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Conjoint Analysis of Option and Volatility Models

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  • Vipul Kumar Singh

Abstract

This study endeavours to find an impeccable option-pricing model to meet the requirements of ‘Options’ practitioners during a tumultuous period. It encompasses ‘smile’ and ‘skew’ characters exhibiting price bias across moneyness and maturity. For the same, we compared and contrasted the classical Black–Scholes model with deterministic and stochastic volatility models. In order to make applicability of models more prominent, the hypothetical model has been put into practical implication of Nifty index options of India. Also, to ensure the model’s all-round applicability, they all have been passed through the most dramatic phase of the Indian financial economy spanning 2006–11, an ideal time to examine the sustainability of such models. Accuracy of model prices has been testified relative to the market, using the well-known error metrics. This research suggests that the deterministic volatility function (DVF) is the most suitable framework to price the Nifty index options. It not only out passes the benchmark Black–Scholes model but also dominates its stochastic counterpart the stochastic alpha, beta and rho (SABR) model. JEL Classification: C01, C13, C52, C53, G17

Suggested Citation

  • Vipul Kumar Singh, 2015. "Conjoint Analysis of Option and Volatility Models," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(3), pages 258-289, December.
    • Handle: RePEc:sae:emffin:v:14:y:2015:i:3:p:258-289
    DOI: 10.1177/0972652714567997
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    References listed on IDEAS

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    More about this item

    Keywords

    Black–Scholes; call options; deterministic volatility function; implied volatility; Nifty index options; SABR; stochastic;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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