Ad-Hoc Black–Scholes vis-à-vis TSRV-based Black–Scholes: Evidence from Indian Options Market

Alok Dixit () and Shivam Singh ()
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Alok Dixit: Indian Institute of Management
Shivam Singh: Indian Institute of Management

Journal of Quantitative Economics, 2018, vol. 16, issue 1, No 4, 57-88

Abstract: Abstract This research paper examines one-day-ahead out-of-sample performance of the volatility smirk-based options pricing models, namely, Ad-Hoc-Black–Scholes (AHBS) models on the CNX Nifty index options of India. Further, we compare the performance of these models with that of a TSRV-based Black–Scholes (BS) model. For the purpose, the study uses tick-by-tick data. The results on the AHBS models are highly satisfactory and robust across all the subgroups considered in the study. Notably, a daily constant implied volatility based ad-hoc approach outperforms the TSRV-based BS model substantially. The performance of the ad-hoc approaches improves further when the smile/smirk effect is considered. For the estimation of the implied volatility smile, we apply three weighting schemes based on the Vega and liquidity of the options. All the schemes offer equally competing results. The major contribution of the study to the existing literature on options pricing is in terms of the ex-ante examination of the ad-hoc approaches to price the options by calibrating volatility smile/smirk on a daily basis.

Keywords: Black–Scholes; Ad-Hoc Black-Scholes; Implied volatility; Volatility smile; Two scale realized volatility; Tick-by-tick data; Indian options market (search for similar items in EconPapers)
JEL-codes: C01 C58 G12 G13 G14 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s40953-017-0078-3

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