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Competency of Monte Carlo and Black–Scholes in pricing Nifty index options: A vis-à-vis study

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  • Singh Vipul Kumar

    (Institute of Management Technology, 35 Km Milestone, Katol Road, Nagpur 441502, India)

Abstract

This paper endeavors to evaluate the computational competency of Monte Carlo in option pricing. The paper compares the price effectiveness of four variants of Monte Carlo, namely variance reduction, Antithetic, IQ, and the Quasi-Monte Carlo, with the classical Black–Scholes model, for the most recent disturbed phase of the economy. To test the quality of variants of Monte Carlo and Black–Scholes this paper uses, as input to the model, three well-known techniques of implied volatility, at-the-money (ATM), volatility index (VIX) and parametric implied volatility (IV). This enables both objectives to be realized simultaneously, and sheds light on the forecasting capabilities of implied volatilities. The research shows that Monte Carlo with parametric implied volatility gives the best performance. Empirical tests show no significant difference between variants of Monte Carlo, nor any effect from the quality of the input parameters.

Suggested Citation

  • Singh Vipul Kumar, 2014. "Competency of Monte Carlo and Black–Scholes in pricing Nifty index options: A vis-à-vis study," Monte Carlo Methods and Applications, De Gruyter, vol. 20(1), pages 61-76, March.
    • Handle: RePEc:bpj:mcmeap:v:20:y:2014:i:1:p:61-76:n:3
    DOI: 10.1515/mcma-2013-0017
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    References listed on IDEAS

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    2. Beckers, Stan, 1981. "Standard deviations implied in option prices as predictors of future stock price variability," Journal of Banking & Finance, Elsevier, vol. 5(3), pages 363-381, September.
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    Cited by:

    1. Vipul Kumar Singh & Pawan Kumar, 2024. "Effectiveness of deterministic option pricing models: new evidence from Nifty and Bank Nifty Index options," Journal of Asset Management, Palgrave Macmillan, vol. 25(2), pages 172-189, March.

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