A Feasibility Analysis of Black-Scholes-Merton Differential Equation Model for Stock Option Pricing by Using Historical Volatility : With Reference to Selected Stock Options Traded in NSE

Dr. Rekha Kala A M, Dr Shyam Lal Dev Pandey

Abstract


In today’s financial world there is a great need to predict the value of the assets, using which strategic decisions can be made to make short term or long term capital gains. Due to the dynamic and uncertain nature of the financial markets, the prediction of the asset prices are really difficult. Many models have been developed to predict the option prices in the financial market. The certainity of these models to predict the option prices to the most accurate level or to the level of minimum deviation is questionable. This study is aimed at analyzing the feasibility of Black - Scholes – Merton differential equation model for stock option pricing in Indian stock exchanges. The result of this study can be used to predict the suitability of using Black - Scholes – Merton differential equation model to predict stock option prices in Indian market. Further the regression analysis has been used to see the impact of time to expiry over the option price and anova test has been used to check whether the mean difference between expected price as computed by Black - Scholes – Merton differential equation model and actual price have any significant difference. The result of analysis found that Black - Scholes – Merton model is more usefull in call option pricing than the put option pricing and also impact of timing is more relevenat for put option pricing than for call option pricing.

 


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DOI: http://dx.doi.org/10.5296/ajfa.v4i2.2022

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