Volatility Clustering Due To Derivatives Trading In Indian Stock Market: An Analysis Of Expiration Day Effects

Abstract

One aspect of derivative trading which is related to its undesirable side effects on equity markets deserves a special mention. This is related to presence of abnormal volume, return or volatility during pre-expiration and expiration period. These effects are known in the literature as expiration day effects. Many researchers have pointed towards significant changes in these variables around expiration of derivative contracts. The most common explanations include the unwinding of delta positions as well as index arbitrage, which is executed by arbitrageurs with sophisticated computer algorithms. The present paper analyses the expiration effects of financial derivatives in Indian stock market.