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BRM Project - Section A - FII & Sensex Volatility Batch 2008-10

BRM Project - Section A - FII & Sensex Volatility Batch 2008-10

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Published by: Amrit Ranjan Sahoo on Feb 05, 2011
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We take this opportunity to convey our sincere thanks to Professor Mayank Patel and Professor Suneel Arora for the kind co-operation and support extended to us during the whole project tenure. Himani Joshi for her supporting nature.ACKNOWLEDGEMENT We would like to add a few heartfelt words for the people who were the part of this project in numerous ways. the people who gave support right from the stage the project idea was conceived. stimulating suggestions and encouragement that helped us in all the time of research for and completing the project. we are deeply indebted to our faculty Dr. who were the constant source of inspiration throughout our project work. friends and colleagues. this project would not have been possible without the blessings of the Almighty. Last but not the least we are thankful to our family. Page 4 . Needless to say.

TABLE OF CONTENTS Cover Title Title. Students Name and Roll No. quarterly inflow) Page 22 Page 23 Page 5 . Section. Semester. Acknowledgement Table of Contents Table of Appendices Abstracts Main Text Current Scenario Limitations Learnings Findings and Suggestions Bibliography Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 to Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 TABLE OF APPENDICES Model Summary and Parameter Estimates (a Predictors: (Constant). quarterly outflow) Model Summary and Parameter Estimates (a Predictors: (Constant). Batch.

Thus. Investment by Foreign Institutional Investors in stock markets surged past the 50-billion dollar on Nov 2007. although there are more than 4. trading in whose shares is seen as indicative of market activity. In this project we will analyze the relationship between FII Inflows and outflows and stock market volatility. This figure proves a phenomenal growth in FII flows when compared to a mere USD 4 million in 1992-93 (the first year of allowing FII participation in the Indian markets). Page 6 . their role in determining share price movements must be considerable. Given the presence of foreign institutional investors in BSE Sensex listed companies and their active trading behaviors.ABSTRACT Since the beginning of liberalization Foreign Institutional Investor (FII) flows to India have steadily grown in importance. the BSE Sensex incorporates just 30 companies.700 companies listed on the stock exchange. Indian stock markets are known to be narrow and shallow in the sense that there are few companies whose shares are actively traded.

as well as asset management companies and other money managers operating on their behalf. By June 2001.000 crores during this time. The total amount of FII investment in India had accumulated to a formidable sum of over Rs. 1900 crores during the first six months of 2001. In order to trade in Indian equity markets. Page 7 . which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. since 1993. over 500 FIIs were registered with SEBI. charitable/endowment/university funds etc. India opened its stock markets to foreign investors in September 1992 and has.Overview on Foreign Institutional Investor Foreign Institutional Investor [FII] is used to denote an investor . the share of FIIs has steadily climbed to about 9% of the total market capitalization of BSE. SEBI's definition of FIIs presently includes foreign pension funds. foreign corporations need to register with the SEBI as Foreign Institutional Investors (FII). In terms of market capitalization too. 50.mostly of the form of an institution or entity. mutual funds. received considerable amount of portfolio investment from foreigners in the form of Foreign Institutional Investor’s (FII) investment in equities. This has become one of the main channels of international portfolio investment in India for foreigners. The trickle of FII flows to India that began in January 1993 has gradually expanded to an average monthly inflow of close to Rs.

The FIIs registered with SEBI come from as many as 28 countries (including money management companies operating in India on behalf of foreign investors). In particular institutions operating from Luxembourg. Given the significant financial flows among the industrial countries. however. the regional breakdown of the FIIs does provide an idea of the relative importance of different regions of the world in the FII flows. those from the UK constitute about 20% with other Western European countries hosting another 17% of the FII‟s. national affiliations are very rough indicators of the "home” of the FII investments. instructive to bear in mind that these national affiliations do not necessarily mean that the actual investor funds come from these particular countries. Page 8 . Nevertheless. US-based institutions accounted for slightly over 41%. Cayman Islands or Channel Islands or even those based at Singapore or Hong Kong are likely to be investing funds largely on behalf of residents in other countries.Sources of FII in India: The sources of these FII flows are varied. It is.

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through capital flows. Portfolio flows in the equity markets. FII investment reduces the required rate of return for equity. Page 10 . and FDI. In a common sense way. 2) Imparting stability to India's Balance of Payments. over and beyond domestic saving. units of scheme floated by Unit Trust of India and other domestic mutual funds (listed or unlisted). This mechanism of funding the current account deficit is widely believed to have played a role in the emergence of balance of payments difficulties in 1981 and 1991. as opposed to debt-creating flows. The equity investment route permits upto 30% investments in debt instrument.FII inflows augment the sources of funds in the Indian capital markets. warrants and derivative instruments. FII and the Sub-Accounts are also permitted to offer their shares in case of buyback of securities and also to lend securities through an approved intermediary. FIIs and the Sub-Accounts are permitted to tender their securities directly in response to open offer made in terms of the SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations. enhances stock prices. Benefits and costs of FII investments Benefits: 1) Reduced costs of equity capital. Prior to 1991. At least 70% of the investments has to be parked in equity related instruments which include securities in primary and secondary markets (listed or unlisted). and fosters investment by Indian firms in the country. debt flows and official development assistance dominated these capital flows. 1997. there is need to augment domestic investment. the impact of FII‟s upon the cost of equity capital may be visualized by asking what stock prices would be if there were no FIIs operating in India.For promoting growth in a developing country such as India. are important as safer and more sustainable mechanisms for funding the current account deficit. The excess of domestic investment over domestic savings result in a current account deficit and this deficit is financed by capital flows in the balance of payments.Where can the investments be made? Foreign corporate and foreign individuals are eligible to make investments only through the equity route.

For example. often accept such practices. FIIs advocate modern ideas in market design.3) Knowledge flows. foreign investors were rapidly able to assess the potential of firms like Infosys. and engage in stabilising trades. and lead to spillovers of human capital by exposing Indian participants to modern financial techniques. are less tolerant of malpractice by corporate managers and owners (dominant shareholder). 5) Improvements to market efficiency-A significant presence of FIIs in India can improve market efficiency through two channels. improved efficiency and better shareholder value. and international best practices and systems. used as they are to the ongoing practices of Indian corporates. even when these do not measure up to the international benchmarks of best practices.The activities of international institutional investors help strengthen Indian finance. FIIs may act as a channel through which knowledge and ideas about valuation of a firm or an industry can more rapidly propagate into India. when adverse macroeconomic news. with their vast experience with modern corporate governance practices.Domestic institutional and individual investors. FIIs. Page 11 . FII participation in domestic capital markets often lead to vigorous advocacy of sound corporate governance practices. such as a bad monsoon. it may be easier for a globally diversified portfolio manager to be more dispassionate about India's prospects. at the level of individual stocks and industries. enhance competition in financial intermediation. which are primarily export-oriented. 4) Strengthening corporate governance. unsettles many domestic investors. development of sophisticated products such as financial derivatives. promote innovation. First. applying valuation principles that prevailed outside India for software services companies. Second.

suggests that across episodes like the Pokhran blasts. portfolio investors can occasionally behave like FDI investors. however. Furthermore. and this lack of sound information may generate herding (a large number of FII‟s buying or selling together) and positive feedback trading (buying after positive returns. Page 12 .Costs: 1) Herding and positive feedback trading. and push prices away from fair values. triggering difficulties in the balance of payments front. FIIs‟ behaviour in India. and seek control of companies that they have a substantial shareholding in. selling after negative returns). India's experience with FII‟s so far. may not be inconsistent with India's quest for greater FDI. however. These kinds of behaviour can exacerbate volatility.There are concerns that foreign investors are chronically ill-informed about India. this suggests that there is little evidence of vulnerability so far. no capital flight has taken place. or the 2001 stock market scandal. however. A billion or more of US dollars of portfolio capital has never left India within the period of one month. so far does not exhibit these patterns 2) BOP vulnerability. SEBI's takeover code is in place. ensuring that all investors benefit equally in the event of a takeover. 3) Possibility of taking over companies. When juxtaposed with India's enormous current account and capital account flows. and has functioned fairly well.There are concerns that in an extreme event. without interest in control. Such outcomes.While FII‟s are normally seen as pure portfolio investors. there can be a massive flight of foreign capital out of India.

Most of the stock trading in the country is done though the BSE & the NSE.  The Sensex is an "index". If the Sensex goes down.  Just like the Sensex represents the top stocks of the BSE. where members of the organization gather to trade company stocks or other securities. or as principals for their own accounts. either corporation or mutual organization.Sensex & Nifty Stock Exchanges are an organized marketplace. is the Bombay Stock Exchange and the NSE is the National Stock Exchange.  The BSE. It gives you a general idea about whether most of the stocks have gone up or most of the stocks have gone down.  The Nifty is an indicator of all the major companies of the NSE. These are the major stock exchanges in the country.  The Sensex is an indicator of all the major companies of the BSE. The BSE is situated at Bombay and the NSE is situated at Delhi. The members may act either as agents for their customers.  If the Sensex goes up. There are other stock exchanges like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and the NSE. Page 13 . the Nifty represents the top stocks of the NSE. it means that the prices of the stocks of most of the major companies on the BSE have gone up. this tells you that the stock price of most of the major stocks on the BSE have gone down. An index is basically an indicator.

99% of the time the FII impact on NSE will be same as on BSE. So we will be comparing Sensex and FII net value ( comparision of FII inflow and outflow ). Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an idea about whether the mid-cap stocks go up and down. SLR. The same will be a proxy for NSE too. PLR.  For our research we will be focusing on BSE Sensex and will use it as aproxy of NSE because 99. This is called the “BSE Mid-cap Index”. Repo rates and interest rates  Lending and borrowing mechanism of stocks Page 14 . Factor affecting Sensex  Fundamentals of the company  Market sentiments  Quarterly results  Liquidity crunch  Government policies  Income and savings of investors  News relating stocks  Inflation  Crude oil dynamics  Technicality of the stock  Profit made by companies  Global positioning of company  Fiscal measures  CRR. There are many other types of indexes.

and the price would fall. these high stock prices did not hold. the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. If a company's results disappoint and are worse than expected.Reasons for stock prices "up" and "down"  Stock prices change every day because of market forces. The only thing we do know is that stocks are volatile and can change in price very rapidly. the price jumps up. wherein. if more people wanted to sell a stock than buy it.  So .  If a company's results are better than expected. this fact demonstrates that there are factors other than current earnings that influence stocks.  For example. Calculation of BSE SENSEX: SENSEX is calculated using the "Free-float Market Capitalization" methodology. you can determine when to buy and sell. at Page 15 . then the price will fall. while others think that by drawing charts and looking at past price movements. This is often indicated by the notation 1978-79=100. Still. By this we mean that stock prices change because of “supply and demand”. The Divisor is the only link to the original base period value of the SENSEX. there would be greater supply than demand. If more people want to buy a stock (demand) than sell it (supply). and most internet companies saw their values shrink to a fraction of their highs. During market hours. replacement of scripts etc. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. prices of the index scripts. The calculation of SENSEX involves dividing the freefloat market capitalization of 30 companies in the Index by a number called the Index Divisor. The base period of SENSEX is 1978-79 and the base value is 100 index points. the stock price of dozens of internet companies rose without ever making even the smallest profit. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.  Conversely. then the price moves up. As we all know. Some believe that it isn't possible to predict how stock prices will change. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions.

This range is then expressed as a percentage of the beginning of the period. the greater the dispersion of returns and the higher the risk associated with the investment. Problem statement: For this research study on the basis of the secondary analysis we have formed the Alternative and Null Hypothesis as: Null Hypothesis (H0) – FII Inflows and outflows will not significantly affect the stock market volatility. It may be measured via the standard deviation of a sample. the greater the chance of lower-than-expected return. and it may either be an absolute number ($5) or a fraction of the mean (5%). In other words. are used by the trading system to calculate SENSEX every 15 seconds. the riskier the investment. Volatility reflects the degree of risk faced by someone with exposure to that variable. Lower price ranges result in lower volatility. The value of SENSEX is disseminated in real time. Page 16 . volatility creates risk that is associated with the degree of dispersion of returns around the average. For securities. VOLATILITY Volatility most frequently refers to the standard deviation of the continuously compounded returns of a financial instrument with a specific time horizon. More broadly. Larger movements in price creating a higher price range result in higher volatility. It is often used to quantify the risk of the instrument over that time period. volatility refers to the degree of (typically short-term) unpredictable change over time of a certain variable.which latest trades are executed. from the low price value to the high price value. Volatility can be traded directly in today's markets through options and variance swaps. Alternative Hypothesis (H1) – FII Inflows and outflows will significantly affect the stock market volatility. As described by modern portfolio theory (MPT). Another way to measure volatility is to take the average range for each period. the higher the standard deviation. Volatility is typically expressed in annualized terms.

MS Excel 2007 Technique used: Sampling design A Sample is an individual element or a group of elements from a population. they are highly correlated. showing a positive relationship between them and are directly proportional. Error of the Estimate 2139. So it shows that. There is 77.880 14. Error .142 Sig.880(a) R Square . which means that 77. The process of selecting a sample from the population is called Sampling. monthlyinflow Coefficients(a) Standardized Coefficients Beta Unstandardized Coefficients Model 1 B (Constant) Monthlyinflow 73. Comparisons of monthly mean of FII’s inflow by monthly mean of the Sensex.313 3.METHODOLOGY Statistical tool used: SPSS. In this we have taken monthly Sensex mean(volatility) as dependent variable and monthly mean of FII’s inflow as an independent factor and we tried to establish a relationship between this two variables. Error 515. The entire population of listed companies can be segmented into mutually exclusive groups or categories based on the sectors.190 Std.774.226 t B .384 .774 Adjusted R Square . Model Summary Model 1 R . Std.000 .770 Std.106 a Dependent Variable: sdvofsensex Page 17 .887 . If yes to what extent it is affecting the dependent variable. that whether a change in one factor brings about a change in the other factor or not.06924 a Predictors: (Constant). Here the value of = 0.4% association between the sensex and FIIs .4% variation in the sensex is due to the FIIs.

00 0.Model Summary and Parameter Estimates 20.000.00 5.00 15.00 monthlyinflow Page 18 .00 2.00 0.00 Mean sdvofsensex 5.00 1.000.00 3.

00 5000.00 10000.00 15000.00 0 10 20 30 40 50 60 Sequence Page 19 .sensexmean Observed Linear 20000.00 0.

227 means that there is less correlation between the fii’s quarterly outflow and sensex .227 Adjusted R Square . Error of the Estimate 210.21. From the linear model used it is seen that the value of = .477(a) R Square .187 Std.91387 a Predictors: (Constant). If yes to what extent it is affecting the dependent variable.0. Model Summary and Parameter Estimates Model Summary Model 1 R . It is the value of determination of correlation which measures the linear association between two variables 0.( 2 ) Comparision of quarterly mean of FII’s outflow by quarterly mean of the Sensex . that whether a change in one factor brings about a change in the other factor or not. In this we have taken quarterly sensex mean(volatility) as dependent variable and quaterly mean of FII’s outflow as an independent factor and we tried to establish a relationship between this two variables. quarterly outflow Page 20 .

(3) Comparision of quarterly mean of the FII’s inflows by quarterly mean of the sensex .From the linear model used it is seen that the value of = . If yes to what extent it is affecting the dependent variable.21. In this we have taken quarterly sensex mean(volatility) as dependent variable and quaterly mean of FII’s inflow as an independent factor and we tried to establish a relationship between this two variables.0. that whether a change in one factor brings about a change in the other factor or not. It is the Page 21 .

Error of the Estimate 226.106 Adjusted R Square . Model Summary and Parameter Estimates Model Summary Model 1 R .059 Std.106 means that there is less correlation between the fii’s quarterly inflow and sensex .85247 a Predictors: (Constant).value of determination of correlation which measures the linear association between two variables 0. quarterly inflow Page 22 .326(a) R Square .

Thus we can conclude that monthly inflow is highly related to standard deviation of sensex. So we can not actually say that what percentage. So we choose the final output and the finding of our research objective in the same. p<0.05.142. It is also to be remembered that the beta coefficient obtained depends on the independent variable which has been used in the analysis. the other factor are affecting the stock volatility. We all concluded that stock is affected by a number of variables of which FII’s is a part.880 has much more influence on the dependent variable. that upto what extent FIIS will be affecting the stock volatility. So we can not predict in the future. which indicates that beta =0.106.190 is the value of regression coefficient (error term) Y’= 73.06924 The B value have been transformed into standard scores is referred to as beta.001 t-value which is greater than 0 .190X t-value for the constant 0. not significant t-value for the regression coefficient = 14.313+3.106 with a probability for less than 0.313+3. R-squared is 0.774 Standard error of the estimate 2139. our result was the closetest in the analysis of the monthly data.313 is the intercept 3. Results of Regression analysis : The prediction equation is Y’= 73.190X t-value of monthly inflow is 14. so one would conclude that this variable do add to the ability to predict sensex. The prediction equation that we have arrived above is done taking other factors as constant.Final Interpretation of the above outputs: Comparing the various outputs of the methods used above . Page 23 . The detailed analysis of the mean inflow of the FIIs with monthly mean of the sensex is given below: 73.

The research project deals with Sensex in the stock market which forms the dependent variable. brokers and even retailers. the increasing shareholding patterns are an indicator towards increasing FII confidence in a company's growth prospects and hence equity returns. traders.Research design: From the hypothesis and the research problem stated it can be seen that this research project is of an exploratory nature. It involves investigation and framing of a hypothesis which needed to be tested. Method of data collection 1. 4. qualitative techniques such as document analysis in the form of secondary data analysis will be used. Independent Variable: FII inflows and outflows Dependent Variable: BSE Sensex value (also using BSE Sensex as proxy of Nifty) The FII holding patterns in a company's shareholding. For measuring this criterion. 3. Backed with well supported research and information these FIIs put their money only in companies where they see opportunities for good returns. The data will be primarily formatted in excel and then will be entered in SPSS 5. The data for FII holding in a company will be collected from the official website of SEBI. reflects the confidence that the foreign investors have in the company. From the various research papers that we have gone through. In order to explore the various alternatives. Page 24 . 2. So. As a last step regression analysis will be performed in SPSS. The data collected is daily for the last 5 years (November 2003 – November 2008). the Sensex values on BSE are considered as a benchmark and hence will be collected from the BSE site. The FII investor investment moves are very closely followed by industry watchers. It is a case wherein the results expected are not definite. we have included the following as our independent variables apart from FII Inflows which we will be testing against the Dependent variable.

FIIs have invested more than Rs 44.Literature Review 1).bseindia. To further analyze the unusual movement of Sensex share price movements of the thirty Sensex companies were studied. Daily Sensex data were used for estimation of volatility Data were taken from the Bombay Stock exchange website (www.nseindia. Page 25 . Researched By : Parthapratim Pal Source: www. Average monthly closing prices of the thirty companies were used for the analysis.com To measure how much the volatility increased during a month. Recent Volatility in Stock Markets in India and Foreign Institutional Investors.000 crore of portfolio capital in the Indian stock market. the following two methods of estimating inter and intraday stock market volatility was used . For the financial year 2003-04. The first formula measures inter day volatility by computing standard deviation of daily returns on stock prices The second formula uses intraday High and lows of stock market prices and estimate intra-day volatility.com) Calculations show that both inter and intraday volatility of BSE Sensex followed similar trend during 2004. There has been a very sharp increase in the net FII investment in India since April 2003. The measures were suggested in the SEBI Publication on volatility by Raju and Ghosh (2004).

com ABSTRACT: The study investigates the week form efficiency in the equity market.bseindia. Samal 1997. METHODOLOGY: As returns are more likely to be normally distributed.Conclusion A number of studies in the past have observed that investments by FIIs and the movements of Sensex are quite closely correlated in India and FIIs wield significant influence on the movement of Sensex (Rangarajan 2000. whereas first difference futures returns are stationary. the Kolmogrov-Smirnov (K-S) goodness of fit test has been employed. To test whether future returns confirm to the assumption of normal distribution or not. The NIFTY and stock returns are found to be deviating from the normal distribution. Further analysis through the AUTOREGRESSIVE INTEGRATED MOVING AVERAGE (ARIMA) process reveals that the NIFTY and the stock futures returns are not independent and shows strong dependencies. Pal 1998). the returns on NIFTY index and individual stock futures are calculated in the following manner: NORMALITY: The primary condition for the return series following the random walk is that it confirms to normal distribution. This is so because other market participants perceive the FIIs to be infallible in their assessment of the market and tend to follow the decisions taken by FIIs. Empirical analysis finds evidence of statistical dependence in the returns generating process. Page 26 . 2). Methods used for calculating returns on NIFTY index and individual stock futures Researched By: Kapil Gupta and Balwinder Singh Source: www. The futures prices are found to be non-stationary at levels.

reasons for Page 27 .d. and q the number of moving average terms.q) model to it. where p denotes the number of autoregressive terms. K-S (Z. RESULTS AND ANALYSIS: Descriptive statistics and the K-S goodness of fit test are good measures to investigate whether the return series confirms to normal distribution .in addition. For a large sample. The serial correlation coefficient measures the relationship between the values of random variables at time t and its value in the previous period. the Box-Ljung statistics follow the chi-square distribution with m degrees of freedom.value)for Nifty futures is significant.INDEPENEDENCE: To test whether the successive returns of returns of Nifty or stock futures are independent or not. but when the original time series is ARIMA(p. d the number of time the series has to be differenced before it becomes stationary. AUTOREGRESSIVE INTEGRATED MOVING AVERAGE( ARIMA): If we have to difference a time series d times to make it stationary and then apply the ARMA(p. AUTO CORRELATION TEST and ARIMA process are employed.q). AUTO CORRELATION TEST: Autocorrelation is a reliable measure for testing of independence of random variables in return series. High volatility in the cash as well as futures market may be the inefficiency of Indian equity futures market.

iii. ii. stock market excess return. Samanta Source: www. volatility-feedback effect (i.e.. Empirical Results: In order to checking the robustness of our empirical results.com The model presented by Guo (2002) consists of a number of equations for capturing/explaining three types of relationship/observed phenomenon. The empirical analysis presented in this article is carried out based on monthly data on three variables. In the same spirit. viz. April 1995 to December 2002 and Page 28 .. These data are compiled and published by the Central Statistical Organization (CSO) and are available in publications of many other organizations. this article assesses the extent of volatility-feedback estimating following auto-regressive model in ordinary least square framework. April 1993 to December 2002. Volatility and Future Output Growth Some Observations Relating to Indian Economy Researched By: G. and Impacts of both stock market excess return and volatility on future output growth.3). ii. P. relevant data on daily or less than monthly periodicity are taken into consideration. stock market volatility and output growth. For deriving monthly information on first two variables. i. Influence of stock market volatility on stock market excess return. The IIP data used in this article cover the period April 1993 to December 2002 and thus monthly information on output growth (Yt) is derived for the period May 1993 to December 2002. relationship between stock market volatility and its own past values). i.nseindia. viz. all estimations are carried out separately for three different time periods. Stock Market Return.

com ABSTRACT: The report has succinctly brought out several relevant issues concerning FII flows. with the recommendations focusing on policy measures needed to deal with these issues. This report gives a detailed analysis about the FII’s inflows in India.iii.e.1994 there were only 3 FII registered in India but in 2005 – 2006 the number increased to 803 signifying the interest of FII in Indian stock market and also shows the net effect of FII’s in the Indian equity market. April 1997 to December 2002. on a yearly basis. Report of the Expert Group on Encouraging FII Flows and Checking the Vulnerability of Capital Markets to Speculative flows(Government of India Ministry of Finance) Research Members: 1) Chief Economic Advisor Chairman 2) Chief General Manager. i. Page 29 . The data given in the report also gives an analysis about the volatility caused thorough outflows as well as inflows. i. SEBI Member 4) Joint Secretary (CM) Member 5) Joint Secretary (FB) Member Source: www.rbi. The data is given on a monthly basis which shows the various factors that affects the volatility in market. Empirical results show that stock market volatility is strongly influenced by its own past values – pointing to the presence of significant volatility-feedback effects in the stock market.e. how FII’s affected the volatility in the market. RBI Member 3) Executive Director. 4). They had also analyzed that during the year 1993. the total number of FII’s registered in India from year 1992-2006.

The risk management system withstood volatility of 8 sigma or above as against the normal built-in capacity of withstanding only 3-6 sigma variations internationally.e. Page 30 . which are negative shocks affecting the economy. There have been four episodes of vulnerability in India. 2004.It also gives an analysis of the period during which the market has been volatile. these events did affect domestic investors’ behavior as well. and the Black Monday of May 17. Apart from this the report explains evolution of FII’s policies in India. and influencing the behavior of investors. the stock market scam of early 2001. But. They have also analyzed the volatility in stock market in relation to different events . the episodes of volatility in India. the Pokhran Nuclear explosion (May 1998) and the attendant sanctions. i.10 The investment behavior of the FIIs vis-à-vis the movements of the stock market indices during these episodes are given FII investment behavior during these four specific events indicates that these events did affect the behavior of the foreign portfolio investors. and comparison of FII’s and FDI’s. These are: the East-Asian crisis in 1997.

It is also taken as a measure of riskiness. Thus in this research paper researchers have tried to address some issues with respect to Indian stock market like . why is this volatility so pronounced and so on. It is the investor reactions. An empirical study of BSE Sensex and a set of representative stocks are carried out to find the changes in their volatility in the last two years. due to psychological or social beliefs. fluctuations in prices of stocks are observed all over the world due to this. which exert a greater influence on the markets. As the investors react to various events whether it be political or economic or any else. A STUDY OF VOLATILITY IN INDIAN STOCK MARKETS TO UNDERSTAND THE REASONS FOR TURBULENCE IN THE LAST TWO YEARS Research Members: Piyush Kumar Chouhan (Student – XIM) Vasant Shukla (Student – XIM) ABSTRACT: The stock market always keeps on shifting its trends. One view says that the market movements can be explained entirely by the information that is provided to the market. Two school of thoughts have been incorporated here. sometimes up and sometime down. has the Indian market developed into a speculative bubble due to the emergence of "New Economy" stocks. the view that volatility is caused by psychological factors is tested. Here VOLATILITY has been described as variability in the price over time measured as the variance or the standard deviation of the returns on the asset. Whatever information we get is never sufficient to find out what caused the market fluctuations. It has been examined from the fundamentalist view put forward by economists who argue that volatility can be explained by Efficient Market Hypothesis. The stock market regulation in introduction of rolling settlement and dematerialization as a measure of reducing volatility is put to test. Here various aspects have been studied like The Psychological Phenomenon. On the other hand. And another states that the movements have nothing to do with economic or external factors.Has the stock market volatility increased. The Page 31 .5).

The market regulators have been trying their best to curb these speculative uprising but have not been able to keep it in control. The IT revolution. The Internet Myth. Conclusion: Though no fundamental factors emerge for the existence of such high volatility the researchers find that other perceptual factors have led to this mad rush for stocks leading to volatility. The feedback effect. Page 32 . A more analytical media reporting which highlights better risk management coupled with investor learning will surely lead to more stable market.Information Boo. Cultural Changes. Dematerialization and Rolling Settlement. Stock Market Regulations.

18 Change in %. -17.79 Sep’08 Quarter 12.24 -6.41 -9.52 18. which had boosted the market to its highest ever levels in January.24 Source: Capitaline Page 33 . So far.25 9. About 14 of the 30 stocks that make the Sensex.48 38.79 Co.80 15. Khandkar.8 billion.79 -6.” notes Nitin A. India’s most widely tracked index.02 8. Most analysts expect this number will rapidly grow as more companies report this data during the ongoing earnings results season.61 Infrastructure Development Finance 37.91 20. the peak of the Indian bull market rally.52 -7.53 -7. Top 10 BSE-500 index firms in which foreign institutional investors (FIIs) have decreased their stake % Holdings of FIIs Company Development Credit Bank Dabur Pharma ACC Nagarjuna Fertilizers and Chemicals Orchid Chemicals and Pharmaceuticals Bajaj Hindusthan Jyoti Structures Mercator Lines Dec’07 Quarter 30.95 -6.67 18. FIIs have withdrawn $11 billion (Rs53.86 6. the first time in a decade when they have been net sellers. This conclusion is based on a Mint analysis of 173 stocks that have already disclosed changes in their stock ownership for the quarter ended September.65 -9.07 27.39 14. a Mumbai brokerage. This fall has largely been broad-based.84 0.and mid-cap stocks.Current Scenario At least one in two companies in the BSE-500 index.240 crore) from the Indian equities market.57 -7. appear to have seen a decline in holdings by foreign institutional investors (FIIs) since January. with foreign investors withdrawing money across large. they had pumped in $17. and 23 of the 50 Nifty index stocks. vice-president at Keynote Capital Ltd. local arms (of FIIs) have been forced to liquidate their holdings in India.75 21. “Because of the global liquidity crunch. About 105 of the 173 stocks that have released their data so far have seen their FII holdings fall in the last three quarters. United Phosphorus 44.95 11.13 13.00 31. Last year. comprising the top 500 firms listed on the Bombay Stock Exchange that account for 93% of India’s market capitalization.16 -6.65 21. are also in the same situation.

which was later on shown through monthly or quarterly data . so fii impact on movement cannot be determined. 3) We had not considered fii investment in debt instruments.99% of the time the fii impact on NSE will be same as BSE . instead we had used monthly and quarterly data.LIMITATIONS : 1) Foreign Institutional Investor includes foreign institutional investor and foreign direct investment. The reason was that in daily data the clear picture of relationship between FII and Sensex was not portrayed . We had only considered fii investment in equities. For the project we had only included foreign institutional investors and not the foreign direct investment. Page 34 . 4) In the project we had only focused on BSE Sensex and had used it as a proxy of NSE because 99. 2) We are not predicting the future impact of fii inflows and outflows on Sensex because there are many other factors affecting sensex. We had not considered daily closing data of Sensex.

3) Collection of data from various sources like websites. 5) Impact of FIIs inflows and outflows on Sensex and their relationship with respect to monthly and quarterly. articles. 4) Verifying the nature of data. Page 35 . where we have applied various tests and try to build some models between the relationships of the variables.LEARNING’S : The learning’s out of the project done is: 1) We have learnt about the various functionality of SPSS. 2) Practical application of quantitative techniques. discussions and others.

Liquidity crunch in U. 3) FII’s does affect the Sensex to an extent but it is not only the individual factor affecting it because there are many other factors which affect the Sensex. 2) A perfect relationship between FII’s and Sensex built on regression model. SUGGESTIONS : The suggestions out of the project are: 1) The collection process of data should be proper and the nature of data is very much important which can affect the result of findings. Ex: . Page 36 .FINDINGS : The findings out of the project are: 1) A complete idea about the concept of volatility and its analysis by calculating intraday volatility. 4) The inflow and the outflows of FIIs affecting the Sensex is also due to various extraneous factors which have caused FII’s to buy and sell. monthly volatility and yearly volatility. 4) Proper literature review has to be done. 2) Individual impact of the FIIs inflows and outflows shows a better relationship with the Sensex other than the net impact of the FIIs. which comes to play in the long run. 3) The statistical test which have to be applied for the project should have logic behind it which should be appropriative.S causes FII’s to sell their stake in Indian stock market.

foster An introduction to stock market volatility – by james fresher An overview of Foreign Institutional Investors – by Richard Benson SEBI website BSE website Page 37 .Jeremy J .by -Eric L Einspruch Data Analysis – using SPSS for Windows – Version 8-10 by .BIBLIOGRAPHY : 1) 2) 3) 4) 5) 6) An introductory guide to SPSS for windows – second edition .

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