Comparative Economic Studies

, Volume 51, Issue 1, pp 118–137 | Cite as

Impact of Derivatives Trading on Emerging Stock Markets: Some Evidence from India

  • Sumon Kumar Bhaumik
  • Suchismita Bose
Regular Article


It is generally accepted that the introduction of financial derivatives that facilitate hedging is an important step in the development of stock markets. However, financial derivatives can potentially increase volatility in the underlying cash market, which might be detrimental to the development of the stock market itself. Using data from India, we examine one possible route through which derivatives trading can increase cash market volatility: expiration day effect. Our results indicate that expiration of equity derivatives contracts does not have any effect on the intra-day volatility of the market index, and it reduces the volatility of inter-day returns to the index.


stock market development derivatives contracts expiration day effect volatility India 

JEL Classifications

G13 O16 


  1. Alizadeh, S, Brandt, MW and Diebold, FX . 2002: Range-based estimator of stochastic volatility models. Journal of Finance 57 (3): 1047–1091.CrossRefGoogle Scholar
  2. Alkeback, P and Hagelin, N . 2004: Expiration day effects of index futures and options: Evidence from a market with a long settlement period. Applied Financial Economics 14 (6): 385–396.CrossRefGoogle Scholar
  3. Andersen, TG and Bollerslev, T . 1998: Answering the sceptics: Yes, standard volatility models do provide accurate forecasts. International Economic Review 39 (4): 885–905.CrossRefGoogle Scholar
  4. Bencivenga, VR, Smith, BD and Starr, RM . 1995: Transactions costs, technological choice, and endogenous growth. Journal of Economic Theory 67 (1): 53–177.CrossRefGoogle Scholar
  5. Bencivenga, VR, Smith, BD and Starr, RM . 1996: Equity markets, transactions costs, and capital accumulation: An illustration. The World Bank Economic Review 10 (2): 241–265.CrossRefGoogle Scholar
  6. Bhide, A . 1993: The hidden costs of stock market liquidity. Journal of Financial Economics 34: 31–51.CrossRefGoogle Scholar
  7. Bollen, NPB and Whaley, RE . 1999: Do expirations of Hang Seng index derivatives affect stock market volatility? Pacific Basin Finance Journal 7: 453–470.CrossRefGoogle Scholar
  8. Bollerslev, T . 1986: Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics 31: 307–328.CrossRefGoogle Scholar
  9. Bollerslev, T . 1987: A conditionally heteroskedastic time series model for speculative prices and rates of return. Review of Economics and Statistics 69 (3): 542–547.CrossRefGoogle Scholar
  10. Chamberlin, TW, Cheung, CS and Kwan, CCY . 1989: Expiration day effects of index futures and options: Some Canadian evidence. Financial Analysts Journal 45 (5): 67–71.CrossRefGoogle Scholar
  11. Cho, YJ . 1986: Inefficiencies from financial liberalisation in the absence of well-functioning equity markets. Journal of Money, Credit and Banking 18 (2): 191–200.CrossRefGoogle Scholar
  12. Chow, Y-F, Yung, HHM and Zhang, H . 2003: Expiration day effects: The case of Hong Kong. The Journal of Futures Markets 23 (1): 67–86.CrossRefGoogle Scholar
  13. de Gooijer, JG, Abraham, B, Gould, A and Robinson, L . 1985: Methods for determining the order of an autoregressive-moving average process: A survey. International Statistical Review 53 (3): 301–329.CrossRefGoogle Scholar
  14. Edwards, FR and Ma, CW . 1992: Futures and Options. McGraw-Hill: New York.Google Scholar
  15. Engle, RF . (1982): Autoregressive conditional heteroskedasticity with estimates of the variance of UK inflation. Econometrica 50: 987–1008.CrossRefGoogle Scholar
  16. Garman, MB and Klass, MJ . 1980: On the estimation of security price volatilities from historical data. Journal of Business 53: 67–78.CrossRefGoogle Scholar
  17. Glosten, LR, Jagannathan, R and Runkle, DE . 1992: On the relation between the expected value and the volatility of normal excess returns on stocks. Journal of Finance 46: 1179–1801.Google Scholar
  18. Granger, CWJ, King, ML and White, H . 1995: Comments on testing economic theories and the use of model selection criteria. Journal of Econometrics 67 (1): 173–187.CrossRefGoogle Scholar
  19. Levine, R . 1991: Stock markets, growth and tax policy. Journal of Finance 46 (4): 1445–1465.CrossRefGoogle Scholar
  20. Levine, R and Zevros, S . 1998: Stock markets, banks and economic growth. American Economic Review 88 (3): 537–558.Google Scholar
  21. Levine, R and Zevros, S. . (2002): Stock market development and long-run growth. World Bank Economic Review 10 (2): 323–339.CrossRefGoogle Scholar
  22. Mayer, C . 1988: New issues in corporate finance. European Economic Review 32: 1167–1188.CrossRefGoogle Scholar
  23. Megginson, WL and Weiss, KA . 1991: Venture capitalist certification in initial public offerings. Journal of Finance, Papers and Proceedings of the Fiftieth Annual Meeting 46 (3): 879–903.Google Scholar
  24. Morck, R, Shleifer, A and Vishny, RW . 1990a: Do managerial objectives drive bad acquisitions? Journal of Finance 45 (1): 31–48.CrossRefGoogle Scholar
  25. Morck, R, Shleifer, A and Vishny, RW . 1990b: The stock market and investment: Is the market a sideshow? Brookings Papers on Economic Activity 2: 157–215.CrossRefGoogle Scholar
  26. Pagano, M . 1993: The floatation of companies in the stock market. European Economic Review 37: 1101–1125.CrossRefGoogle Scholar
  27. Parkinson, M . 1980: The extreme value method for estimating the variance of the rate of return. Journal of Business 53: 61–65.CrossRefGoogle Scholar
  28. Pope, PF and Yadav, PK . 1992: The impact of option expiration on underlying stocks: The UK evidence. Journal of Business Finance and Accounting 19: 329–344.CrossRefGoogle Scholar
  29. Rogers, LCG and Satchell, SE . 1991: Estimating variance from high, low, and closing prices. Annals of Applied Probability 1 (4): 504–512.CrossRefGoogle Scholar
  30. Rogers, LCG, Satchell, SE and Yoon, Y . 1994: Estimating the volatility of stock prices: A comparison of the methods that use high and low prices. Applied Financial Economics 4: 241–247.CrossRefGoogle Scholar
  31. Shleifer, A and Summers, LH . 1988: Breach of trust in hostile takeovers. In: Auerbach, A (ed) Corporate Takeovers: Causes and Consequences. University of Chicago Press: Chicago.Google Scholar
  32. Shleifer, A and Vishny, RW . 1986: Large shareholders and corporate control. Journal of Political Economy 94: 461–488.CrossRefGoogle Scholar
  33. Singh, A . 1997: Financial liberalisation, stock markets and economic development. Economic Journal 107: 771–782.CrossRefGoogle Scholar
  34. Stoll, HR and Whaley, RE . 1987: Program trading and expiration day effects. Financial Analysts Journal 43: 16–28.CrossRefGoogle Scholar
  35. Stoll, HR and Whaley, RE . 1991: Expiration day effects: What has changed? Financial Analysts Journal 47: 58–72.CrossRefGoogle Scholar
  36. Stoll, HR and Whaley, RE . 1997: Expiration day effects of the all ordinaries share price index futures: Empirical evidence and alternative settlement procedures. Australian Journal of Management 22: 139–174.CrossRefGoogle Scholar
  37. Vipul . 2005: Futures and options expiration-day effects: The Indian evidence. The Journal of Futures Markets 25 (11): 1045–1065.CrossRefGoogle Scholar

Copyright information

© Palgrave Macmillan 2009

Authors and Affiliations

  • Sumon Kumar Bhaumik
    • 1
  • Suchismita Bose
    • 2
  1. 1.Economics and Finance, School of Social Sciences, Brunel University, Marie JahodaUxbridgeUK
  2. 2.ICRA Limited, Associate of Moody's Investors Service in India

Personalised recommendations