Ideal Investment Protection in Optimistic Perceptions: Evidence From the Indian Equity Options Market

Abstract

The study is an experiential assessment on the ability of the Indian equity options market to resist the adverse impacts that arise from unexpected changes in the underlying equity market, focusing on two distinct investor perceptions within optimistic dimension in the market, viz. the recovery phase and the growth phase, which were evident in the Indian market scenario post the period of financial upheavals due to global economic crisis during the latter half of 2000s. The risk mitigation capability of the options is examined in terms of long run integration and short run re-equilibrating relationship shown by near month calls and puts with varied stages of exercisability with their underlying equity segment in the National Stock Exchange of India. Further, the ideal hedge sizes of the options and the hedge gains resulting from affecting them in the investment profile are identified under minimum variance framework, using Diagonal BEKK GARCH. The results are indicative that all different options segments express to have the expected resistance ability during both bullish perceptions under consideration, and prove that optimal use of options with equity portfolio provides assured hedge gains in terms of reduction in un-anticipatable variances.