Long-Term Effects of Expiration of Derivatives on Indian Spot Volatility

Abstract

This paper examines the impact of expiration of derivatives on spot volatility of Indian capital market. The review of the literature shows that the previous Indian studies have covered a period of only 4–6 years after the introduction of derivative trading in India in 2000. They are unanimous about volume effect but not about return and volatility effect. This paper uses regression techniques and one symmetric and three asymmetric GARCH models, namely, TGARCH, EGARCH, and PGARCH, to evaluate the impact. It uses daily data on popular index S&P CNX Nifty of National Stock Exchange of India, during a period of more than a decade from June 12, 2000 to January 10, 2012. Findings of the study show that spot returns, volume, and volatility are high on expiration day and they build up further on the day after expiry which shows that the Indian market is weakly efficient. The expiration effect is mainly due to concentration of volumes in near-month contracts and absence of physical settlement.