IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/17943.html
   My bibliography  Save this paper

Effects of market sentiment in index option pricing: a study of CNX NIFTY index option

Author

Listed:
  • Nagarajan, Thirukumaran
  • Malipeddi, Koteswararao

Abstract

This paper provides evidence of the role of sentiments in pricing Indian CNX Nifty index call Option during the period from April 2002 to December 2008. It also shows that Black-Scholes option pricing model using the implied volatility of previous day is pricing the Index options much closer to the actual price compared to Modified Black-Scholes pricing model incorporating non-normal skewness and kurtosis suggested by Corrado & Sue [1996]. The market is pricing the call option higher than Black-Scholes price during bullish period compared to that of bearish period even though sentiments are incorporated in the underlying asset which in this case is the Nifty Index. The index call options are priced about 1.5 percent more than Black-Scholes price during Bullish period compared to that of Bearish period during the period of observation.

Suggested Citation

  • Nagarajan, Thirukumaran & Malipeddi, Koteswararao, 2009. "Effects of market sentiment in index option pricing: a study of CNX NIFTY index option," MPRA Paper 17943, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17943
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/17943/1/MPRA_paper_17943.pdf
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Corrado, Charles J & Su, Tie, 1996. "Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, Summer.
    2. Wang, Yaw-Huei & Keswani, Aneel & Taylor, Stephen J., 2006. "The relationships between sentiment, returns and volatility," International Journal of Forecasting, Elsevier, vol. 22(1), pages 109-123.
    3. Christine A. Brown & David M. Robinson, 2002. "Skewness and Kurtosis Implied by Option Prices: A Correction," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(2), pages 279-282.
    4. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, April.
    5. Andrea Buraschi & Alexei Jiltsov, 2006. "Model Uncertainty and Option Markets with Heterogeneous Beliefs," Journal of Finance, American Finance Association, vol. 61(6), pages 2841-2897, December.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Saurabha, Rritu & Tiwari, Manvendra, 2007. "Empirical Study of the effect of including Skewness and Kurtosis in Black Scholes option pricing formula on S&P CNX Nifty index Options," MPRA Paper 6329, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Option Pricing; Black-Scholes option pricing model; Modified Black- Scholes by Corrado & Sue; Put call ratio; Sentiment indicators;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:17943. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.