Identifying underpricing in index options

摘要

This study analyses the occurrence and extent of underpricing of index options on the National Stock Exchange (NSE) of India. The study uses discriminant analysis to explain the incidence of underpricing, and regression analysis to explain the extent of underpricing. Further, the study proposes three sets of models to explain underpricing of options. The first set of models considers only the impact of moneyness on underpricing. The second set of models considers the impact of both moneyness and time to expiration on underpricing. The third set of models considers the impact of moneyness, time to expiration, and changes in returns and volatility of the underlying asset on underpricing.