Option Pricing Experiments: Gaps in Stochastic Models, Scalability in Indian Contexts

Abstract

Considering the Indian National Stock Exchange’s growing prominence in international derivative trading, there is a pressing necessity for effective pricing mechanisms that are aligned with market realities. Thus, this study is crucial as it provides a systematic literature review of 195 studies on option pricing experiments conducted by various researchers in the past. These studies are obtained from various databases like Scopus, Google Scholar and Web of Science with keywords, “option pricing”, “derivative pricing”, “empirical”, “non-parametric technique”, and “parameter methods”. It commenced with literature on pricing efficiencies of Black Scholes through some country specific studies. It then discusses the studies based on impact evaluation of crisis on pricing efficiencies globally. Followed by it is the extant literature with respect to deterministic and stochastic parametric models as well as cross model studies in parametric models and non-parametric techniques, which combine to formulate specific research gaps in the literature as well as methodologies used commonly for option pricing. Finally, the study provides a roadmap for resolution of these research gaps which can aid scholars and practitioners in developing more dependable, precise, and empirically proven option pricing models, ultimately improving the efficiency and stability of financial markets.

Keywords: Option Pricing Efficiency, Black-Scholes Model and Alternatives, Parametric and Non-Parametric Pricing Models, Financial Crises and Option Pricing

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