Pricing Error Analysis of Taiwan Index Options and Taiwan Index Futures under the Black-Scholes Framework

Abstract

Abstract This study discusses the pricing errors of Taiwan Index Options and Futures under the Black–Scholes Model (BSM). Using 1,353 TEJ trading samples from May 4–11, 2026, we compare theoretical prices with market realities across ITM, ATM, and OTM options to investigate the impact of implied volatility. Results show that BSM systematically underestimates market prices, indicating that Taiwan Index options are overpriced. This phenomenon is driven by irrational market sentiment, hedging demands, and ex-dividend season expectations. Among all types, ATM options exhibit the largest pricing errors due to their high liquidity and sensitivity to market expectations. Furthermore, implied volatility strongly drives these errors, as the real market displays a volatility skew that violates BSM’s constant volatility assumption. Conclusion: While BSM remains a foundational financial tool, its theoretical assumptions are insufficient to fully explain real market behavior in Taiwan.