is secular and persistent across markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:465–486, 2011     

The Chinese warrant bubble: A fundamental analysis

We investigate the information content in Chinese warrant prices based on an option pricing framework that incorporates short‐selling and margin‐trading constraints in the underlying stock market. We show that Chinese warrant prices can be explained under this pricing framework. On the basis of this new model, we develop a price deviation measure to quantify stock market investors' unobserved demand for short selling or margin trading due to market constraints. We find that warrant‐price deviations are driven by underlying stock valuation to a great extent. Chinese warrant prices, save for the time around expiration dates, are better characterized as derivatives than as pure bubbles.