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A Study of Market Efficiency from Option Prices Evidence from the National Stock Exchange of India

Journal Transition Studies Review

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Title A Study of Market Efficiency from Option Prices Evidence from the National Stock Exchange of India
 
Creator Shaikh, Imlak
Padhi, Puja
 
Subject Implied Volatility; Realized Volatility; Market Efficiency Information Content; Granger causality; Index options BSOPM
G14
 
Description This paper investigates the market efficiency of S&P CNX Nifty equity index options for at-the-money non-overlapping monthly implied volatilities. Under the rational expectation hypothesis, call and put implied volatilities are calculated using Black and Scholes option pricing-model for the period June, 2001 to May, 2011. The ordinary least squares estimation clearly shows that implied volatility is the best estimate of future realized volatility. An empirical result on Granger causality shows that there is only unidirectional causality prevails in the Indian options market. Granger causality test (Sims and Geweke) indicates that calland put implied volatility causes the realized volatility but realized volatility cannot cause implied volatility. Granger causality test also confirms that for Indian options market historical volatility does not subsume useful information what already contained in the option price (i.e. implied volatility). The study concludes that volatility estimates based on the option’s price are the best estimate for the future volatility and useful in the pricing of derivatives and portfolio-risk-management.
 
Publisher Journal Transition Studies Review
 
Date 2015-08-17
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://transitionacademiapress.org/jtsr/article/view/28
10.14665/1614-4007-22-1-005
 
Source Journal Transition Studies Review; Vol 22, No 1 (2015); 69-88
1614-4015
1614-4007
 
Language eng
 
Relation http://transitionacademiapress.org/jtsr/article/view/28/6
 
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