The Expiration-Day Effect of Derivatives Trading: Evidence from the Taiwanese Stock Market

Transcription

1 Journal of Applied Finance & Banking, vol. 5, no. 4, 2015, ISSN: (prin version), (online) Scienpress Ld, 2015 The Expiraion-Day Effec of Derivaives Trading: Evidence from he Taiwanese Sock Marke Tsung-Yu Hsieh 1 and Huai-I Lee 2 Absrac This work examines wheher he expiraion-day effec of derivaives rading exiss in he Taiwanese sock marke. The empirical resuls indicae ha he fuures volailiy does no increase seadily as he expiraion-day approaches, bu only in he hree days before his dae. Furher, he sock volailiy decreases afer he opening of he opions marke. Nex, while he rading volumes increase afer he opening of opions rading, he variaions in hem decrease significanly. Finally, significan price reversal exiss in boh he sock and fuures markes, bu no in he opions marke. JEL classificaion numbers: G14, G15 Keywords: Expiraion-Day Effecs, Price Reversal 1 Inroducion Derivaives have recenly araced much aenion from boh scholars and invesors. One of he feaures of hese insrumens is delivery a he expiraion day. The ime for delivery no only affecs he marke iself, bu also generaes price pressure wih regard o he underlying asses. Mos sudies relaed o his issue focus on he spo price (Garbade & Silber, 1983; Soll & Whaley, 1987 & 1991; Edwards, 1988; Wiherspan, 1993) or he expiraion-day effec of he spo marke (Klemkosky, 1978; Herbs & Maberly, 1990; Hancock, 1993; Chen & Williams, 1994; Karolyi, 1996; Pardo, 1998; Bollen & Whaley, 1999; Corredor, Lechon & Sanhamaria, 2001). Many sudies (e.g., Soll & Whaley, 1997; Corredor, Lechon & Sanhamaria, 2001) indicae ha he cause of he expiraion-day effec is he selemens ha occur in he derivaives marke. This is because invesors will reverse heir posiions by buying or selling he spo goods, leading o more order imbalances, especially when here are inconsisencies beween he selemen and spo prices. In such 1 Assisan Professor, Deparmen of Finance, MingDao Universiy, Taiwan, 369 Wen-Huan Rd., Peeow, ChangHua, 52345, Taiwan, R.O.C.. 2 Deparmen of Markeing and Disribuion Managemen, WuFeng Universiy, Taiwan. Aricle Info: Received : March 12, Revised : April 28, Published online : July 1, 2015

2 54 Tsung-Yu Hsieh and Huai-I Lee cases, he conracs of physical delivery will be expeced o have srong expiraion-day effecs. Sucliffe (1997) indicaes ha he underlying asses will have a direc influence on he variaions in he margins, hedging sraegies, and he pricing of opions (fuures), and so he sudy of such asses is very imporan (Anderson, 1985; Milonas, 1986; Gallaway & Kolb, 1996; Chen, Duan & Hung, 1999; Han, Kling & Sell, 1999). In addiion, he opening price of he sock he day afer he final selemen day is used as he selemen price of fuures. Therefore, on boh he expiraion dae and selemen dae, he sock price will be expeced o be affeced by he relaed fuures posiions. Alhough many works have examined he expiraion-day effec, mos of hem focus on he developed markes, such as he US, bu less focus on emerging markes ha have low liquidiy and a greaer abiliy o engage in arbirage. To address his gap in he lieraure, his work examines wheher he expiraion-day effec exiss in he Taiwanese Sock Marke using he firms lised on he Taiwan Sock Exchange Corporaion (TSEC) for he 16-year period covering 1998/9/1 o 2004/3/31. More specifically, his aricle discusses he following issues. Firs, i examines wheher he rading volume, price and volailiy change significanly as he expiraion day of Taiwanese sock index fuures and opions approaches. Nex, i examines wheher he Samuelson effec or oher specific rading paerns exis on he expiraion day. Finally, his sudy invesigaes wheher here are reversals wih regard o sock price, rading volume and volailiy afer he expiraion of opions and fuures in he Taiwanese marke. The empirical resuls show ha he sock reurn volailiy does no increase seadily, bu seadily only increases in he wo or hree days before he expiraion of fuures. Furher, he volailiy decreases bu he sock reurns increase afer he opening of he opions marke. Similarly, while he rading volume significanly increases afer he opening of he opions marke, he volailiy of he rading volume decreases. Finally, price reversal does exis in boh he sock and fuures markes, bu no reversals are found wih regard o he sock rading volume. The remainder of his paper proceeds as follows. Secion 2 will discuss he daa and measuremen of he variables. Nex, Secion 3 discusses he empirical findings. Finally, Secion 4 gives he conclusions of his work. 2 Daa and Measuremen of he Variables 2.1 Daa This work uses he following variables, including sock reurns, rading volume, he volailiy of sock reurns and he volailiy of rading volume, o examine wheher he expiraion-day effec exiss in he TSEC. The sudy period is from 1998/9/1 o 2004/3/31, a oal of 6 years. The daa are obained from he TEJ (Taiwan Economics Journal) Daabase.

3 The Expiraion-Day Effec of Derivaives Trading from he Taiwanese Sock Marke Variable Measures Price reversal The rading volume or sock price may be abnormally high or low when open ineres is closed ou before he expiraion dae. Generally, if no new rading informaion appears, he sock price should rever o he fair price. If no, his resul should be regarded as he arrival of new rading informaion, raher han being due o arbirage or manipulaion by invesors. This work follows previous sudies (Soll & Whaley, 1991; Hancock, 1993), and uses he binomial disribuion o examine wheher price reversal exiss near he expiraion days. If he has he opposie sign o, hen his means ha a price reversal has occurred. R i, R i, 1 R ln( C / O ) (1) (1) i, i, i, R ln( O / C ); (2) (2) i, 1 i, i, 1 where R i, is he sock reurn on he expiraion day in sock i; on he day afer he expiraion day; C i, denoes he opening price a day in sock i The reversal in rading volume R i, 1 is he sock reurn denoes he closing price a day in sock i; A change in rading volume can be seen as a change in rading informaion, and regarded as he arrival of new informaion. If he order imbalance a he expiraion day is due o arbirage beween invesors, he sock price will rever o he fair price he nex day if no new informaion arrives. This work uses he difference beween rading volumes o examine wheher here is any reversal in rading volume, which is as follows: D ; (3) i, volume i, volume i, 1 (3) Where Volume i, is he rading volume on he expiraion day in sock i; Volumei, 1 is he rading volume on he day afer he expiraion day. O i, 3 Empirical Analysis 3.1 Descripive Saisics The descripive saisics are shown in Table 1. Firs, he sock reurns are abou wo imes greaer han he fuures reurns, alhough here is no significan difference wih regard o he risk. Nex, before using radiional linear regression analysis, he assumpions need furher o be examined. Based on he resuls of skewness and kurosis, he disribuion is highly skewed o righ, wih a high degree of kurosis. We also use he ADF es o examine wheher he sock reurns, fuures reurns or opions reurns are saionary, wih he resuls being posiive in all cases. Furhermore, he resuls show ha he issue of muli-collineariy among hese variables can be ignored, because all heir Variance Inflaion Facor (VIF) values are less han 2.

4 56 Tsung-Yu Hsieh and Huai-I Lee The ARCH effec is also examined using he LM es, and he empirical resuls show ha i has a significan effec in his conex. Therefore, he AR(m)-GARCH(1,1) or AR(m)- EGARCH(1,1) (m 6) are used o esimae he regression analysis. Furher, he J-B es indicaes ha assumpion of normaliy is rejeced for he wo series, and he QMLE (Quasi Maximum Likelihood Esimae) will be used in he laer analysis o increase he efficiency of he coefficien esimaions. Furhermore, he resuls of he Ljung-Box es indicae ha he residual does no exhibi serial correlaions. Finally, similar resuls wih regard o he ARCH effec and he violaion of he normaliy assumpions, are also obained for he rading volume of sock marke. Therefore, in he laer analysis, EGARCH (1, 1) will be used o capure he heerogeneiy of reurns. Table 1: Descripive saisics Sock reurns Fuures reurns ln (Trading volume) Reurn 6.09x x Sd. Dev Skewness Kurosis J-B *** *** ** Q(15) *** LM(5) *** *** *** Uni Roo Tes *** *** *** Noe: *, ** and *** indicae saisical significance a he 10%, 5% and 1% levels, respecively. 3.2 Expiraion-day Effec: Reurn and Volailiy Because volailiy has asymmeric effecs in he US, French and Japanese sock markes, his work uses he EGARCH(1,1) model o esimae he regression equaion. This model is defined as follows: 5 R R D Opion u Week i, 0 1 i, 1 1 i 2 i, i i, i 1 (4) ln D Opion ln ; (4) 2 i, 1 i, 1 2 i, 0 1 i i, 1 i, 1 i, 1 where Week i,, i = 1 if Monday, 2 if Tuesday, 3 if Wednesday, 4 if Thursday, 5 if Friday, and 0 oherwise. R i, ln(c i, / C i, 1) indicaes he closing price a day in sock i; u ~ Normal(0, ). i, 2 Invesors will close ou heir posiions before he opions or fuures expire if open ineres exiss due o arbirage in he marke. The order imbalance will hus increase, leading he sock price o move away from he equilibrium, furher increasing he volailiy of sock reurns. In Table 2, he volailiy of sock reurns significanly decreases afer opions rading sars, while he reurns significanly increase. The opening of opions rading provides a hedging ool o he sock marke. However, volailiy does no increase seadily as he opions expire, apar from in he las wo or hree days, in which i rises.

5 The Expiraion-Day Effec of Derivaives Trading from he Taiwanese Sock Marke 57 Table 2: Expiraion-day effec: reurns and volailiy: EGARCH(1,1) Coefficien Model 1 Model 2 Model 3 Model 4 Model 5 Panel A: Reurns * *** *** *** *** *** Panel B: Condiional volailiy * * *** *** ** *** *** R Noe: *, ** and *** indicae saisical significance a he 10%, 5% and 1% levels, respecively. The sandard error is included in parenheses. Model 1: he ime o mauriy day includes only one day (he expiraion day); Model 2: he ime o mauriy day includes wo days (he day before he expiraion day and he expiraion day); Model 3: he ime o mauriy day includes hree days (he wo days before he expiraion day and he expiraion day); Model 4: he ime o mauriy day includes four days (he hree days before he expiraion day and he expiraion day); Model 5: he ime o mauriy day includes five days (he five days before he mauriy day and he expiraion day). 3.3 Expiraion-day Effec: Trading Volume and Volailiy of Trading Volume If he open ineres is no closed ou near he expiraion day, invesors will be eager o reverse heir posiions and he rading volume will be abnormally high (Bhaacharya, 1987; Soll & Whaley, 1991; Karolyi, 1996). Because he rading volume is non-saionary, his work uses is logarihm as a variable and he five lags of rading volume as he explanaory variables. The regression equaions are defined as follows: log( Volume ) log( Volume ) D Opion D T u i, 0 i i, 1 i i i i, i 1 i 1 Opion D i, i 1 i, 1 1 i, 1 ; (5) where Volume i, is he rading volume a day in sock i; T denoes ime rend; u ~ Normal(0, ). i, 2 3 Due o he absence of any week effec, i will be ignored in his work.

6 58 Tsung-Yu Hsieh and Huai-I Lee Table 3: Expiraion-day effec: rading volume and volailiy of rading volume: GARCH(1,1) Variable Model 1 Model 2 Model 3 Model 4 Model 5 Panel A: Trading Volume ** ** ** ** ** Panel B: Condiional Volailiy * * * R Noe: *, ** and *** indicae saisical significance a he 10%, 5% and 1% levels, respecively. The sandard error is included in he parenheses. Model 1: he ime o mauriy day includes only one day (he mauriy day); Model 2: he ime o mauriy day includes wo days (he day before he mauriy day and he mauriy day); Model 3: he ime o mauriy day includes hree days (he wo days before he mauriy day and he mauriy day); Model 4: he ime o mauriy day includes four days (he hree days before he mauriy day and he mauriy day); Model 5: he ime o mauriy day includes five days (he five days before he mauriy day and he mauriy day) The empirical resuls in Table 3 show ha rading volume does no significanly increase using he -es or median es. Afer he opening of opions rading, he rading volumes of he sock marke significanly increase and he changes in hese are significanly smaller han before he opening of such rading. 3.4 Reversal Effec: Price and Trading Volume The rading volume or sock price will be abnormally high or low when he open ineres is closed ou due o expiraion day arriving. Generally, if no new informaion arrives, he sock price should rever o he fair price, and if no his should be regarded as he arrival of new rading informaion, raher han due o arbirage or manipulaion by invesors. Klemkosky (1978), Soll and Whaley (1991) and Pope and Yadav (1992) indicae ha price pressure exiss when a derivaive expires, and ha he sock price will rever o he fair price afer his. The empirical resuls are shown in Table 4. I can be seen ha price reversal exiss in he fuures marke, in boh he full sudy periods and he various sub-periods. In addiion, he same is also rue for he sock marke. Therefore, he abnormal sock prices found during he whole sudy period may be due o arbirage or manipulaions by invesors. However, his reversal effec is no found for he rading volume.

7 The Expiraion-Day Effec of Derivaives Trading from he Taiwanese Sock Marke 59 Table 4: Reversal effec: price and rading volume Periods Sock Reurns Fuures Reurns Trading Volume n 1998/9~1998/12 1 (0.3125) 0 (0.0625) 3 (0.9375) /1~1999/12 6 (0.6127) 3 (0.0730) 8 (0.9270) /1~2000/12 5 (0.3872) 5 (0.3872) 6 (0.6127) /1~2001/12 2 (0.0193) 2 (0.0193) 5 (0.3872) /1~2002/12 4 (0.1938) 2 (0.0193) 6 (0.6127) /1~2003/12 2 (0.0192) 0 (0.0002) 9 (0.9807) /1~2004/03 2 (0.8750) 0 (0.0002) 2 (0.8750) /9~2004/03 22 (0.003) 12 (0.0000) 39 (0.9289) 67 Noe: n is he number of reversals in reurns or rading volume. The number in parenheses is he p-value, which is defined as follows: binomial (numbers, numbers of reversal, 0.5). 4 Conclusions Based on he findings of previous sudies, he sock reurns, volailiy and rading volume will be affeced by he expiraions of opions or fuures. This paper examines wheher he expiraion effec exiss in he Taiwanese sock marke. The empirical resuls show ha sock reurn volailiy does no increase seadily in he TSEC, bu only increases in he wo or hree days before he expiraion of fuures. In addiion, he volailiy decreases bu sock reurns increase afer he opening of he opions marke. Furhermore, he rading volume increases significanly before he expiraion day, bu is volailiy decreases. Finally, price reversal exiss in boh he Taiwanese sock marke and fuures marke, bu no reversal effec wih regard o rading volume exiss. ACKNOWLEDGEMENTS: The auhors graefully acknowledge funding from he Naional Science Council of Taiwan (MOST H ). References [1] Anderson, R. W., 1985, Some Deerminans of he Volailiy of Fuures Prices, Journal of fuures Markes, 5, [2] Bhaacharya, A. K., 1987, Opion Expiraions and Treasury Bond Fuures Prices, Journal of Fuures Markes, 7, [3] Bollen, N. and R. E. Whaley, 1999, Do Expiraions of Hang Seng Index Derivaives affec Sock Marke Volailiy? Pacific-Basin Finance Journal, 7, [4] Chen, C. and J. Williams, 1994, Triple-Wiching Hour, he Change in Expiraion Timming, and Sock Marke Reacion, The Journal of Fuures Markes, 14, [5] Chen, Y. J., J. C. Duan and M. W. Hung, 1999, Volailiy and Mauriy Effec in he Nikkei Index Fuures, The Journal of Fuures Markes, 19, [6] Corredor, P., P. Lechon and R. Sanhamaria, 2001, Opion-Expiraion Effec in Small Markes: he Spanish Sock Exchange, Journal of Fuures Markes, [7] Edwards, F. R., 1988a, Does Fuures Trading Increase Sock Marke Volailiy?, Financial Analyss Journal, 44,

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