Empirical tests of boundary conditions for NSE options

Abstract

In this paper the lower boundary conditions for traded call options are derived and subjected to empirical testing. A null hypothesis is formulated based on the theoretical conditions and tested using data on call options traded on the National Stocked exchange. The hypothesis argues that the stock and options markets are well synchronized so that simultaneous closing prices are within theoretical boundaries. The evidence in the ex-post-tests is found to be inconsistent with this hypothesis. But this may not reflect market inefficiency - only ex-ante tests can show whether the arbitrage opportunities can be tapped.