Abstract
The study is an experiential assessment on the ability of the Indian equity options market to resist the adverse impacts that arise from unexpected changes in the underlying equity market, focusing on two distinct investor perceptions within optimistic dimension in the market, viz. the recovery phase and the growth phase, which were evident in the Indian market scenario post the period of financial upheavals due to global economic crisis during the latter half of 2000s. The risk mitigation capability of the options is examined in terms of long run integration and short run re-equilibrating relationship shown by near month calls and puts with varied stages of exercisability with their underlying equity segment in the National Stock Exchange of India. Further, the ideal hedge sizes of the options and the hedge gains resulting from affecting them in the investment profile are identified under minimum variance framework, using Diagonal BEKK GARCH. The results are indicative that all different options segments express to have the expected resistance ability during both bullish perceptions under consideration, and prove that optimal use of options with equity portfolio provides assured hedge gains in terms of reduction in un-anticipatable variances.
Highlights
From the post financial crisis period spanning from the end of 2008, the Indian equity market expresses to have substantial expansion with a persistent bullish dimension, and a perceptional change is identifiable around November 2013, when the market regained its position prior to the steep fall caused by the crisis
Investors who are ready for trading in equity options for assured profits can opt for ITM or DITM options, as per their willingness to pay for the hedge, to be included in the portfolio to be hedged at an optimal hedge size of 0.57 or 0.85, respectively, expecting an approximate hedge gain of 56.88% and 78.33%, respectively
Post confirming the ability of both the call and put options markets with different levels of exercisability by establishing the presence of integration of the market pairs and by estimating the time required by the market segments for regaining the integration from deviances due to asymmetric informational absorption, ideal hedge sizes and the resulting hedge gains are evaluated for both recovery and growth dimensions, following minimum variance framework
Summary
From the post financial crisis period spanning from the end of 2008, the Indian equity market expresses to have substantial expansion with a persistent bullish dimension, and a perceptional change is identifiable around November 2013, when the market regained its position prior to the steep fall caused by the crisis. The contributions of the present study to the finance literature are three-fold It suggests a compilation of experiential methodologies for developing time series for the options market. It estimates ideal proportions for holding diverse equity options so as to effect mitigation of uncertainties in the equity market to a maximum possible extent and the resulting gains from such hedges following minimum variance framework, instead of widely used approaches based on different options pricing models. Thirdly, adding to the uniqueness of the study, it compares the efficacy of the equity options market to offer exploitable risk mitigation focusing two distinct perceptions in the bullish dimension of the equity market
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