Triple Witching – paper review

This article presents a brief review and listing of academic papers on triple witching.

Summary

The expiry of stock index futures, stock index options and stock options happens in a programmed calendar throughout the year. On four days a year these three different types of derivative all expire on the same day – the third Friday of the months of March, June, September and December. This day is sometimes referred to as triple witching day, and is associated with increased trading volumes and volatility.

Review

Following the 1987 stock market crash there was great interest in program trading (a term not so commonly used today) and its impact on volatility. This led to a minor flurry of academic interest in associated topics such as triple witching.

The earliest mention of triple witching we can find in an academic paper is Feinstein and Goetzmann (1988), which looked at the increased volatility caused by the coincident expirations. A couple of years later Stoll and Whaley (1990) found greatly increased trading volume in the last half-hour on expiration days. However, they did not find any significant difference between stocks subject to program trading and other stocks.

In June 1987 the settlement of S&P 500 and NYSE index futures was changed (to settle at the open and not the close) in an attempt to decrease the impact of expiration. The effect of this was the topic of the most cited paper on triple witching, Stoll and Whaley (1991). Not surprisingly, perhaps, they found that volume and volatility of the S&P 500 and NYSE contracts was lower at the close and higher at the open for the period after June 1987 compared to the period before. The impact on price at the open was slightly smaller post-June 1987 than it had been at the close pre-June 1987.

Academic interest in triple witching then waned, albeit articles continued to appear on the more general topic of option expiration.

A rare, recent article (Stratmann and Welborn, 2012)  found a positive relationship between ETF settlement failures and ETF short sale volume, the cost to borrow ETFs, and triple witching days.

Academic papers

[Papers listed in reverse date order; ♠ indicates major paper.]

INDEX (of papers listed below)

  1. Exchange-Traded Funds, Fails-to-Deliver, and Market Volatility [2012]
  2. Open volume and time to open on option-expiration days [2008]
  3. The Empirical Distribution of Intradaily Stock Return Volatility [1994]
  4. Triple-witching hour, the change in expiration timing, and stock market reaction [1994]
  5. Whatever Happened to the Triple Witching Hour? [1993]
  6. Expiration-Day Effects: What Has Changed? [1991]
  7. An alternative methodology for measuring expiration day price effects at Friday’s close: The expected price reversal—A note [1991]
  8. Program Trading and Individual Stock Returns: Ingredients of the Triple-Witching Brew [1990]
  9. The Effect of the “Triple Witching Hour” on Stock Market Volatility [1988]

PAPERS


Exchange-Traded Funds, Fails-to-Deliver, and Market Volatility
Authors [Year]: Thomas Stratmann and John W. Welborn [2012]
Journal [Citations]: GMU Working Paper in Economics, 12(59), pp [2]
Abstract: Exchange-traded fund (ETF) trading volumes have increased over the last decade and so have ETF settlement failures at the clearing corporation. We test the hypothesis that ETF short selling, high stock borrow prices, and options contract expiration contribute to ETF fails-to-deliver (FTDs). We document a positive relationship between net daily ETF settlement failures and daily ETF short sale volume, the cost to borrow ETFs, and quarterly index options expiration dates (so-called “triple witching” dates). These findings are not consistent with the claim that fails are random. Rather, these findings are consistent with the hypothesis that market makers fail to deliver to avoid paying borrowing costs associated with their short sales. Further support for this hypothesis comes from a positive correlation between ETF FTDs and ETF put option open interest. Finally, we show that ETF settlement failures are important for the functioning of markets because they impact market index volatility. We find that positive changes in aggregate ETF FTDs Granger-cause higher market index volatility. We attribute this causality to buying and borrowing of common stock shares by market makers in order to close-out ETF FTD positions by trade date plus six days (“T 6”). We conclude that ETF FTDs are not inconsequential for market stability.
Ref: AA654


Open volume and time to open on option-expiration days
Authors [Year]: W. Paul Spurlin and Bonnie F. Van Ness and Robert A. Van Ness [2008]
Journal [Citations]: International Review of Economics & Finance, 17(2), pp245–257 [3]
Abstract: We examine the volume and time to open for stocks on option-expiration Fridays. We show that previous findings of abnormal daily volume on option-expiration Fridays can be largely explained by the large volume of trading in the batch opening for stocks that trade on the NYSE and not by an increase in volume over the remainder of the day. We also find that there is an increase in the time to open for stocks on triple-witching Fridays and a decrease in the time to open for stocks on non-quarterly, option-expiration Fridays.
Ref: AA661


The Empirical Distribution of Intradaily Stock Return Volatility
Authors [Year]: Rong Chen and David Ellis and Robert Wood [1994]
Journal [Citations]: , , pp [2]
Abstract: We examine the distribution of intradaily volatility of common stock returns of a portfolio (updated annually) of the 250 most actively traded stocks on the NYSE for the sample period 1983-92. Our results suggest that there was a shift in the distribution of return volatility around 1985-86: both the level and dispersion of volatility increased significantly after 1985. We find that the well known ‘U’-shaped pattern of both intradaily volatility and volume shifted almost uniformly upwards following 1985; moreover, the U-shape is present not merely in the level of volatility and volume, but in the dispersion also. We examine intradaily volatility and volume on triple witching days, and find that volume is significantly higher at the open but not the close, while the opposite is true for volatility. Finally, we model the joint relationship of volatility and volume and find it be complex and non-linear.
Ref: AA655


Triple-witching hour, the change in expiration timing, and stock market reaction
Authors [Year]: Chao Chen and James Williams [1994]
Journal [Citations]: Journal of Futures Markets, 14(3), pp275–292 [28]
Abstract:
Ref: AA658


Whatever Happened to the Triple Witching Hour?
Authors [Year]: G. D. Hancock [1993]
Journal [Citations]: Financial Analysts Journal, 49(3), pp66-72 [34]
Abstract: On June 19 1987, the Chicago Mercantile Exchange (CME), the New York Futures Exchange (NYFE) and the New York Stock Exchange (NYSE) changed the expiration day of some index futures and select index options in an effort to reduce the impact of the tripe witching hour. Since June 1987, market activity on derivative contract expiration days has not been abnormal when compared with trading on non-expiration days. However, as there has been no evidence of significant price distortions prior to the change it is difficult to conclude that the CME changes caused a decrease in price distortions. Even so, the volatility of returns remains high during expiration periods, most likely because of the unwinding of intermarket arbitrage positions.
Ref: AA657


Expiration-Day Effects: What Has Changed?
Authors [Year]: Hans R. Stoll and Robert E. Whaley [1991]
Journal [Citations]: Financial Analysts Journal, 47(1), pp58-72 [107]
Abstract: In June 1987, the Chicago Mercantile Exchange, the New York Stock Exchange and the New York Futures Exchange changed the settlement of their S&P 500 and NYSE index futures and option contracts from the close of trading to the open in an attempt to mitigate concern about occasional abnormal stock price movements at “triple witching hours.” This study analyzes volatility and volume effects on quarterly and monthly (non-quarterly) expiration days in the two one one-half year period before and the two and one-half year period after June 1987. At quarterly expirations, both trading activity and price volatility in S&P 500 and NYSE contracts were smaller at the close in the post June 1987 period than in the pre-June 1987 period. At the open, however, trading volume and price reversals increased significantly between the pre-June 1987 period and the post-June 1987 period. The price effect observed at the open on quarterly expirations since June 1987 has been somewhat smaller than the price effect observed at the close in the period before June 1987. This may reflect the new settlement procedures or the fact that expiration-day trading is now split between open and close. At monthly (non-quartery) expirations, index stocks behave like non—index stocks on expiration days and like index stocks on non-expiration days. Trading activity and price reversals do not appear to have changed, in a statistical sense, since June 1987, nor are they large in an absolute sense.
Ref: AA653


An alternative methodology for measuring expiration day price effects at Friday’s close: The expected price reversal—A note
Authors [Year]: Anthony F. Herbst and Edwin D. Maberly [1991]
Journal [Citations]: Journal of Futures Markets, 11(6), pp751–754 [6]
Abstract:
Ref: AA660


Program Trading and Individual Stock Returns: Ingredients of the Triple-Witching Brew
Authors [Year]: Hans R Stoll and Robert E Whaley [1990]
Journal [Citations]: The Journal of Business, 63(1), ppS165-S192 [64]
Abstract: The price and trading volume behaviors of individual stocks in the Standard and Poor’s 500 Stock Index (S&P 500) are analyzed on stock index futures expiration days, a time when the market is known to be subject to heavy program trading. The price behavior of stocks that are subject to program trading is shown to be very similar to stocks that are not. Stocks that decline in price in the last half hour Friday tend to increase in price at the opening on Monday and vice versa. The Monday reversal as a fraction of the Friday price change is only slightly higher for the S&P 500 stocks than for non-S& P 500 stocks, indicating that the price reversals reflect, for the most part, the bid-ask spreads of the individual stocks. Trading volume in the last half hour of expiration days is shown to be substantially higher than normal.
Ref: AA656


The Effect of the “Triple Witching Hour” on Stock Market Volatility
Authors [Year]: Steven P. Feinstein and William N. Goetzmann [1988]
Journal [Citations]: Economic Review, 1988 (Sep), pp2-18 [17]
Abstract: This paper investigates the “Triple Witching Hour” – the four times during the year when stock options, stock index options, and stock index futures simultaneously expire-to determine whether these periods are characterized by excessive volatility in the stock market.
Ref: AA659


See also

 

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