Expirationâ€Day Effects of the All Ordinaries Share Price Index Futures: Empirical Evidence and Alternative Settlement Procedures

Stock index futures were the most successful financial innovation of the 1980s. In spite of their widespread use internationally, they continue to be criticised for causing ‘aberrations’ in the stock market, particularly on expiration days when futures contracts are cashâ€settled. This paper examines expirationâ€day effects of the Sydney Futures Exchange's All Ordinaries Share Price Index (SPI) futures and discusses alternative futures settlement procedures. Our investigations indicate that, while index stock trading volume is abnormally high near the close on expiration days, price movements are not different from those observed on other days. In other words, the SPI futures cash settlement at the close appears to have worked well through our sample period. This study also describes and analyses the two basic alternative cash settlement procedures—a single price settlement and an average price settlement.