Pricing Efficiency in CNX Nifty Index Options Using the Black–Scholes Model: A Comparative Study of Alternate Volatility Measures

Tanuj Nandan and Puja Agrawal
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Tanuj Nandan: Tanuj Nandan is at School of Management Studies, Motilal Nehru National Institute of Technology, Allahabad 211004, India, email: tanujnandan@gmail.com
Puja Agrawal: Puja Agrawal is at Amity University, Uttar Pradesh, India, email: pujaweb@gmail.com

Margin: The Journal of Applied Economic Research, 2016, vol. 10, issue 2, 281-304

Abstract: This article attempts to determine the method of volatility estimation that prices the CNX Nifty Index options closest to the theoretical price as computed by the Black–Scholes (1973) model. Volatility has been estimated using simple variance, implied volatility, volatility index and the asymmetrical exponential generalised auto-regressive conditional heteroskedasticity (EGARCH) (1,1) model with generalised error distribution innovations. The trend in mispricing has been studied using error estimates and non-parametric tests. Our findings indicate significant mispricing in CNX Nifty Index options. The results of our study will have major implications for investors who use options as part of their portfolios and corporates who use them for risk hedging. Our study is important, as there are only a few studies that examine the pricing efficiency of options with a focus on volatility modelling. Also, our study spans a longer time period than the previous studies. JEL Classification: G14, G32, C14

Keywords: Pricing efficiency; Black–Scholes model; Volatility Modelling; EGARCH Model; Non-parametric Tests; Options Market (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:10:y:2016:i:2:p:281-304

DOI: 10.1177/0973801015625390

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