Effectiveness of deterministic option pricing models: new evidence from Nifty and Bank Nifty Index options

Vipul Kumar Singh () and Pawan Kumar ()
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Vipul Kumar Singh: Indian Institute of Management, Mumbai, Erstwhile National Institute of Industrial Engineering, Mumbai
Pawan Kumar: Dublin City University

Journal of Asset Management, 2024, vol. 25, issue 2, No 5, 172-189

Abstract: Abstract This research delves into the empirical performance of deterministic option pricing models in the dynamic financial landscape of India. The primary focus is on uncovering pricing discrepancies and discerning whether these disparities arise from inherent limitations in the theoretical foundations of the models or are influenced by the trading behaviors of market participants. The investigation centers on the analysis of call and put option contracts for the Nifty Index and Bank Nifty Index, both extensively traded on the National Stock Exchange (NSE) of India. The study’s findings highlight that models developed to address the theoretical constraints of the benchmark Black–Scholes model demonstrate noteworthy performance. However, the complexity of these models does not consistently translate into enhanced pricing efficiency. Notably, the Black–Scholes and Practitioner Black–Scholes models exhibit superior performance across various moneyness-maturity categories. Furthermore, the research underscores the substantial impact of option contract liquidity on the efficiency of the pricing models. Specifically, highly traded at-the-money and out-of-the-money option contracts exhibit a higher level of pricing accuracy.

Keywords: Black–Scholes; CEV model; Gram–Charlier; Nifty Index; Options; Practitioner Black–Scholes; Volatility (search for similar items in EconPapers)
JEL-codes: C14 C2 C53 G13 G17 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-024-00348-1

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