Effects of market sentiment in index option pricing: a study of CNX NIFTY index option
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 . 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.
|Date of creation:||17 Oct 2009|
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- 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 175-92, Summer.
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- 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.
- 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.
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- 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.
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