Expiration Effect on Indian Stock Market

8/8/2019 Expiration Effect on Indian Stock Market

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Indian Stock Market

Indian Stock market is one of the oldest stock

markets in Asia, having a history of 200 years

At present, there are twenty one recognized stockexchanges in India

It does not include the Over The Counter Exchange

of India Limited (OTCEI) and the National StockExchange of India Limited (NSEIL)


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National Stock Exchange

The National Stock Exchange was incorporated in

1992Came into being in order to lift the Indian stockmarket trading system on par with the internationalstandards, on the basis of the recommendations ofhigh powered Pherwani Committee

Trading was opened on this stock market in mid1994

It was recently accorded recognition as a stockexchange by Dept. of Company Affairs

The National Stock Exchange (NSE) was rankedfirst in term of trading volumes of individual stockfutures in 2007


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Growth Of Indian Stock Market

Indian stock markets have seen tremendous growth in

last few years in both equity and derivative segmentThis growth can be attributed to the confidencedeveloped among investors for the stock market

Such confidence among investors has arises from well

developed securities market which is backbone of thefinancial system of a country

In the derivative exchange-traded market, the biggestsuccess story has been derivatives on equity products

Index option and Index futures are leading the packfollowed by Stock futures and stock options in term ofvolumes


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Derivatives contracts at National StockExchange


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Objective of the Study- What is this effect

We have studied the effects of the expiration day of

stock options and futures on the trading of theunderlying shares

We have analyzed the stock data for a twofoldeffect:

Effect of expiration on stock prices Effect of expiration on volume


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Pricing Model

The model that we have used to judge whether

expiration has any effect on stock prices is: ln (yt) = + 1 ln (yt-1 ) + 2 ln (yt-2 ) + ut + 3 (D)

where ln (yt) - describes the percentage change in the

stock prices. This is the dependent variable inour model.

This term gives the intercept.

ln (yt-1 ) & ln (yt-2 ) - These terms are the lag terms

D This variable acts as a dummy variable

ut - refers to the noise term in the regression model

1 , 2, 3 - are the coefficients


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Trading Volume Model

The trading volume model is similar to the pricing

model that we have adopted. The model is givenby the following equation

ln (yt) = + 1 ln (yt-1 ) + 2 ln (yt-2 ) + ut + 3 (D)

where ln (yt) - percentage change in the trading volume.

This is the dependent variable in our model.

This term gives the intercept.

ln (yt-1 ) & ln (yt-2 ) - These terms are the lag terms ut - refers to the noise term in the regression model

1 , 2, 3 - are the coefficients


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The Hypothesis

Generally it is observed that stock prices fall on

expiry date and trading volume jumps up on theexpiry date. Thus, in line with the generalobservations, our Hypothesis is as follows:

H0: (1) = 0 (for both the models)


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Effect on Price

Stock Effect on Price () Interpretation

Reliance = -0.06p-value = 3.29e-05

This shows that the stock price declines by 6% on the expirydate and a low p-value makes the observation statisticallysignificant

TCS = -0.00483390p-value = 0.3520

The stock price decreases by 0.48%, however this has a highp-value thus making the observation statistically insignificant

UNITECH = 0.00167060 p-value = 0.8509

The stock price increases by 0.16%, however this has a veryhigh p-value thus making the observation statisticallyinsignificant.

SUZLON = -0.00881281p-value 0.29892

The stock price decreases by 0.88%, however this has a highp-value thus making the observation statistically insignificant.

ONGC = 0.00237815p-value - 0.6220

The stock price increases by 0.23%, however this has a veryhigh p-value thus making the observation statisticallyinsignificant.


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Effect On Volume

Stock Effect on Volume () Interpretation

Reliance = 0.294019p-value = .0181

The trading volume increases by 29.4%; this isalso supported by the low p-value

TCS = 0.441178

p-value 0.0018

The trading volume increases by 44.11%; this is

also supported by the low p-value

UNITECH = -0.0237494p-value - 0.8356

The trading volume decreases by 2.3%; howeverthis has a very high p-value thus making theobservation statistically insignificant

SUZLON = 0.123252p-value - 0.03149


ONGC = 0.468929p-value - 0.0016



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Conclusion (Effect on Price)

From the above results we can see that on an

average the stock prices are negatively correlatedwith the expiration effect

Mostly we see the dummy coefficient being negativeamongst the stocks; however there are deviations

in some casesBut in all of these cases the p-values are not lowenough to draw any conclusion.

Hence we can conclude that expiration day has a

negative effect on stock prices


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Conclusion(Effect on Volume)

The trading volume results are much more

consistent and four out of the five stocks show aclear increase in trading volume on the expirationdate.

This is supported by low p-values

Thus we can conclude that trading increases onexpiry day


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THANKYOU

Expiration Effect on Indian Stock Market

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