CFA Institute

Whatever Happened to the Triple Witching Hour?

Author(s): G. D. Hancock
Source: Financial Analysts Journal, Vol. 49, No. 3 (May - Jun., 1993), pp. 66-72
Published by: CFA Institute
Stable URL: http://www.jstor.org/stable/4479651 .
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Whatever Happened to the Triple Witching Hour?
G. D. Hancock, Assistant
Professorof Finance,
School of Business
Administration,University
of Missouri-St.Louis
OnJune 19, 1987, the Chi-
cago MercantileExchange
(CME),theNew YorkFu-
turesExchange(NYFE)and
theNew YorkStockEx-
change (NYSE)changed the
expirationday of some in-
dexfutures and select in-
dex options in an effortto
reduce the impactof the
triplewitchinghour. Since
June 1987, marketactivity
on derivativecontractexpi-
ration days has not been
abnormal when compared
with trading on non-expi-
ration days.However,as
therehad been no evidence
of significantprice distor-
tions prior to the change, it
is difficultto conclude that
the CMEchanges caused a
decreasein price distor-
m
cn tions. Even so, the volatility
of returnsremainshigh
LU
z
:D during expirationperiods,
most likely becauseof the
unwinding of intermarket
z arbitragepositions.
D volatility usually sparked by the
0 triple witching hour."3
-J
L/)
Index arbitrage and program
z trading are popular culprits
-J whenever the market experi-
ences periods of unusual price
z
z pressure. Yet Fama argues that
LL index arbitrage,facilitatedby pro-
gramtrading,should haveexactly
66 the opposite effect: By linking
TechnicalNotes
stock and futures prices, index
arbitrage should reduce the
noise in the combined signals of
the two markets.1 Conversely,
market mechanisms that reduce
the efficiency of index arbitrage
destroy some of the economic
value of the futures market by
increasing the variance of dis-
crepancies between stock and fu-
tures prices.
Abnormal stock price movements
frequently accompany the triple
witching hour-the final hour of
trading on days when index fu-
tures, index options and regular
stock options expire simulta-
neously. In an effort to eliminate
or reduce the impact of the triple
witching hour, the Chicago Mer-
cantile Exchange (CME),the New
York Futures Exchange (NYFE)
and the New York Stock Ex-
change (NYSE)changed the expi-
ration day of the S&P and NYSE
composite index options and in-
dex futures expiring in Marchcy-
cle months.2
Prior to June 19, 1987, the S&P
and NYSE composite index op-
tions and index futures ceased
trading at the close of the third
Friday in Marchcycle months. As
Table I shows, many of the in-
dexes now cease trading at the
close of the third Thursday in
Marchcycle months and the rele-
vant contract price is the opening
price on Friday.The change was
made to "quell the stock market
This note investigates the impact
of the changes made by the CME
on the market as a whole during
the triple witching hour periods.
In order to focus on the market as
a whole, the idiosyncratic factors
associated with individual stock's
returns will be largely ignored, as
will the market-making capacity
of different specialists.
The Impact of Derivative
MarketActivity-on the Spot
Market
While there is little agreement on
whether the futures market has
had any long-run impact on the
volatilityof the cash market, there
is a general consensus that the
markets are interrelated and that
an expiration-day effect does ex-
ist. Kling argues that the expira-
tion-day phenomenon is due to
weaknesses in the specialist trad-
ing system.5 The main weakness
he sees is that regulatory advan-
tages given to specialists allow
them to drive other providers of
liquidity out of the market. This
can become a problem when
market participants unwind their
covered positions at the termina-
tion of trading. The close-out is
frequently in cash, so when clos-
ing trades on one side of the
market predominate, a substantial
order imbalance can result in the
cash market.If the specialists han-
dling the underlying stock cannot
provide sufficient liquidity, these
order imbalances lead to sharp
price movements, either up or
down.
Stoll and Whaley examine expira-
tion-dayeffects for the period July
1, 1983 through December 27,
1985.6 They use a data base that
contains hourly price observa-
tions from closing the day before
expiration to 10:30 a.m. EST on
the day after expiration. Their re-
sults show that volatility of price
changes is significantly higher on
expiration days, especially during
the last 15 minutes of trading.The
observed price effects also appear
to be associated only with the
S&P 500 futures contract expira-
tion, rather than the S&P 500 op-
tion contracts. The authors at-
TableI Futuresand Options Index Settlement Glossary
Underlying Index Exchange Trading Ends Settlement Basis *Index Arbitrage:
S&P 500 Index A tradingstrategythattakes
Futures CME Thursday Friday Opening advantageof any violationof
Options on Futures CME Thursday Friday Opening the cost-of-carryprinciple.If
Options (new) CBOE Thursday Friday Opening
Options (old)* CBOE Friday FridayClose
the spot stock index price and
S&P 100 Index the futuresprice are mis-
Options CBOE Friday Friday Close aligned,for example,an index
MajorMarketIndex arbitragecan constructa trade
Futures CBT Friday Friday Close thatearns a profitwith zero
Options AMEX Friday FridayClose investment.
NYSEComposite Index
Futures (new) NYFE Thursday Friday Opening
Futures (old)* NYFE Friday Friday Close *Noise:
Options NYSE Thursday Friday Opening A noisy process consistsof
Value Line Index variablesthatare dependent;
Futures KBOT Friday Friday Close thatis, autocorrelationcoeffi-
Options PHSE Friday FridayClose cients are not zero.
Source:"Moneyand Markets,"WallStreetjournal,June 12, 1987. *Pooled F-Test:
*Thecontractclasswithgreaterinvestorparticipation. A test of the relationshipbe-
tween the averagevolatilityof
two randomvariablesat differ-
ent points in time.
tribute the price effect to the the triple witching hour.8 They
additionalcost of liquidity,whichexamine the tradingvolume and *Pooled t-Test:
frequently increases on expira- price behaviorof all NYSEstocks A test of the differencebe-
tion days, as well as with large on all expirationdays. The evi- tween the means of two ran-
block transactions. dence indicates that expiration- dom variablestakenat differ-
dayeffectsare quitesmallon both ent points in time. The test
Stoll and Whaley also examine quarterlyand monthlyexpiration requiresthe use of a pooled
the tradinglinks between index days. ThatStoll and Whaley'sre- standarderror of the differ-
futures and the stock marketin sults are very similar to those ence between the means.
orderto evaluatemodificationsin presented in this note, although
tradingproceduresthatcould al- the latterare based on a different *Program Trading:
leviate marketcongestionon ex- data set, strongly suggests that Tradingthatinvolvesthe use
piration days.7 They discuss in regulators have overreacted to of a computerto look for
some detailthe impactof switch- expiration-dayeffects. profitabledivergencesfrom
ing settlementfrom Friday'sclos- cost-of-carryrelationshipsand
ing price to Friday's opening Feinsteinand Goetzmanninvesti- suggestsrisk arbitragetrading
price.StollandWhaleyarguethat, gate triple witchinghours in or- strategiesto profitfrom those
with some modifications,such as der to determinewhether these pricingerrors.
disclosure of the demand and periods are characterizedby ex-
supplysituation,the opening set- cessive volatility.9They examine *' Stock Market Volatility: on
tlement may result in more effi- the daily returnsof the S&P500 The magnitudeof price
cienthandlingof the largetrading index fromJanuary1983 through changesover a given period z
imbalancesthat frequentlyoccur June 1988, measuringhow many of time for a given marketin-
on expiration days. Withoutthe expirationdaysfell abovethe me- dex. The largerthe magnitude D
modifications,however, the spe- dian volatilityand how manybe- of price changes,as measured
cialist retains too much discre- low. They find that, prior to the by standarddeviation,the z
tion, and the order-imbalance rule changesin 1987,triplewitch- higher the stock market D
problemmaybe compounded. ing hour dayswere more likelyto volatility.
fall above the median volatility -J

Most recently, Stoll and Whaley than below. However, after the Z>

have studied a two-and-one-half rule changes there appeared to z

year period prior to June 1987 be a "reducedpropensityfor ex- In a recent study using 11 quar- 67 -

and a two-and-one-halfyear pe- pirationFridaysto exhibitunusu- terlyexpirationsof S&P500 index U

riod afterJune 1987 in order to ally high volatility."Of course, contractsin the periodJune 1984
determine whether changes in with such a small sample,defini- through December 1986, Stoll z
the settlement times of certain tive conclusions cannot be and Whaleystudy the expiration
contractsmitigatedconcern over reached. behavior of individual stocks.10
 More specifically,they examine
whether expiration-day effects
simplyreflectnormalmovements
between bid and ask prices.They
find thatthe volume of tradingin
the last half hour of expiration
daysis substantiallyabovenormal
and the price behaviorof stocks
that are subjectto programtrad-
ing (i.e., those included in the
S&P500) is verysimilarto thatof
stocks that are not (i.e., those
stocks not included in the S&P
500). They conclude that the
price reversals on the Monday
followingan expirationdaydo in
factreflectthe bid-askspreadsof
the individualstocks.
Herbstand Maberlystudythe pe-
riod June 1984 through Septem-
ber 1989,comparingthe 12 expi-
rations prior to the June 1987
changesto the 10 expirationsthat
occurred after the changes.11
Theyfind thatthe new settlement
procedureshave significantlyre-
duced triple witching hour vola-
tility,but only at the expense of a
significantincrease in first-hour
volatility.
The NYSErecently proposed a
rule that would curb certain
forms of program trading and
thus reduce stock market vola-
tility during expiration peri-
ods. Not all agree thatvolatility
would be reduced.For example,
ChicagoBoardOptionsExchange
(CBOE)officialsbelieve that an
afternoon expiration allows in-
vestors to respond to important
economic news, which is often
disclosed on Fridays. To curb
m trading, they argue, would in-
Liij
z crease investors'risk.
:D
I week, as well as the number of
Using minute-by-minutecash in-
dex values for the period from
z2 April30, 1987to July24, 1989,this
:D note investigatesthe triplewitch-
0
ing hour.13To assess the degree
of uniformityof price changesin
the market,it firstuses a variantof
the comparison-periodapproach
-j to analyzechanges in returnson
u the S&P500 cash index. Then,to
z
determine the overall impact of
z
6i8 marketprice effects,reversalsof
the S&P500 cash index are calcu-
68 lated in expiration periods and
comparedwith reversalsin non- Thursday of the expiration
expirationperiods. month. Individualstock options
continuetradinguntilthe close of
Volumeof tradingduringthe tri- the third Friday.Thus the last
ple witching hour is deempha- hour on Thursdayand the first
sized. The goal of this studyis to and last hours on Fridayare eval-
evaluate the price effects rather uated to ascertainthe impact of
than the functioningof market- the expirationperiod. A second
makers or the performance of expiration period-when op-
individualstocks. tions, but not futures, expire-
includes the last hour of trading
Comparison-Period on the third Thursdayand the
Approach firstand last hours of tradingon
The methodologyis a variantof the third Fridayfor contractsex-
the comparison-periodapproach piring in Januarycycle months.
(CPA),first developed by Masu- Letthe rate of returnof the S&P
lis.14This approachuses an esti- 500 spot index at minutet during
mateof the averagerateof return month i be denoted:
on the S&P500 cash index over a
representativeperiod,designated ri,t = Upi,t + 1 - Pi')/Pi,t]
the comparisonperiod.Thisaver-
age rate of return is then com- A pooled t-testis used to test for
pared with the average rate of the equivalence of the average
return on the index around the abnormalrates of return of the
time of contractexpirations. expirationperiod (ARE)and the
comparison (ARC).17A
The sample used here includes pooled F-testperiods is used to test for
nine comparison periods and the variabilityof averagerates of
nine expirationperiods. The hy- return.
pothesisthattriplewitchinghour
expirationsdistortthe underlying The ARE,for month i, based on
cash marketcan be rejectedif the minute-by-minute index values,is
averagerateof returnon the S&P aggregatedover the last hour of
500 cash index aroundexpiration tradingfor each of the nine peri-
periods does not differ signifi- ods separatelyand is given as:
cantly from the average in the
comparisonperiod.15 Eq. 1
The representativeperiod is des-
ignatedas the lasthour of trading 60
on the firstThursdayand the first
and last hours of tradingon the AREi= E ri,t/60.
first Friday of February cycle t= 1
months, times in which neither
index options nor index futures The ARE,is calculatedfor three
contractsexpire. This approach separate time periods for both
holds constant the day of the expirationperiods-the lasthour
of tradingon the thirdThursday,
observations, so that any ob- the last hour on the third Friday
served changes in the rate of and the first hour on the third
returncan be attributedto expi- Friday. The ARE is aggregated
rationeffects,ratherthan day-of- over all nine periods as follows:
the-weekeffects.16
Eq. 2
The triple witching hour occurs
duringthe lasthour of tradingfor 9
contractsthatexpire in Marchcy-
cle months. The expiration day ARE = > ARE1/9.
for index futures was originally i= 1
the thirdFridayof the expiration
month; now the indexes cease Note thata separateAREexistsfor
tradingat the close of the third each time period for both expira-
Table II Comparison-Period Approach Using 60-Minute Intervals period.Note that,when the expi-
ration period is compared with
Part A: Triple Witching Hour (MarchCycle) Returns/No-Expiration the option-only expiration
(FebruaryCycle) Returns months,the differencein volatili-
Last Hour On Thursday First Hour on Friday Last Hour On Friday ties is not as great as when the
t = -0.9234a t = -0.0238 t = -0.2138 expiration period is compared
F = 24.88b F = 60.08 F = 65.13 with the non-expirationperiod.
The factthatvolatilitiesdiffersig-
Part B: Options-Only-ExpirationQanuaryCycle) Returns/No-ExpirationReturns nificantlybetween time periods
(FebruaryCycle)
Last Hour On Thursday First Hour On Friday Last Hour On Friday
suggests that the varianceof the
t = -0.2506 t =-0.2602 t =-0.2469
S&P500 in any given period is
F = 27.57 F = 54.94 F = 51.77 not a good indicatorof its vari-
ance in other time periods.21
Part C: Triple Witching Hour (March Cycle) Returns/Options-Only-Expiration
OanuaryCycle) Returns Anyincreasein variancesfor the
Last Hour On Thursday FirstHour On Friday Last Hour On Friday marketas a whole when deriva-
t= +0.7188 t= -0.0001 t= -0.0181 tive security contracts expire
F =2.70 F =1.71 F =3.64 probablyreflects an increase in
trading volume from investors
a. All t-testresultsare insignificantat the 5%level. unwindingtheirpositionsanden-
b. All F-testresultsare significantat the 5%level with 540-1degreesof freedom. gagingin intermarketarbitrage.22
This activity, however, appears
tion periods (i.e., when options SC = the varianceof the com- not to cause price distortionsfor
andfuturesexpireandwhen only parison-periodreturns. the marketas a whole.
optionsexpire). The same proce- The results in Table III are very
dure is used to obtain the ARC, The pooled F-testwas obtained similarto those presentedin Ta-
with the relevant time periods by takingthe ratioof Se to SCwith ble II.The F-testresultsare not as
fallingon the first Thursdayand 540-1degreesof freedom.19 largeas those presentedin Table
Fridayof the Februarycycle. The II, but they remain significant,
test is then repeated using 15- Table II shows the resultsof the indicating that risk differences
minute trading intervalsinstead pooled t-test (Equation(3)) and persistin the 15-minuteintervals.
of 60-minutetradingintervals.18 the pooled F-test for each time Thisresultis interesting,
The test statisticfor equality of period, using 60-minutetrading it is the last 15 minutesofbecause trading
means is denoted as: intervals. The results of the that is claimed to be the most
pooled t-test are insignificant volatile.These resultsdo not sup-
Eq. 3 for each time period, regardless port this claim. Furthermore,
of how the expirationperiod is pricing discrepancies are no
defined. This indicates that the more apparentin the 15-minute
ARE- ARC impact of expiring futures and intervalsthanin the longer inter-
options contracts is not strong vals.
SEp[l/Ne + 1/Nc]l/' enough to cause price distortion.
It is interestingto note that,in all In summary,the expirationof de-
where SEpis the pooled standard but one case, the averagerate of rivative securities does not ap-
error of the differencebetween returnin the comparisonperiod pearto causepricedistortionsfor m
means,defined as (ARC)is larger than the average the marketas a whole. Further-
rate of return in the expiration more, while there are significant z
[(Ne - 1)Se + (Nc -1)S period (ARE).This result is con- differences in volatilitybetween
sistentwith priorfindingsthatthe periodssurroundingcontractexpi-
(Ne + Nc -2)]1/2 S&P500 declines in price during rationsand other periods, signif-
the last hour of tradingprior to icantdifferencesin volatilityexist -J
where expiration.20 (Thisdoes not imply regardless of the time periods
Ne = the number of observa- that all stocks in the S&P 500 chosen.
z
tions in the expiration decline.)
Reversals
period; The pooled F-testsare all signifi- The unwindingof arbitrageposi-
NC = the number of observa- cant at the 5% level (with 540-1 tions could put either upwardor
tions in the comparison degrees of freedom). This indi- downward pressure on prices.
z
period; catesthatvolatilityof returnsdur- Stoll and Whaley showed that
Se = the variance of the expi- ing the expirationperiods is sig- thereare significantlynegativeav- z
ration-period returns; nificantly different from return erage returnson the S&P500 and
and volatilityduring the comparison the S&P 100 when futures and 69
 Table III Comparison-Period Approach Using 15-Minute Intervals PartB of TableIVshows the rates
of returnduringthe last 15 min-
Part A: Triple Witching Hour (March Cycle) Returns/No-Expiration utes of the relevantFridaycom-
(FebruaryCycle) Returns pared with those in the first 15
Last 15 Mins. On Thursday First 15 Mins. On Friday Last 15 Mins. On Fniday minutes of the following trading
t = -1.8155a t = -0.2361 t = -0.2714 day,with the cycles as defined in
F =30.99b F =1.47 F =1.89 PartA. The results differ slightly
across the three time periods.
Part B: Options-Only-Expiration JanuaryCycle) Returns/No-Expiration First,when both futuresand op-
(FebruaryCycle) Returns tions expire, two of the nine ex-
Last 15 Mins. On Thursday First 15 Mins. On Friday Last 15 Mins. On Friday
t = -0.2398 t =-0.2553 t =-0.2824
pirationsshow reversals,but nei-
F = 2.34 F =2.44 F =3.23 ther is significant. Next, when
only options expire, four of the
Part C: Triple Witching Hour (MarchCycle) Returns/Options-Only-Expiration nine periods show reversals,and
(JanuaryCycle) Returns two are significant.Lastly,when
Last 15 Mins. On Thursday First 15 Mins. On Friday Last 15 Mins. On Friday there is no expiration,two of the
t = - 1.0122 t = -0.0036 t = -0.0139 nine periods show reversals,one
F =13.23 F =1.66 F =1.71 of which is significant.
a. All t-testresultsare insignificantat the 5%level. These findingssuggestthatinter-
b. All F-testresultsare significantat the 5%level with 135-1degreesof freedom.
market arbitragemay occur on
Fridaysoccasionally,althoughnot
consistently.But there appearsto
options expire together.23This TableIVreportsthe reversalsand be no discerniblepatternof arbi-
suggests that arbitragerstend to continuationsobserved on days trageon expirationdays,as non-
be long in stocks and short in when futuresand options expire, expirationdaysshow reversalsas
futures,at leastduringthe period when only options expire and well. Furthermore,of the eight
fromJuly1, 1983throughDecem- when there is no expirationat all. reversalsobservedover all three
ber 27, 1985. PartA compares rates of return periods, only three are of suffi-
duringthe last 15 minutesof the cient magnitudeto cover transac-
If the price change on an expira- relevantThursdaywith those dur- tion costs.
tion day is abnormal,the price ing the first 15 minutes the fol-
will tend to return to a normal lowing Friday.Index futuresand Reported MarketActivity
level on the following trading index optionsexpire on the third A perusalof the WallStreetjour-
day.If the price does not reverse, Thursday,while individualstock nal since June 19, 1987 shows
the initialprice changemusthave optionsexpireon the thirdFriday that the markets on the third
been, we assume, the result of of Marchcycle months. Options- ThursdayandFridayof each quar-
new information,not the resultof only expirationsare evaluatedon terlyexpirationperiod havebeen
unwindingarbitragepositions.A the Januarycycle. The no-expira- unremarkable.Table V notes a
reversalis defined as a changein tion period is defined as the first
few exceptions. In December
the sign of the rate of return Thursdayand Fridayof the Feb- 1987, the market plunged by
duringthe last 15 minutesof the ruarycycle. 50.07 points late on the third
expiration day, compared with Thursday of the monthandroseby
the rate of returnduringthe first The ratesof returnin PartA show 50.90pointsby close of the follow-
15 minutesof the followingtrad- thatonly one reversaloccurredin ing day. This marketmovement
Lu
z
ing day.A continuationis defined the three time periods specified. was attributedto the assurance
as no change in the sign of the The reversalappearsas the first from Fed ChairmanGreenspan
ratesof returnbetween these pe- entry under the futures and op- that the October deficit was an
riods.Specifically,the returndur- tions expirationperiod and is not aberration.In June of 1988, the
D
ing the last 15 minutesof trading of a significantmagnitude.The market fell by 37.16 points on
on the expirationday is given as: other entries are continuations, news of the potentialinflationary
implying that the initial price impactof the Midwestdrought.In
z = (Pdose1-Pclose- change is the resultof new infor- March of 1989, the market
Roj 15,i)/
D mation,not the resultof unwind- plunged by 48.57 points in re-
0 Pclose - 15,i ing arbitragepositions. Interest- sponse to IBM'slow earningsre-
H
ingly,theredoes not appearto be ports and increased inflationary
-J
and the return during first 15 any differencein the behaviorof expectations.The increasein the
zo minutes of the following trading return patternsbetween expira- DJIAof 45.50 points in March
day is: tion periods and non-expiration 1990 was attributedto reduced
periods-once again suggesting expectations of tighter money
Rjj = (Popen + 15,i -
Popen,i)/Popen,i no expiration-dayeffect. supply.
TableIV Reversals
Part A: Rates of Return During the LastFifteen Minutes on Thursday Compared with the First Fifteen Minutes on Fridaya
Futures/OptionsExpiration Options-OnlyExpiration No Expiration
06-18-87: 0.00748% 07-16-87: 0.003313% 04-30-87: 0.002550%
06-19-87:(-0.002707%) 07-17-87: (0.013419%) 05-01-87: (0.048601%)
09-17-87: 0.172950% 10-15-87: -0.349985% 08-06-87: 1.162216%
09-18-87: (1.481056%) 10-16-87:(-0.271502%) 08-07-87: (0.976992%)
12-17-87: -1.426428% 01-14-87: -0.875227% 11-04-87: -1.691447%
12-18-87:(-1.517406% 01-15-87:(-0.589995%) 11-05-87:(-1.634898%)
03-17-88: 0.589955% 04-14-88: 0.202978% 02-04-88: 0.588954%
03-18-88: (0.601979%) 04-15-88: (0.163407%) 02-05-88: (0.722091%)
06-16-88: -0.033208% 07-14-88: 0.269156% 05-05-88: -0.198870%
06-17-88:(-0.056868%) 07-15-88: (0.298832%) 05-06-88:(-0.239884%)
09-15-88: -0.062606% 10-20-88: (0.265030% 08-04-88: 0.151625%
09-16-88:(-0.022402%) 10-21-88: (0.281875%) 08-05-88: (0.117885%)
12-15-88: 0.089774% 01-19-89: 0.076339% 11-03-88: 0.239187%
12-16-88: (0.132551%) 01-20-89: (0.070230%) 11-04-88: (0.140964%)
03-16-89: (0.558942%) 04-20-89: 0.455362% 02-02-89: 0.618865%
03-17-89: (0.414887%) 04-21-89: (0.409548%) 02-03-89: (0.562582%)
06-15-89: 0.623711% 07-20-89: 0.514293% 05-04-89: 0.743896%
06-16-89: (0.595788%) 07-21-89: (0.505188%) 05-05-89: (0.711288%)
Part B: Rates of Return During the LastFifteen Minutes on Friday Compared with the First Fifteen Minutes on Mondayb
Futures/OptionsExpiration Options-OnlyExpiration No Expiration
06-19-87: 0.027880% 07-17-87: 0.039993% 05-01-87: 0.047314%
06-22-87: (0.048770%) 07-20-87:(-0.018812%) 05-04-87: (0.077126%)
09-18-87: -0.001476% 10-16-87: -0.359700% 08-07-87: -0.087543%
09-21-87: (0.005683%) 10-19-87:(-0.407055%) 08-10-87:(-0.049428%)
12-18-87: 0.179739% 01-15-88: 0.166910% 11-06-87: -0.102791%
12-21-87: (0.105708%) 01-18-88:(-0.016794%) 11-09-87:(-0.204894%)
03-18-88: -0.002198% 04-15-88: 0.000523% 02-05-88: 0.022425%
03-21-88: (-0.996006%) 04-18-88: (0.019989%) 02-08-88: 0.057390%
06-17-88: 0.022311% 07-15-88: 0.044139%* 05-06-88: -0.031673%
06-20-88: (-0.030074%) 07-18-88:(-0.035352%) 05-09-88: (0.003216%)
09-16-88: 0.058705% 10-21-88: 0.018361% 08-05-88: 0.012858%
09-19-88: (0.036053%) 10-24-88: (0.022872%) 08-08-88: (0.052198%)
12-16-88: 0.048305% 01-20-89: -0.006730%* 11-04-88: -0.043837%*
12-19-88: (0.018061%) 01-23-89: (0.035708%) 11-07-88: (0.011232%)
03-17-89: -0.150296% 04-21-89: 0.074304% 02-03-89: -0.112339%
03-20-89: (-0.052907%) 04-24-89: (0.029960%) 02-06-89:(-0.101127%)
06-16-89: 0.026432% 07-21-89: 0.047863% 05-05-89: 0.050512%
06-19-89: (0.051523%) 07-24-89: (0.019712%) 05-08-89: (0.059357%)

a. Fridayreturnsare in parenthesesbelow the respectiveThursdayreturns.

b. Mondayreturnsare in parenthesesbelow the respectiveFridayreturns.
*Magnitude of reversalsignificantat the 5%level.

The remarkable increases or de-
creases in market volatility that
have occurred around the triple
m
futures and options expire (or termarketarbitrage.To the extent
when only options expire). There thatintermarketarbitrageactivity LU
z
do, however, appear to be signif- does occur, it does not appearto D

witching hour can be attributed
to investor responses to new in-
formation. The remaining quar-
terly Thursdays and Fridays are
relatively quiet, with no report of
unusual market activity.This sug-
icant differences between return
volatility during expiration peri-
ods and volatility during non-
expiration periods. It appears that
changing the expiration dates of
options and futures has not been
be associatedwith an expiration-
day effect.It usuallyoccurs on a
Friday,perhapsbecause selected z
macroeconomicinformationsuch il
as unemploymentandmoneysup-
plydataaresystematically released -J

gests that the triple witching hour
is not something that need be of
major concern and is rarely the
sole source of market stimulation.
Implications
effective in reducing volatility to
"normal"levels.
The S&P 500 frequently exhibits
price continuations rather than
reversals. This suggests that the
on Fridays.
z
Concern over expiration-dayef- -,
fects appearsto be unwarranted. U
Price distortionsare not evident, z
and increasedvolatilityis attribut- z
u

The S&P 500 demonstrates no initial price change is a result of able, in partat least,to the incor-
significant price distortions when new information, rather than in- porationof new information.Re- 71
 Table V Wall StreetJournal Re- "Program Trading and Expiration
ports on DJLA Activity* Day Effects,"Financial AnalystsJour- ARE= AREi/ 9.
nat March/April1987 and "Pro- t=1
Third Third gram Trading and Individual Stock
Month/Year Thursday Friday Returns:Ingredients of the Trple-
WitchingBrew," Journal of Business 19. The F-ratio is SI/S, when Se > S,
June 1987 +0.78 +12.72 63(1990), 165-92. and SJIe when Sc > S,
Sept. 1987 -2.29 -3.26 20. See Stoll and Whaley, "Program
5. A. Kling, "How the Stock Market
Dec. 1987 -50.07 +50.90 Trading and Expiration Day Ef-
Can Learn to Live with Index Fu-
March 1988 +21.72 +1.33 tures and Options," FinancialAna- fects," "Index Futures, Program
June 1988 -37.16 +9.78 lysts Journal September/October Trading and Stock Market Proce-
Sept. 1988 -8.36 +5.87 1987. dures" and "Program Trading and
Dec. 1988 -1.25 + 17.71 6 Stoll and Whaley, "Program Trad- Individual Stock Returns,"op. cit
ing and Expiration Day Effects,"op. 21. j j Merrick,Jr., "VolumeDetermi-
March 1989 +20.17 -48.57
-28.36 +1.38 cit nation in Stock and Stock Index
June 1989
Sept. 1989 -14.63 +9.69 7. H R Stoll and R Whaley, "Index Futures Markets:An Analysis of Ar-
Dec. 1989 -7.46 -14.08 Futures, Program Trading and bitrage and VolatilityEfects,"Jour-
Stock Market Procedures,"Journal nal of Futures Markets 7 (1987),
March 1990 +7.88 +45.50 483-96, and S Beckers, "Variances
June 1990 -1.48 +7.67 of Futures Markets8 (1988), 391-
412. of Security Price Returns Based on
Sept. 1990 -39.11 -5.94 High, Low and Closing Prices,"
Dec. 1990 +2.73 +4.20 8. H R. Stoll and R. Whaley, "Expira-
tion-Day Effects:WhatHas Joumal of Business 56 (1986), 97-
March 1991 -2.97 -3.96 Changed?" FinancialAnalystsJour- 112.
June 1991 -1.56 +11.62 nal January/February 1991. 22. Merrick, "VolumeDetermination,"
Sept. 1991 +6.48 -5.14 op. cit
9. S. P. Feinstein and W N Goetz-
Dec. 1991 +6.27 +20.12 23. Stoll and Whaley, "Program Trad-
mann, "TheEffect of the 'Triple
WitchingHour' on Stock Market ing and Expiration Day Effects,"
*A1ldeclines/increasesrefer to movementin Volatility,"Economic Review, Sep- op. cit
the DowJonesIndustrialAverageas reported tember/October1988.
by the WallStreetJournal. 10. Stoll and Whaley, "Program Trad-
ing and Individual Stock Returns,"
op. cit
ducing volatilitywould therefore 11. A F Herbst and E D. Maberly,
require that informationsome- "StockIndex Futures, Expiration
how be suppressedor thatsecu- Day Volatility,and the 'Special'Fri-
rity prices not be allowed to re- day Opening: A Note," Journal of
flect new informationquickly. Futures Markets10 (1990), 323-
25.
Footnotes 12. C Torres, "BigBoard Seeks Curb
1. R. j Barro, E F Fama, D. R. Fis- on Option, Futures Volatility,"Wall
chel, A. H Meltzer, R W Roll and Street Journal, September21, 1990.
L. G. Telser, Black Monday and the 13. The data were obtainedfrom the
Future of Financial Markets(Home- Chicago Mercantile Exchange with
wood, IL:Irwin, 1987). the permission of the Standard &
2. Throughout thispaper, the March Poor's Corporation.
cycle refers to the months of March, 14 R. W Masulis, "TheEffectsof Capi-
June, Septemberand December; the tal Structure Changes on Security
January cycle refers to the months Prices:A Study of Exchange Offers,"
m
0) ofjanuary, April,July and October; Journal of Financial Economics
and the February cycle refers to the June 1980.
Lii
z months of February, May, August 15. Thisdoes not mean that individual
D
and November. stocks cannot be affected by the ex-
3. Another change was made by both piration of derivatives, but only that
Z: exchanges in June 1987: Serial the market as a whole is not af-
contract months were added for the fected.
z
w
index options. Index options expire 16 Even so, other days of the week
D
0 on the third Friday of all expiration were usedfor comparison purposes;
LA
months except those months in the no change in the end results was
-J March cycle. See S. McMurrayand observed.
H4
B. E Garcia, "WaryTradersForesee 17. R L. Inman and W j Conover,
z
Confusion as Triple Witching Time Modern Business Statistics (New
-j
Looms," Wall Street Journal June York:John Wiley & Sons, 1983).
u 12, 1987. 18. Note that
z

z 4 For an in-depth comparison of the

reaction of individual stocks in the
S&P500 versus non-S&P500 AREi=>l ri,t/ 15 and
72 stocks, see H R. Stoll and R. Whaley,