Determinants of In-the-money Expiration of Call Option Contracts—An Empirical Evidence from Call Options on Nifty 50 Index

A. Sudhakar and Potharla Srikanth

Global Business Review, 2016, vol. 17, issue 6, 1373-1387

Abstract: Increased integration of stock markets with other stock markets in the world and other segments of domestic and foreign financial markets is the fundamental reason for the increased volatility in the Indian stock market. Though volatility is an instinct behaviour of stock market, its reasonable prediction can help an investor in making a profitable investment plan. Research on volatility measurement and forecasting is as old as the existence of stock markets. Ex post measures of volatility have lost their significance in the light of evolution of ex-ante measures of volatility, especially, ‘Implied volatility’. Implied volatility can be estimated with the help of option pricing models. The present study examines the role of various determinants of the probability of exercising call options. Volatility, one of the key elements of option pricing, has been measured in three different variants, that is, historical volatility, realized volatility and implied volatility. Probit and Logit model are commonly used in qualitative regression estimation and they are applied to estimate the probability of exercising call options. The results of the analysis brings out the fact that neither the historical volatility nor the Black- and Scholes-model-based implied volatility can demonstrate significant influence on the estimation of probability of exercising call options. Realized volatility based the probability of exercising call options has greater magnitude of impact on Nifty 50 Index returns compared to that of historical volatility and implied volatility based probability of exercising call options. In the estimation of probability of exercising call options, Logit model outperforms the Probit model. The comparatively heavy fat-tailed distribution of Logit model is attributable to the better performance of the model.

Keywords: Call options; implied volatility; Black and Scholes model; Probit model; Logit model (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:sae:globus:v:17:y:2016:i:6:p:1373-1387

DOI: 10.1177/0972150916660402

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