Pricing Efficiency of Equity Index Option Contracts: Evidence from National Stock Exchange of India

The present study examines the pricing efficiency of equity index options traded at National Stock Exchange of India by comparing the premium of options contracts traded on NIFTY, BANKNIFTY, CNXIT, NIFTYJUNIOR, and CNX100 indices with their respective theoretical price estimated by using Black-Scholes Model. 91-day T-Bill rate is used as risk-free rate and standard deviation computed on daily returns of the underlying index is used as volatility to estimate the theoretical prices. Pricing efficiency has been tested both for daily closing prices per se as well as for the In-the-Money, At-the-Money, and Out-of-the-Money options contracts.

Mean Absolute Errors (MAE), Mean Squared Errors (MSE), Root Mean Squared Errors (RMSE), and Theil's U statistics suggest that the premium of equity index options contracts do not follow Black-Scholes Model.