Does Short-dated Options Introduction Mitigate Expiry Day Effects? Evidence from the Introduction of Weekly Index Options

Kotha Kiran Kumar

Abstract


High volatility in the stock market is often attributed to derivative expirations. The National Stock Exchange of India, largest derivatives exchange in the world by number of contracts traded, introduced weekly or short-dated derivatives in Feb 2019 to mitigate the expiration day effects. The study empirically examines the return and volatility data surrounding expiration days during the period before and after the introduction of weekly derivatives. First, for the period before the introduction of weekly contracts, the study gathers empirical evidence suggesting the presence of upward shift in price effects around expiration day and a transitory upward shift in volatility. Next, the study shows with a comprehensive time series analysis, these adverse expiration day effects disappear in the period after the introduction of weekly options. The paper concludes that the weekly, short-dated, contracts fill the gap in the market depth and are beneficial to the over all market welfare. As the weekly options are gaining popularity across the exchanges and investors, the study has important implications to the regulators and practitioners around the world.

Keywords: Volatility, Expiration Day, GARCH.


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References


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