Over the last 10 years, Prof Vipul has researched the Indian financial markets with focus on the index and stock derivatives. In this journey, he has also worked on stock and index volatility, which has a direct linkage with option pricing.
His initial papers on mispricing, ‘Price Efficiency of Stock and Index Futures in India’, [Prajnan, 33(3), October – December, 2004, 195-217] and ‘Temporal Variation in Futures Mispricing’ [Vikalpa, 30(4),October – December, 2005, 25-38],identify the mispricing of the stock and index futures contracts in which he finds numerous arbitrage opportunities after accounting for the transaction costs. The mispricing persists for one working day. He finds NIFTY futures to be persistently underpriced and most of the high-volume stock futures to be overpriced, and finds no change in the mispricing pattern of futures contracts over the first three years of their introduction.
To understand the nature of mispricing, his paper ‘Mispricing, Volume, Volatility and Open Interest: Evidence from Indian Futures Market’ [Journal of Emerging Markets Finance, 7(3), December, 2008, 263-292] examines the inter-dependence of mispricing, volatility, volume and open interest of stock futures, and the volatility and volume of their underlying shares in a vector autoregressive framework. He finds that the mispricing is not explained by other variables, and finds a lagged relationship between the volatility of futures, and that of their underlying.
His next paper ‘Futures and Options Expiration Day Effects: The Indian Evidence’ [Journal of Futures Markets, 25(11), November, 2005, 1045-65] examines the effect of expiration of options and futures on price, volatility and volume of the underlying shares. He finds that the underlying share prices tend to get marginally depressed a day prior to expiration and strengthen significantly a day after the expiration. An abnormally high volume is also observed on the expiration day. This publication had a high impact, judged by the number of citations.
His next paper‘Impact of the Introduction of Derivatives on Underlying Volatility: Evidence from India’ [Applied Financial Economics, 16(9), 1 June, 2006, 687-97.] investigates the changes in volatility in the Indian stock market after the introduction of derivatives. He finds strong evidence of a reduction in the volatility of the underlying shares and increase in that of Nifty after the introduction of derivatives. He explains this contradiction through the increased correlation between prices of the constituent shares of Nifty, caused by arbitrage transactions in the cash market. This publication had a very high impact, judged by the number of citations.
His next two papers ‘Cross-Market Efficiency in the Indian Derivatives Market: A Test of Put-Call Parity’ [Journal of Futures Markets, 28(9), September, 2008, 889-910.] and ‘Box Spread Arbitrage Efficiency of NIFTY Index Options: The Indian Evidence’[Journal of Futures Markets, 29(6), June, 2009, 544-562.] examine the efficiency of the Indian options and futures market using model-free tests. He tests the put-call-futures and put-call-index parity conditions, and box spread arbitrage for European style Nifty Index options. He finds numerous violations of all these arbitrage conditions, which vanish quickly. This broadly confirms the efficiency of the Indian derivatives market.
His next two papers, co-authored with Joshy Jacob, ‘Forecasting Performance of Extreme-value Volatility Estimators’ [Journal of Futures Markets, 27(11), November, 2007, 1085-105.] and ‘Estimation and Forecasting of Stock Volatility with Range-Based Estimators’ [Journal of Futures Markets, 28(6), June, 2008, 561-81.] evaluate the forecasting performance of extreme-value volatility estimators using Two-Scale Realized Volatility as the benchmark. Extreme-value estimates with relatively simple forecasting methods are found to provide substantially better short-term and long-term forecasts, compared to historical volatility. The possible improvement in forecasts is likely to be economically significant for applications like options pricing. The high impact of these papers is visible in their numerous citations.
Prof Vipul has investigated the mispricing of index options, and index and stock futures in the Indian market and the effect of derivatives trading on the cash market. He brings out various aspects of this area through his seven published papers (all solo efforts), published in reputed national and international journals (discussed above). He has also worked on the estimation and forecasting effectiveness of range-based volatility estimators with Joshy Jacob, which resulted in two international published papers.
Indian financial market has not been adequately researched in the area of financial derivatives (both the impact of derivatives, and their mispricing). Prof Vipul has tried to fill this gap quite successfully. In most of his papers, he has used the high-frequency data, which ensures that the non-synchronous error is obviated and the results are more reliable. He has also researched the nascent area of range-based volatility estimators, which are proved to be more efficient. He has ensured a rigourous quantitative approach in all his works. As a consequence, his works have been appreciated by the International academic fraternity. This is reflected in the high level of the journals where his papers found acceptance for publication, and also in their citation. In the process, the International academic fraternity became better aware of the Indian financial market and its functioning. This, hopefully, would open new vistas for the future Indian researchers in terms of the acceptance of their works.