Expiration Effect On Indian Stock

Market

Group 8
Priyadarshi PGP/13/100
Dheeraj Tiwari PGP/13/203
Gaurav darda PGP/13/205
Arindam Mandal PGP/13/257
Yashwant Mulwani PGP/13/307
Kingshuk Chateerjee PGP/13/310
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 stock
exchanges in India
It does not include the ‘Over The Counter Exchange
of India Limited’ (OTCEI) and the ‘National Stock
Exchange of India Limited’ (NSEIL)
National Stock Exchange
The National Stock Exchange was incorporated in
1992
Came into being in order to lift the Indian stock
market trading system on par with the international
standards, on the basis of the recommendations of
high powered ‘Pherwani Committee’
Trading was opened on this stock market in mid
1994
It was recently accorded recognition as a stock
exchange by Dept. of Company Affairs
The National Stock Exchange (NSE) was ranked
first in term of trading volumes of individual stock
futures in 2007
 Derivative Market
Financial markets in last decade have been characterized by the
development of derivative securities such as options, swaps and
futures
This development has both positive and negative effects


Positive Effects Negative Effects

New risk sharing Offer new opportunities of


opportunities price manipulation

More complete financial

markets
Arbitrage between the cash and futures markets requires investors
to unwind positions in the latter market on the day of expiration of
contracts
The consequent increase in the number of large buy and sell orders,
and the temporary mismatch between these orders, can significant
affect prices and volatility in the underlying cash market

Growth Of Indian Stock Market
Indian stock markets have seen tremendous growth in
last few years in both equity and derivative segment
This growth can be attributed to the confidence
developed among investors for the stock market
Such confidence among investors has arises from well
developed securities market which is backbone of the
financial system of a country
In the derivative exchange-traded market, the biggest
success story has been derivatives on equity products
Index option and Index futures are leading the pack
followed by Stock futures and stock options in term of
volumes
Growth Of Indian Stock Market
Growth Of Indian Stock Market
Derivatives contracts at National Stock
Exchange
 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 the
underlying shares
We have analyzed the stock data for a twofold
effect:
• Effect of expiration on stock prices
• Effect of expiration on volume

Data For Analysis

We selected five stocks, of which three are having a

high market capitalization while other two are having
medium to low market characterization
Name of the Security Turnover Market Capitalisation

(Rs. crore) as on 31.3.2010

(Rs. crore)

RELIANCE INDUSTRIES LTD 175590.43 353056.22

OIL AND NATURAL GAS CORP. 38,641.29 234,997.92

TATA CONSULTANCY SERV LTD. 37,384.19 152,790.46

UNITECH LTD 114,711.64 17,581.58

SUZLON ENERGY LIMITED 87,650.60 11,185.12

 Pricing Model
The model that we have used to judge whether
expiration has any effect on stock prices is:
 ln (yt) = α + β1 ln (yt-1 ) + β2 ln (yt-2 ) + ut + β3 (D)

where


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

stock prices. This is the dependent variable in
our model.
• α – 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
• β1 , β2, β3 - are the coefficients
•
 Trading Volume Model
The trading volume model is similar to the pricing
model that we have adopted. The model is given
by the following equation
 ln (yt) = α + β1 ln (yt-1 ) + β2 ln (yt-2 ) + ut + β3 (D)


where


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

This is the dependent variable in our model.
• α – 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
• β1 , β2, β3 - are the coefficients
•
•
Methodology
We have taken the stock prices of the five
companies from Aug’09 to July’10. This has given
us a sample of 248 for each of the companies
The expiration effect has been studied on daily
stock price
We have used Gretl, a software application for
statistical analysis, to run regression tests
We have analyzed the results to test the statistical
significance of our findings
For this we have taken the p-value as the guiding
parameter and also have incorporated the R-
Square value in our findings
 The Hypothesis
Generally it is observed that stock prices fall on
expiry date and trading volume jumps up on the
expiry date. Thus, in line with the general
observations, our Hypothesis is as follows:


 H0: (β1) = 0 (for both the models)


Effect on Price
Stock Effect on Price (β) Interpretation

Reliance β = -0.06 This shows that the stock price declines by 6% on the expiry
p-value = 3.29e-05 date and a low p-value makes the observation statistically
significant

TCS β = -0.00483390 The stock price decreases by 0.48%, however this has a high
p-value = 0.3520 p-value thus making the observation statistically insignificant

UNITECH β = 0.00167060 The stock price increases by 0.16%, however this has a very
p-value = 0.8509 high p-value thus making the observation statistically
insignificant.

SUZLON β = -0.00881281 The stock price decreases by 0.88%, however this has a high
p-value – 0.29892 p-value thus making the observation statistically insignificant.

ONGC β = 0.00237815 The stock price increases by 0.23%, however this has a very
p-value - 0.6220 high p-value thus making the observation statistically
insignificant.
Effect On Volume
Stock Effect on Volume (β) Interpretation

Reliance β = 0.294019 The trading volume increases by 29.4%; this is

p-value = .0181 also supported by the low p-value

TCS β = 0.441178 The trading volume increases by 44.11%; this is

p-value – 0.0018 also supported by the low p-value

UNITECH β = -0.0237494 The trading volume decreases by 2.3%; however

p-value - 0.8356 this has a very high p-value thus making the
observation statistically insignificant

SUZLON β = 0.123252 The trading volume increases by 12.32%; this is

p-value - 0.03149 also supported by the low p-value

ONGC β = 0.468929 The trading volume increases by 46.89%; this is

p-value - 0.0016 also supported by the low p-value
Conclusion (Effect on Price)
From the above results we can see that on an
average the stock prices are negatively correlated
with the expiration effect
Mostly we see the dummy coefficient being negative
amongst the stocks; however there are deviations
in some cases
But in all of these cases the p-values are not low
enough to draw any conclusion.
Hence we can conclude that expiration day has a
negative effect on stock prices
Conclusion(Effect on Volume)
The trading volume results are much more
consistent and four out of the five stocks show a
clear increase in trading volume on the expiration
date.
This is supported by low p-values
Thus we can conclude that trading increases on
expiry day
THANK
YOU