An Extensive Analysis of the Arbitrage Efficiency and Risk Return Dynamics of Investment Strategies in the Indian Equity Derivative Market

Abstract

This study explores the efficiency of arbitrage and risk-return profile associated with trading strategies within Indian equity derivative market preferring countries’ regulations and market characteristics. Using multicountry data across years we analyed bid-ask spreads, transaction costs and delta-neutral strategies, volatility trades and arbitrage trading. Scholars and financial market participants should interpret our results to indicate that arbitrage efficiency remains high in the Indian equity derivative market, as the bid–ask spread is 0. 14% and transaction costs which make the arbitrage unfair from profitability perspective. Strategies in the delta-neutral approach had an annualized return of 12 per cent. 5%, volatility that is 8. 1%, while the Shapre ratio of this portfolio is equal to 1. 52. On the other hand, volatility trading strategies realized better results of 15% gross returns. The current inflation is at 8% with volatility rate pegged at 12%. 5% which, in turn, provided a lower sharpe ratio of 1. 26. The risk-less trades showed the least volatility of 4. 1%, and moderate Return of 9. 3% with a Sharpe ratio of 2 higher than that of the mean reverting strategy. 15 as measuring the productivity of capital and stressing on increased efficiency of risk-adjusted returns. Governing factors The interference of the regulatory measures in the market led to changes in the liquidity and the volatility levels. It is for these reasons therefore that this research will seek to examine these parameters so as to provide valuable inputs into risk management and strategic planning in derivative markets.