Drishtikon: A Management Journal

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

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
     

   Subscribe/Renew Journal


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.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Ackert, L. F., & Tian, Y. S. (1998). The introduction of Toronto Index Participation Units and arbitrage opportunities in the Toronto 35 Index option market. Journal of Derivatives, 5, 44-53.

  • Ackert, L. F., & Tian, Y. S. (1999). Efficiency in index options markets and trading in stock baskets (Working Paper 99-5). Atlanta, US: Federal Reserve Bank of Atlanta.

  • Ackert, L. F., & Tian, Y. S. (2000). Evidence on the efficiency of index options markets. Federal Reserve Bank of Atlanta Economic Review, 85(1), 40-52.

  • Ackert, L. F., & Tian, Y. S. (2001). Efficiency in index options markets and trading in stock baskets. Journal of Banking and Finance, 25, 1607-1634.

  • Baesel, J. B., Shows, G., & Thorpe, E. (1983). The cost of liquidity services in listed options. Journal of Finance, 38(3), 989-995.

  • Bharadwaj, A., & Wiggins, J. B. (2001). Box spread and put-call parity tests for the S&P 500 Index LEAPS market. Journal of Derivatives, 8, 62-71.

  • Bhattacharya, M. (1983). Transactions data tests of efficiency of the Chicago board options exchange. Journal of Financial Economics, 12(2), 161-185.

  • Black, F., & Scholes, M. (1972). The valuation of option contracts and a test of market Efficiency. Journal of Finance, 27, 399-418.

  • Blomeyer, E. C., & Boyd, J. C. (1995). Efficiency tests of options on treasury bond futures contracts at the Chicago Board of Trade. International Review of Financial Analysis, 4, 169-181.

  • Brown, R. L., & Easton, S. A. (1992). Empirical evidence on put-call parity in Australia: A reconciliation and further evidence. Australian Journal of Management, 17, 11-20.

  • Brunetti, M., & Torricelli, C. (2005). Put-call parity and cross-markets efficiency in the index options markets: Evidence from the Italian market. International Review of Financial Analysis, 14, 508-532.

  • Capelle-Blancard, G., & Chaudhury, M. (2001). Efficiency tests of the French Index (CAC 40) options market (working paper). Montreal, Canada: McGill Finance Research Center.

  • Cassese, G., & Guidolin, M. (2004). Pricing and informational efficiency of the MIB30 Index Options Market. An analysis with high-frequency data. Economic Notes, 33, 275-321.

  • Chesney, M., Gibson, R., & Louberge, H. (1994). Arbitrage trading and index option pricing at SOFFEX: An empirical study using daily and intradaily data. Cahiers du Department d'Economique, Faculte des Sciences Economiques, Universite de Geneve.

  • Dixit, A., Yadav, S. S., & Jain, P. K. (2009). Violation of lower boundary conditions and market efficiency: An investigation into Indian options Market. Journal of Derivatives and Hedge Funds, 15(1), 3-14.

  • Dixit, Alok., Yadav, S. S., & Jain, P. K. (2011). Testing lower boundary conditions for index options using futures prices: Evidences from the Indian options market. Vikalpa, 36(1), 15-31.

  • Draper, P., & Fung, J. K. W. (2002). A study of arbitrage efficiency between the FTSE-100 Index futures and options contracts. Journal of Futures Markets, 22, 31-58.

  • Evnine, J., & Rudd, A. (1985). Index options: The early evidence. Journal of Finance, 40, 743-756.

  • Finucane, T. J. (1991). Put-call parity and expected returns. Journal of Financial and Quantitative Analysis, 26, 445-457.

  • Fung, J. K. W., & Chan, K. C. (1994). On the arbitrage free pricing relationship between index futures and index options: A note. Journal of Futures Markets, 14, 957-962.

  • Fung, J. K. W., Cheng, L. T. W., & Chan, K. C. (1997). The intraday pricing efficiency of Hang Seng Index options and futures markets. Journal of Futures Markets, 17, 327-331.

  • Fung, J. K. W., & Fung, A. K. W. (1997). Mispricing of futures contracts: A study of index futures versus index options contracts. Journal of Derivatives, 5, 37-44.

  • Fung, J. K. W., & Mok, H. M. K. (2001). Index options-futures arbitrage: A comparative study with bid/ask and transaction data. Financial Review, 36, 71-94.

  • Garay, U., Ordonez, M. C., & Gonzalez, M. (2003). Tests of the put-call parity relation using options on futures on the S&P 500 Index. Derivatives Use, Trading and Regulation, 9, 259-280.

  • Jensen, M.C. (1978). Some anomalous evidence regarding market efficiency. Journal of Financial Economics, 6(1), 95-101.

  • Kamara, A., & Miller, T. W. (1995). Daily and intradaily tests of European put-call parity. Journal of Financial and Quantitative Analysis, 30, 519-539.

  • Keane, S. (1983). Stock market efficiency. Philip Allan Publishers Limited.

  • Klemkosky, R. C., & Resnick, B. G. (1979). Put-call parity and market efficiency. The Journal of Finance, 34, 1141-1155.

  • Lee, J. H., & Nayar, N. (1993). A transactions data analysis of arbitrage between index options and index futures. Journal of Futures Markets, 13, 889-902.

  • Li, S. (2006). The arbitrage efficiency of Nikkei 225 options market: A putcall parity analysis. Monetary and Economics Studies, 24(2), 33-54.

  • Lung, K. L. W., & Marshall, A. (2002). A study of mispricing and parity in the Hang Seng futures and options markets. Review of Pacific Basin Financial Markets and Policies, 5, 373-394.

  • Merton, R. (1973). Theory of rational option pricing. Bell Journal of Economics and Management Science, 4(1), 141-183.

  • Mittnik, S., & Rieken, S. (2000). Put-call parity and the information efficiency of the German DAX Index options market. International Review of Financial Analysis, 9, 259-279.

  • Ofek, E., Richardson, M., & Whitelaw R. F. (2004). Limited arbitrage and short sales restrictions: Evidence from the options markets. Journal of Financial Economics, 74, 305-342.

  • Phillips, S., & Smith, C. Jr. (1980). Trading costs for listed options: The implications for market efficiency. Journal of Financial Economics, 8(2), 179-201.

  • Rubinstein, M. (1985). Nonparametric tests of alternative option pricing models using all reported trades and quotes on thirty most active CBOE option class from August 23. Through August 31, 1978. Journal of Finance, 3, 425-442

  • Stoll, H. R., (1969). The relationship between put and limits of arbitrage. Journal of Finance, 24, 801-824

  • www.nse-india.com; www.rbi.org.in


Abstract Views: 693

PDF Views: 2




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

Abstract Views: 693  |  PDF Views: 2

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