REEXAMINING THE EXPIRATION DAY EFFECTS OF STOCK INDEX DERIVATIVES: EVIDENCE FROM TAIWAN

This study examines whether the expiration of derivative contracts affects the underlying spot assets in Taiwan. The expiration effect refers to abnormal return, price reversal, abnormal return volatility, and abnormal volume in underlying spot stock markets as derivatives contracts expire. Due to the unique settlement procedure in the Taiwan Futures Exchange, this study also examines if the expiration effects occur on the settlement day which is the next business day after the expiration day. Our empirical results indicate that expiration day effects do exist in Taiwan. However, the more pronounced expiration day effect occurs on the settlement day due to the unique settlement mechanism in Taiwan. This paper also investigates the expiration effect of MSCI Taiwan Stock Index Futures traded on the Singapore Exchange, which also uses Taiwan’s stock market as the underlying asset. The results indicate that as SGXTW expires, there are also expiration effects such as abnormal return, abnormal return volatility, and abnormal volume in the Taiwan spot market.