“Market Efficiency and Option Pricing in India: Empirical Evidence From The National Stock Exchange”

This study evaluates the pricing efficiency of Nifty 50 index options on the National Stock Exchange of India from April 2022 to March 2024 using the Black-Scholes model. This study applies the model by assessing pricing accuracy using historical volatility and weighted implied volatility (WSIV). The findings reveal significant price discrepancies, with call options trading below their fair value and put options trading above their fair value, indicating market inefficiencies. These inefficiencies persist despite regulatory reforms due to short-selling constraints that hinder effective dynamic risk hedging. The use of futures prices in the valuation model fails to eliminate inefficiencies, suggesting that Indian investors rarely employ futures for delta-hedging purposes. Notably, the WSIV method yields a systematic underestimation of theoretical option prices, contrasting with the patterns observed in more developed markets. The persistent pricing inefficiencies are attributed to Indian investors' reliance on historical volatility for option valuation. This study has important implications for academic researchers, market practitioners, and regulators, providing insights into the applicability and limitations of the Black-Scholes model in emerging markets, identifying arbitrage opportunities, and highlighting the need to address structural issues and trading asymmetries to enhance market efficiency.