A STUDY ON THE EXPIRATION EFFECT WITH RESPECT TO NIFTY 50 STOCKS

Name : SREE RAM K Roll No. : MB13A47 COMPANY: Balance Equity Private Ltd BRIEF BACKGROUND: High volatility in the stock market is often attributed to index derivative expirations. Such has been the case in the US, Japan, Australia, and, most recently, India. Investigations of the US, Japanese, and Australian markets, however, fail to establish a direct link. The empirical evidence indicates that, while trading volume is higher than normal on index futures and option expiration days, stock market volatility is no different. NEED FOR STUDY: Stock index derivatives are one of the most important and successful innovations of modern-day financial markets. The markets for such products first appeared in the US in the early 1980s and quickly spread to the major financial centers of Europe and the Pacific Rim. The success of financial contract markets is usually measured by trading volume. For index derivatives, trading volume of index derivatives often exceeds the trading volume of underlying stocks. The average daily rupee trading volume for the National Stock Exchanges S&P CNX Nifty futures contract, for example, was Rs 14,000 crores. In contrast, the average daily rupee trading volume for all stocks listed on the NSE combined was about Rs 9,000 crores. The primary reason for the popularity of stock index futures and option markets is that they provide a fast and inexpensive means of changing stock market exposures, both domestically and internationally. Despite their success, derivatives in general, and index derivatives in particular, have their critics. A complaint commonly levied against index derivatives is that they may induce an abnormal level of trading activity in the stock market at expiration. Whether recent stock market volatility is attributable to the expiration of index derivatives is difficult to assess. Many factors affect market volatility. This study is conducted to find the effect of expiration day on different factors such as price, return volatility and volume.

OBJECTIVE: The objective of the study is: To find that whether the Index derivatives contract expiry creates abnormal volatility in underlying asset prices To find that whether there is any significant difference in the return between Expiry, T-1 and T-2 days

RESEARCH METHODOLOGY: Data used: Daily closing Price and volume of 45 stocks listed in the NIFTY 50 stocks Methodology used: Event study methodology Empirical Study

FINDINGS: The price returns are significant on the T-2 and T-1 days of expiration The returns are highly volatile in most of the cases when compared to the non expiration days The volumes traded during the expiration day are significantly higher than those traded in the non expiration days

CONCLUSION: The speculators and arbitrageurs could make use of the abnormal price returns that arises during T-2, T-1 and on the expiry (T) day by formulating appropriate trading strategies.