Efficiency of S&P CNX Nifty Index Option of the National Stock Exchange (NSE), India, using Box Spread Arbitrage Strategy


G. P. Girish(1*), Nikhil Rastogi(2)

(1) IBS Hyderabad, ICFAI Foundation For Higher Education (IFHE) University, Andhra Pradesh
(2) Institute of Management Technology (IMT) Hyderabad
(*) Corresponding Author


Box spread is a trading strategy in which one simultaneously buys and sells options having the same underlying asset and time to expiration, but different exercise prices. This study examined the efficiency of European style S&P CNX Nifty Index options of National Stock Exchange, (NSE) India by making use of high-frequency data on put and call options written on Nifty (Time-stamped transactions data) for the time period between 1st January 2002 and 31st December 2005 using box-spread arbitrage strategy. The advantages of box-spreads include reduced joint hypothesis problem since there is no consideration of pricing model or market equilibrium, no consideration of inter-market non-synchronicity since trading box spreads involve only one market, computational simplicity with less chances of mis-specification error, estimation error and the fact that buying and selling box spreads more or less replicates risk-free lending and borrowing. One thousand three hundreds and fifty eight exercisable box-spreads were found for the time period considered of which 78 Box spreads were found to be profitable after incorporating transaction costs (32 profitable box spreads were identified for the year 2002, 19 in 2003, 14 in 2004 and 13 in 2005) The results of our study suggest that internal option market efficiency has improved over the years for S&P CNX Nifty Index options of NSE India.     

Full Text:



Ackert, L. F., and Tian, Y. S. 2001. Efficiency in index options markets and trading in stock baskets. Journal of Banking and Finance 25: 1607–1634.

Benzion, U., Danan, S., and Yagil, J. 2005. Box spread strategies and arbitrage opportunities. Journal of Derivatives 12: 47–62.

Bharadwaj, A., and Wiggins, J. B. 2001. Box spread and put call parity tests for the S&P 500 Index LEAPS Market. Journal of Derivatives 8: 62–71.

Billingsley, R. S., and Chance, D. M. 1985. Options market efficiency and the box spread strategy. Financial Review 20: 287–301.

Blomeyer, E. C., and Boyd, J. C. 1995. Efficiency tests of options on Treasury bond futures contracts at the Chicago Board of Trade. International Review of Financial Analysis 4: 169–181.

Brunetti, M., and Torricelli, C. 2007. The internal and cross market efficiency in index option markets: an investigation of the Italian market. Applied Financial Economics 17: 25-33.

Capelle-Blancard G., and Chaudhury M. 2001. Efficiency tests of the French index (CAC 40) options market. Working paper. McGill Finance Research Center.

Cavallo L., and Mammola P. 2000. Empirical tests of efficiency of the Italian index options market. Journal of Empirical Finance 7: 173-193.

Evnine J., and Rudd A. 1985. Index options: the early evidence. Journal of Finance 40: 743-756.

Fung, J. K. W., Mok, H. M. K., and Wong, K. C. K. 2004. Pricing efficiency in a thin market with competitive market makers: Box spread strategies in the Hang Seng Index Options Market. Financial Review 39: 435–454.

Hemler, M. L., and Miller, T. W. 1997. Box spread arbitrage profits following the 1987 market crash: Real or illusory? Journal of Financial and Quantitative Analysis 32: 71–90.

Kamara, A., and Miller, T.W. 1995. Daily and intra-daily tests of European put–call parity. Journal of Financial and Quantitative Analysis 30: 519–539.

Marchand, P. H., Lindley, J. T., and Followill, R. A. 1994. Further evidence on parity relationships in options on S&P 500 index futures. Journal of Futures Markets 14: 757–771.

Mittnik S., and Rieken S. 2000. Put-call parity and the informational efficiency of the German DAX- index options market. International Review of Financial Analysis 9: 259-279.

NSE Fact book. 2012. Futures and Options Segment of NSE India. 2012. (http://www.nseindia.com)

Ofek, E., Richardson, M., and Whitelaw, R. F. 2004. Limited arbitrage and short sales restrictions: Evidence from the options markets. Journal of Financial Economics 74: 305–342.

Ronn, A. G., and Ronn, E. I. 1989. The box spread arbitrage: Theory tests and investment strategies. Review of Financial Studies 2: 91–108.

Vipul. 2009. Box spread Arbitrage efficiency of Nifty Index Options: The Indian Evidence. The Journal of Futures Markets 29: 544–562.

World Federation of Exchanges (WFE). 2011. International Options markets Association Report 2011. http://www.world-exchanges.org.

DOI: https://doi.org/10.22146/gamaijb.5473

Article Metrics

Abstract views : 1000 | views : 834


  • There are currently no refbacks.

Copyright (c)