Forecasting Volatility and Pricing Option: An Empirical Evaluation of Indian Stock Market

The present study empirically investigates and examine seven models of volatility forecasting, namely unconditional standard deviation (also written as Long Term Moving Volatility), Standard GARCH (Generalized Autoregressive Conditional Heteroscedasticity) model, GJR-GARCH model, Exponential GARCH model (eGARCH), Asymmetric Power GARCH model (apGARCH), Component Standard GARCH model (csGARCH) , and Option Implied Volatility model to gauge the most appropriate model of volatility forecasting in Nifty constituent companies. The assessment of risk and determination of price of the asset class is primarily dependent on the volatility calculated for the class of asset. In view of obtaining precision in the process of determining the price of the option and making hedging most effective, it’s imperative to have the most appropriate method of calculating the volatility. The present study finds option implied volatility as the best performing model except in few categories of option data where VIX outperformed. Similarly on empirical performance of Black-Scholes (BS) model the present study finds that performance is not same across various maturities which indicate volatility is not constant as assumed by BS model during the tenure of the study in Indian market.