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

Author

Listed:
  • 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)

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

Suggested Citation

  • Tanuj Nandan & Puja Agrawal, 2016. "Pricing Efficiency in CNX Nifty Index Options Using the Black–Scholes Model: A Comparative Study of Alternate Volatility Measures," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 10(2), pages 281-304, May.
    • Handle: RePEc:sae:mareco:v:10:y:2016:i:2:p:281-304
    DOI: 10.1177/0973801015625390
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    References listed on IDEAS

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    More about this item

    Keywords

    Pricing efficiency; Black–Scholes model; Volatility Modelling; EGARCH Model; Non-parametric Tests; Options Market;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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