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 misspecification 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 boxspreads 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. [ABSTRACT FROM AUTHOR]