Expiry-Related Changes in Adverse Selection for Futures and Options

Summary

This question frames a market-microstructure research problem: whether intraday adverse selection on a futures or options contract changes systematically as that contract approaches expiry. The focus is the instrument itself, rather than adverse selection in its underlying, and the author asks for both theoretical models and empirical studies.

The motivating observation is a rise in price impact for S&P 500 E-mini futures during the week before expiry. The question proposes contract-specific liquidity decline as one possible explanation, as traders rotate into another contract, while leaving open whether other mechanisms could account for the pattern. No papers, model, data analysis, or causal explanation are supplied, so the observation is a research prompt rather than established evidence of a general expiry effect. Testing the idea would require separating expiry proximity from changes in trading activity, liquidity, and market conditions.

Key ideas

• The question concerns how intraday adverse selection on a contract may vary as expiry approaches.
• Its scope is the futures or options instrument itself, not its underlying asset.
• The author reports observing increased price impact in S&P 500 E-mini futures during the week before expiry.
• A decline in contract liquidity as trading shifts elsewhere is raised as a possible explanation.
• The document supplies no research references or evidence establishing the cause or generality of the observation.

Tags

# Are there academic papers on the 'term structure' of adverse selection for futures and options?


# Are there academic papers on the 'term structure' of adverse selection for futures and options?












By term structure I mean a non-stationarity in the pattern of intraday adverse selection as a given instruments approaches its expiry. Note that I am interested in the adverse selection on the instrument itself, not the underlying.

On the empirical side, I've seen myself a significant uptick of the price impact on S&P500 E-mini futures in the week leading into expiry. I am interested in understanding if that empirical observation is linked to a general decrease of liquidity as people rotate out of the instrument, or if there is something else in play.

References on models, whether theoretical or empirical would be greatly appreciated!

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.