A study on efficiency dynamics of equity options market: evidence from national stock exchange, India

Purpose The study aims to investigate the efficiency dynamics of the single stock equity options market concerning the National Stock Exchange (NSE), India. Design/methodology/approach This study examines the efficiency of the single stock equity call options market over 110 months from January 2011 to February 2020 by analyzing violations of the lower boundary condition (LBC) and arbitrage profit thereof. The authors use the runs test and the test of proportions to assess market efficiency and use binary logistic regression to identify and examine the relationship between LBC violation and its significant explanatory variables. Findings The analysis reveals trends in LBC violations for the entire sample of equity stock options, indicating market inefficiency. Additionally, the study shows that a bullish underlying spot market, shorter time to expiry and lower trading volume of equity stock options contracts increase the likelihood of LBC violations and arbitrage profits, ignoring transaction costs. Practical implication – Overall, the findings intend to forecast arbitrage trading opportunities by identifying significant explanatory variables and their impact, thereby contributing to market efficiency. Practical implications Overall, the findings intend to forecast arbitrage trading opportunities by identifying significant explanatory variables and their impact, thereby contributing to market efficiency. Originality/value Few studies exist on the efficiency of the single stock equity options market and the underlying equity spot market in the Indian context. The study’s original contribution is to identify and examine the factors contributing to LBC violations and resultant arbitrage opportunities.