This paper examines the impact of expiration of derivatives on spot volatility of Indian capital market. The review of the literature shows that the previous Indian studies have covered a period of only 4–6 years after the introduction of derivative trading in India in 2000. They are unanimous about volume effect but not about return and volatility effect. This paper uses regression techniques and one symmetric and three asymmetric GARCH models, namely, TGARCH, EGARCH, and PGARCH, to evaluate the impact. It uses daily data on popular index S&P CNX Nifty of National Stock Exchange of India, during a period of more than a decade from June 12, 2000 to January 10, 2012. Findings of the study show that spot returns, volume, and volatility are high on expiration day and they build up further on the day after expiry which shows that the Indian market is weakly efficient. The expiration effect is mainly due to concentration of volumes in near-month contracts and absence of physical settlement. 1. Introduction Derivatives were introduced on two major exchanges of India, namely, National Stock exchange (NSE) and Bombay Stock Exchange (BSE) in 2000. During this time Indian government took many decisions to bring major structural changes in the market. NSE acted as a catalytic agent in reforming the micro structure, market practices, and trading volumes of the Indian securities market. It is dominating the derivative segment with more than 99% of the market share in 2011-12. The exchanges manage their respective cash and derivative segments which have been well integrated with uniform trade practices and trade timings. Screen-based trading allows the arbitrageurs to use computer programs for identifying arbitrage conditions and ensures quick execution of orders. Index and stock-based derivatives are traded in monthly series, the expiration date for each series being the last Thursday of the expiry month, that is, Indian market experiences the quadruple witching day. At any point of time, three monthly series are traded side by side and are cash settled on the expiration or an early exercise. As derivative contracts call for cash settlement on the expiration day, the trading and manipulation activities of speculators and unwinding of cash positions by arbitrageurs in the cash markets sometimes cause distortion to price, volume, and volatility near the expiration day. If many arbitrageurs liquidate at the same time and in the same direction, price and volatility effects are possible. Speculators can also make deliberate attempts to manipulate prices. The severity of
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