Title: Violations of put-call parity for CNX Nifty index options: a study at National Stock Exchange

Authors: Tanuj Nandan; Puja Agrawal

Addresses: School of Management Studies, Motilal Nehru National Institute of Technology Allahabad, Teliarganj, Allahabad, 211004, India ' Amity School of Business, Amity University, Sector 125, Noida-201313, Uttar Pradesh, India

Abstract: Derivatives markets provide a platform for market participants to hedge their risk, and aid price discovery. Correct pricing of derivatives instruments is imperative in the performance of these functions. In the present study, an attempt has been made to examine the valuation of CNX Nifty index options in terms of put-call parity (PCP) relationship, over a ten-year period. Since PCP is a no-arbitrage-based argument, it does not suffer from the limitations that are inevitable while gauging pricing efficiency using model-based approaches. Various error estimates, supported by non-parametric tests have been used validate our results statistically. Our findings indicate frequent violations of PCP, though the magnitude of mispricing is small. Further, the results are charted across moneyness, days-to-expiry and liquidity. The present study can be extremely important for all stakeholders, as violation of PCP leads to risk-free profitable arbitrage, which is an antithesis to efficient markets.

Keywords: derivatives; put-call parity; PCP; no-arbitrage; index options; CNX Nifty; pricing efficiency; mispricing; error estimates; non-parametric tests; moneyness.

DOI: 10.1504/GBER.2018.092765

Global Business and Economics Review, 2018 Vol.20 No.4, pp.485 - 502

Accepted: 16 Mar 2017
Published online: 29 Jun 2018 *

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