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An Empirical Test of Cross-Market Efficieny of Indian Index Options Market Using Put-Call Parity Condition


Affiliations
1 S.K. Patel Institute of Management & Computer Studies, Gandhinagar, Gujarat, India
2 G.H Patel Post Graduate Institute of Business Management, Vallabh Vidyanagar, Sardar Patel University, Gujarat, India
     

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The purpose of the present study is to examine the cross market efficiency of the Indian index options, futures and cash market by testing S&P CNX Nifty index options, by Put-Call Parity condition using spot index values and futures prices. Over a period from April 01, 2008 to March 31, 2012, the daily closing prices of nifty index options contracts, spot values and futures contracts have been used in this research. The results of the sensitivity analysis of violations with respect to time to maturity and moneyness demonstrates that the majority of violations in options contract are exploitable, however, the proportion of exploitable violations severely falls after considering the transaction cost, as most of the profits were wiped out and showing negative profits. Thus, although the Indian index options market shows traces of inefficiency, in totality it is suggested that the Indian index options market is efficient as majority of violations are un-exploitable after incorporating transaction cost.

Keywords

Market Efficiency, Options Market, Put-Call Parity Condition.
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  • An Empirical Test of Cross-Market Efficieny of Indian Index Options Market Using Put-Call Parity Condition

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Authors

Debaditya Mohanti
S.K. Patel Institute of Management & Computer Studies, Gandhinagar, Gujarat, India
P. K. Priyan
G.H Patel Post Graduate Institute of Business Management, Vallabh Vidyanagar, Sardar Patel University, Gujarat, India

Abstract


The purpose of the present study is to examine the cross market efficiency of the Indian index options, futures and cash market by testing S&P CNX Nifty index options, by Put-Call Parity condition using spot index values and futures prices. Over a period from April 01, 2008 to March 31, 2012, the daily closing prices of nifty index options contracts, spot values and futures contracts have been used in this research. The results of the sensitivity analysis of violations with respect to time to maturity and moneyness demonstrates that the majority of violations in options contract are exploitable, however, the proportion of exploitable violations severely falls after considering the transaction cost, as most of the profits were wiped out and showing negative profits. Thus, although the Indian index options market shows traces of inefficiency, in totality it is suggested that the Indian index options market is efficient as majority of violations are un-exploitable after incorporating transaction cost.

Keywords


Market Efficiency, Options Market, Put-Call Parity Condition.

References