International Journal For Multidisciplinary Research

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Expiration Day Effect of Index Futures on Spot market Volatility: An Exploration

Author(s) Dhananjay Sahu
Country India
Abstract The present paper examines the expiration day effect of index futures contracts on spot market volatility in Indian stock market by using daily return of CNX Nifty Index from April 2017 to March 2019 excluding holidays when there were no transactions. The GARCH (1, 1) model that captures the heteroscedasticity in returns has been applied to study market volatility by using Nifty midcap index return as independent variables in order to remove the influence of market-wide factors price movement on CNX Nifty returns. The results indicate that the expiration day has had a significant impact on market volatility. The results of GARCH coefficients suffice the fact that there is a marginal decrease in volatility on the expiration day of index futures contract. This implies that index arbitrageurs hold simultaneous positions in cash market as well as in futures market and unwind their positions at the termination of trading in derivatives contract in order to realize arbitrage profits. When such trades happen to be on one side of the market at the close of the contract, a substantial order imbalance in cash market arises and the temporary mismatch between these orders, can significantly affect prices and volatility in the underlying cash market.
Keywords Expiration Day effect, Spot market Volatility, Stock Market Index, GARCH
Field Business Administration
Published In Volume 1, Issue 1, July-August 2019
Published On 2019-08-20
Cite This Expiration Day Effect of Index Futures on Spot market Volatility: An Exploration - Dhananjay Sahu - IJFMR Volume 1, Issue 1, July-August 2019.
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E-ISSN 2582-2160
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