Analysis of the gosset option pricing formulae in the Indian options market

By: Material type: Computer fileComputer filePublication details: Ahmedabad Indian Institute of Management 2023Description: 36 p. : ill. Includes bibliographySubject(s): DDC classification:
  • SP2023/3655
Summary: Option pricing is an area of considerable interest and has been studied extensively over the last five decades. It allows investors to calculate the fair value of options and make informed investment decisions, including hedging decisions. The foundation of an analytical approach to option pricing was laid by Fischer Black, Myron Scholes, and Robert Merton in 1973 when they proposed the Black-Scholes-Merton (BSM) model for pricing options (Black & Scholes, 1973). However, the assumptions of the Black-Scholes model don’t hold in real market situations, and several attempts have been made at improving the BS model by relaxing the assumptions (Heston, 1993). Gosset formulae are one of the alternatives that relax the assumption of normality of the log stock returns made in the BSM model and rather assume a Student’s t distribution (Cassidy et al., 2010). We analyze the applicability of Gosset formulae in the Indian options market by calibrating the parameters of the model to market data. We also investigate the stability of parameters obtained post-calibration to market data. Finally, we present a comparative analysis between the Gosset formulae and more established models like Heston’s model.
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Student Project Vikram Sarabhai Library Reference Students Project SP2023/3655 (Browse shelf(Opens below)) e-Book - Digital Access SP003655

Submitted to Prof. Vineet Virmani

Submitted by: Tanuj Garg

Option pricing is an area of considerable interest and has been studied extensively over the last five decades. It allows investors to calculate the fair value of options and make informed investment decisions, including hedging decisions. The foundation of an analytical approach to option pricing was laid by Fischer Black, Myron Scholes, and Robert Merton in 1973 when they proposed the Black-Scholes-Merton (BSM) model for pricing options (Black & Scholes, 1973).

However, the assumptions of the Black-Scholes model don’t hold in real market situations, and several attempts have been made at improving the BS model by relaxing the assumptions (Heston, 1993). Gosset formulae are one of the alternatives that relax the assumption of normality of the log stock returns made in the BSM model and rather assume a Student’s t distribution (Cassidy et al., 2010).

We analyze the applicability of Gosset formulae in the Indian options market by calibrating the parameters of the model to market data. We also investigate the stability of parameters obtained post-calibration to market data. Finally, we present a comparative analysis between the Gosset formulae and more established models like Heston’s model.

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