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Volatility Risk Premium in Indian Options Prices

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  • Sonia Garg
  • Vipul

Abstract

The article examines the volatility forecasting and option pricing performance of model‐free implied volatility (MFIV) in comparison to that of the forecasts based on model‐free realized volatility (RV). There is evidence that the forecasts based on RV are significantly more efficient and less biased than those based on MFIV, whereas the option prices based on MFIV are significantly more efficient and less biased than those based on RV. These contrasting results can be reconciled by accounting for the volatility risk premium (VRP), which is found to follow an autoregressive process in this study. The significant daily returns, observed for various option strategies used to exploit the VRP, are substantially reduced, when the normal transaction costs are accounted for. Although the VRP is priced in the Indian options market, it can provide economic benefits only to those option writers, who have sufficiently low transaction costs. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:795–812, 2015

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  • Sonia Garg & Vipul, 2015. "Volatility Risk Premium in Indian Options Prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(9), pages 795-812, September.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:9:p:795-812
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    Cited by:

    1. Milne, R. John & Salari, Mostafa, 2016. "Optimization of assigning passengers to seats on airplanes based on their carry-on luggage," Journal of Air Transport Management, Elsevier, vol. 54(C), pages 104-110.
    2. Prasenjit Chakrabarti & Kiran Kumar Kotha, 2017. "Options Order Flow, Volatility Demand and Variance Risk Premium," Multinational Finance Journal, Multinational Finance Journal, vol. 21(2), pages 49-90, June.
    3. Sonali Jain & Jayanth R. Varma & Sobhesh Kumar Agarwalla, 2019. "Indian equity options: Smile, risk premiums, and efficiency," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(2), pages 150-163, February.
    4. Aparna Bhat & Piyush Pandey & S. V. D. Nageswara Rao, 2024. "The asymmetry in day and night option returns: Evidence from an emerging market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(8), pages 1320-1337, August.

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