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Volatility in Indian Stock Market Dr Amneet Kaur1 ABSTRACT Now days, everybody is affected by the movements in the stock

markets whether its an upward or downward. In this paper we tried to explain the reasons behind these sudden movements in the stock market. Why Indian stock market is affected by USA recession and European market downfall. The liberalization, introduction of derivative instruments, evolution in information technology sector has made it easy to invest any type of securities in the world stock market from anywhere. The researchers have tried to identify the causes and caring for volatility.

Introduction Stock volatility refers to the potential for a given stock to experience a drastic decrease or increase in value within a predetermined period of time. Investors evaluate the volatility of stock before making a decision to purchase a new stock offering, buy additional shares of a stock already in the portfolio, or sell stock currently in the possession of the investor. Volatility is associated with high levels of trading in stock, futures and options. Stock volatility may also be influenced by situations that are impacting the stock market in general. Market volatility can take place when consumers begin to lose confidence in the economy, or when political issues cause investors to become more conservative in their trading activity. There are number of factors that can impact stock volatility. One of the major concerns is the stability of the underlying assets supporting the stock issue. Meaning: Volatility as described here refers to the actual current volatility of a financial instrument for a specified period. It is the volatility of a financial instrument based on historical prices over the specified period with the last observation the most recent price. Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. Measurement: Volatility of a stock is measured by the variability in the price over time measured as the variance or the standard deviation of the returns on the stock. The more the standard deviation the more volatile the stock is. This is also a measure of the riskiness of the asset since the more variation it has the more unpredictability associated with its returns. The most commonly used measure of stock return volatility is standard deviation. This statistic measures the dispersion of return. When the standard deviation is more, the chance of large positive or negative is more.

Assistant Prof ,Guru Gobind Singh College for Women sector 26, Chandigarh

National Volatility Scenario

Table 1: Volatility of major indices in Indian capital market Year BSE Sensex BSE_100 Index S&P CNX Nifty CNX Nifty Junior 1997-98 2.3 2.6 2.02 4.03 1998-99 1.83 1.67 1.53 2.74 1999-00 1.72 2.23 1.82 3.06 2000-01 NA NA NA NA 2001-02 1.5 1.6 1.4 1.58 2002-03 1.01 0.99 0.99 1.23 2003-04 1.35 1.51 1.43 1.57 2004-05 1.48 1.5 1.61 1.83 2005-06 1.03 0.98 1.04 1.13 2006-07 1.75 1.76 1.77 2.05 2007-08 1.93 2.04 2.02 2.41 2008-09 2.8 2.71 2.66 2.8 Volatility is standard deviation of daily returns (source NSE, BSE) Fig A : Graph of volatility of major indices in Indian capital market
12 10 8 6 BSE_100 Index 4 2 0 BSE Sensex CNX Nifty Junior

S&P CNX Nifty

Above table 1 shows the volatility of major indices in Indian capital market. Volatility is measured by calculating standard deviation of daily returns of the financial traded securities. Fig A shows the Graph of volatility of indices of Major Indian capital market. It is clear from the Fig A , Volatility is increasing every year and it is higher in 2008-09.

International Table 2: Volatility of Select World Stock Indices Hong Kong Singapore 1.4 0.9 1.4 0.8 1.9 1.3 1.3 1 1.1 0.8 2.5 1.5 2.8 2.5 1.7 1.5 2 1.5 1.8 1.5 1.2 1 1.1 1.2 1 0.8 0.7 0.6 0.9 0.9 1.7 1.4 3 2.2 3.2 2.4

USA UK France Australia 1992 0.6 1 1.2 0.7 1993 0.5 0.6 1 0.7 1994 0.6 0.8 1.1 0.9 1995 0.5 0.6 1.1 0.7 1996 0.7 0.6 1.8 0.7 1997 1.1 1 1.4 1 1998 1.3 1.3 1.7 0.9 1999 1.1 1.1 1.2 0.8 2000 1.4 1.2 1.5 0.9 2001 1.4 1.4 1.6 0.8 2002 1.6 1.7 2.2 0.7 2003 1.1 1.2 1.4 0.9 2004 0.7 0.7 0 0 2005 0.7 0.6 0.7 0.6 2006 0.6 0.8 0.9 0.8 2007 0.9 1.1 1.1 1 2008 2.6 2.4 2.6 2 2009 2.6 2.4 2.7 2 Source: SEBI

Fig B :Graph of Volatility of Select World Stock Indices


18 16 14 12 10 8 6 4 2 0 hing kong Australia France UK USA Singapore

Above table 2 shows the volatility of selected world stock indices from 1992 to 2009.It is clear from the fig B the volatility of all selected world indices is increasing. Singapore, Hong Kong, Australia, France, there is more stock markets volatility than UK, USA.

Causes of volatility

Globalization In the era of globalization the worlds markets are largely interdependent and this can be seen by the volatility in the stock markets all over the world. Change in volatility can be seen since FIIs entered in Indian stock market. Since the beginning of liberalization of investment policies, role of FIIs in India has steadily grown in importance. The strong trend towards globalization has brought about significant developments in the Indian economy. One of them is tremendous increase in the mobility of capital across national borders. The FIIs are major institutional investors in Indian capital market. Movement in the Sensex has clearly been driven by the behavior of foreign institution investors. The presence of foreign institution investor in the sensex companies and their active trading behaviors, their role in determining the share price movements must be considerable. Indian stock markets are known to be known narrow and shallow in the since that there are few companies whose shares are actively traded. Although there are 4700 companies listed with stock exchange. The BSE sensex incorporates only 30 companies, trading on whose shares are seen as indicative f market activity. This shallowness also means that the FIIs can also affect the behavior of other retail investors, who tend to follow the FIIs when making their investment decision. - Increase in investment by FIIs cause sharp price increase. It would provide additional incentives for FII investment and this encourages further investment so that there is a tendency for anytime correction in the market. And when the correction begins it would have to lead by an FII pullout and can take the form of extremely sharp decline in the share prices.
- FIIs are attracted to the market by expectations of a price increase that tend to be automatically realized, the inflow of foreign capital can result in an appreciation of the rupee. This increases the return earned in foreign exchange, when rupee assets are sold and the revenue converted into dollars. As a result, the investments turn even more attractive triggering an investment twisting that would imply a sharper fall when any correction begins. - The growing realization by the FIIs of the power they wield in what are shallow markets, encourages speculative investment aimed at pushing the market up and choosing an appropriate moment to exit. This implicit manipulation of the market if resorted to often enough would obviously imply a substantial increase in volatility. - In volatile markets, domestic speculators too attempt to manipulate markets in periods of unusually high prices.

75000 70000 65000 60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

NET INVESTMEN T by FII's SENSEX

7.94 7.05 8.07 7.66 4.5

15.05 8.88

15.04

9.17 7.79 9.02 11.46 12.87

Banks Engineering Finance FMCG Information Tecnology Infrastructure Manufacturing Media & Entertainment Petrochemicals Pharmaceuticals Services Telecommunication Miscellaneous

Dematerialization Dematerialization or Demat is a process whereby your securities like shares, debentures etc, are converted into electronic data and stored in computers by a Depository. Securities registered in your name are surrendered to depository participant (DP) and these are sent to the respective companies who will cancel them after Dematerialization and credit your depository account with the DP. The securities on Dematerialization appear as balances in your depository account. Demand and Supply forces determine prices of a product. Liquidity plays an important role in the

interplay of demand and supply forces. The impact of dematerialization on liquidity in the Indian stock exchanges is quantified and analyzed. Quality of shares changed for better owing to dematerialization and thus investors are expected to earn higher returns. Changes in quality of shares are expected to cause changes in demand and supply for shares, which in turn, influences the levels in share prices i.e. volatility.

Table 3 : Progress of Dematerialization: NSDL & CDSL as at the end of the period. NSDL MarJun-08 09 7,530 7,530 44,387 258 7,556 9,563, 784 250,34 3 39,125 7,801 7,801 31,103 275 8,777 9,685, 568 282,27 0 31,066 CDSL MarJun-08 09 6,025 6,025 44,024 433 6,498 5,135, 602 63,100 5,646 6,213 6,213 31,437 468 6,934 5,527, 479 70,820 4,397

Parameters of progress Companies-Agreement signed Companies-Available for Demat Market Cap. Of companies available Number of depository participants Number of DP locations Number of investors Accounts Demat quantity Demat Value

Mar08 7,354 7,354 52,197 251 7,204 9,372, 335 236,89 7 43,770

Jun-09 7,800 7,800 47,695 280 9,340 9,857, 785 296,77 9 42,572

Mar08 5,943 5,943 51,626 420 6,372 4,798, 222 49,820 5,900

Jun-09 6,275 6,275 48,051 475 6,942 5,715, 518 70,670 6,878

STOCK DERIVATIVES Derivatives include futures, forwards; options and swaps, and these can be combined with each other or with traditional securities and loan to create hybrid instruments. Futures and options have become essential instruments of price discovery, portfolio diversification and risk hedging in recent times on the Indian stock markets. In India derivatives were introduced as a hedging device in June 2000 through the introduction of stock index futures in Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). This was followed by the introduction of the index option (June 2000), stock options (July 2001) and stock futures (November 2001). Derivatives are financial instruments whose values are derived from the price of an underlying item and this underlying item can be equity, index, foreign exchange, commodity or any other asset. Change In the prices of underlying assets will definitely affect the price of instrument. Secondly, The volume in derivatives markets, especially on the futures and options on National Stock Exchange, witnessed a tremendous increase and recently the turnover is much higher than the turnover in the cash market which will affect the stock price volatility.

Fig C: Graph of number of derivative contracts traded

800000 700000 600000 500000 400000 300000 200000 100000 0 No. of contracts

Above table shows the comparative data on the dematerialization on NSDL & CDSL at the end of 2008 and 2009 INFORMATION TECHNOLOGY The remarkable technologies advances in the field of computer and communication industries have made it easier for large numbers of people to learn and react to information quickly. These days, the Internet is making stock information of high quality available almost instantly to individual investors everywhere. Armed with such information, these investors can make more informed financial decisions regarding buying and selling stocks. Furthermore, there are lower commissions charged for executing orders through the Internet compared to the traditional broker's commissions. Due to these two factors, a new group of investors has emerged. And, as a direct result of this phenomenon, the volume of trading and the volatility of stock prices are expected to increase substantially. Internet also made it possible for financial markets o provide liquidity for investors around the world. These changes have two types of effect on market. First, there are large incentives for investors to get and act on new information. Second because new information spreads more quickly, the rate at which price changes in response to information has also accelerated. The liquidity of organized securities markets plays an important part in supporting the value of traded securities, but it also means that the price can change quickly. From this perspective, volatility is a symptom of highly liquid securities market. The effect of the Internet on business activities has been enormous during the last several years. The Internet is making high quality stock information available to individual investors almost instantly. Online trading of stocks has become very popular, both to those trading online and to those using traditional brokers; many investors are also moving from doing their own research to trading online. Consequently, the number of online brokerage accounts has increased significantly during the last 7 years. Although there are other factors at play, such as general economic conditions, market conditions and interest rates, each of which can clearly contribute to change in the volume and volatility of the market, in this study we have limited ourselves to concentrating on the effect of the Internet on the stock market in terms of the volume and volatility of the market.

Trading Volume Trading volumes in the equity segments of the stock exchanges have witnessed a phenomenal growth over the last few years. The trading volumes saw a considerable increase in late 1990s.The compound annual growth rate of trading volumes on all stock exchanges taken together has been 8.91% over the period 2001-02 to 2008-09. Below table 4 shows that the NSE consolidated its position as the market leader by contributing 71.43% of the total turnover in India in 2008-09 and 75.03% in first quarter of 2009-10 . Since its inception in 1994, NSE has emerged as the favoured exchange among trading members.

Table 4: Total turnover in capital market turnover


Stock Exchanges NSE BSE Capital Market Turnover(Rs.mn.) 2009-10(Apr2007-08 2008-09 Jun) 35,510,380 15,788,570 27,520,230 11,000,740 11,316,710 3,766,790 Share in Turnover (%) 20072008200908 09 10(Apr-Jun) 69.21 30.77 71.43 28.55 75.03 24.97

According to the WFE Statistics, in terms of number of trades in equity shares, NSE ranks 3rd with 13,68,050 thousands of trades as end December 2008 and 4th with 782,027 thousands of trades during January 2009 to June 2009. The trades details of the top ranked stock exchanges are presented in table 5 below. Table 5: Total Numbers of Trades in Equity Shares (in thousands)

Exchanges Nasdaq NYSE Euro next(US) Shanghai Stock Exchange NSE Shenzhen SE Korea Exchange

End December 2008 3,779,392 4,050,573 1,278,881 1,368,050 658,047 641,754

January 2009-June2009 2,240,242 1,641,340 983,849 782,027 561,010 449,920

Below fig shows the number of companies listed with Indian stock exchange .with the increased number of listed companies the number of shares traded in the market also increases which further increases the volatility in return.

Fig D shows the number of companies listed with stock exchange for trading. It is clear from the figure that , since 1995 the number increased 11 times over the period of 20yrs
1600 1400 1200 1000 800 600 400 200 0 135 550 422 612 648 720 785 793 818 909 970 13811432 1228 1069

No. of Companies listed

Jan-97

Jan-06

Jan-95

Jan-96

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-07

Jan-08

Fig D: Number of companies listed Trading hours

Source: Fact book 09

The Securities and Exchange Board of India, the market regulator, allowed exchanges to extend trading hours. The extension of trading hours at Indian stock exchanges has started boosting trading volumes.NSE posted a 28%increase in daily average cash turnover at Rs. 17,812.77 cr, BSE clocked a 31.9 % surge in turnover at Rs.6,162.34 cr, in January after extension of trading hours. With six-and-ahalf hours of trading, the Indian cash market now has the second longest trading sessions in the eastern part of the world, next only to the Australian Securities Exchange. Stock trading as Profession Stock trading is a field of profession which includes financial market analyst, brokers, and institutions assisting stock trading which provides information regarding available investment options in the financial market. In the 80s only equity shares were traded in the market, but now there are many financial instruments available for trading like derivatives, debts, commodity trading, ETFs, MF. One needs professional skill to invest in these financial products. The institutions assists trading, they provide trading tools and strategies, state of the art and efficient infrastructure and this has resulted in traders becoming more mature and responsive. Capital market regulatory bodies NSE, BSE, SEBI are now offering certified courses for brokers, stock traders. Media The extensive coverage of stock market news even in the non-financial dailies indicates that the newspapers are an important source of information and comment upon the stock market, at least for private (as opposed to institutional) investors. The press is more likely to influence decisions of members of the public than decisions of fund managers in part because the later will already have much of the information obtained by journalists from brokers and other sources. Each and every news regarding the stock market is available to the public. Every news channels have their own websites and dedicated

Jan-09

column to stock market news and research. Every minute theses websites are updated with national as well as international economy news. Conclusion India, along with other emerging markets, contributing significantly to the rising world trade. There is drastic change in the return of the stocks and volatility of stock prices after liberalization policies. Investment by FIIs and the movements of Sensex are quite closely correlated in India. The FIIs are currently the most sensitivity non-promoter shareholder in most of the Sensex companies and they also control more tradable shares of Sensex companies than any other investor groups. Results of this study show that not only the FIIs are major players in the domestic stock market in India, but there are many other major factors affecting stock market volatility like Dematerialization and technological advancement in the field of computer and communication industry. Internet also made it possible to provide information available to customer very easily and also provide liquidity in the market. The imperatives of changing time, technology and needs of the economy, require us to take further steps to build up on the financial sectors capabilities, already achieved, in the form of the next generation reforms. This would help our financial markets to achieve their full potential growth. Suggestions Volatility is one of the important aspects of financial market developments providing an important input for portfolio management, option pricing and market regulations. The degree of volatility presence in the stock market would lead investors to demand a higher risk premium, creating higher cost of capital, which impedes investment and slows economic development. Volatility can be managed efficiently and effectively in a well-diversified portfolio with enhancement in awareness and knowledge. We need to provide awareness among investors regarding development in the economic and corporate world. Institutions providing stock trading facilities need to educate investors and secure them against adverse effect of volatility. Now media can reach single person easily, it is very easy to share information and educate people. Institutions involved in stock trading & regulations i.e. NSE, BSE and SEBI etc should enhance providing online information through their websites and also offering certified courses. BIBLIOGRAPHY 1 2 3 4 5 6 7 www.nseindia.com www.sebi.gov.in SEBI annual report www.worldbank.org Securities Market In IndiaA Review, 200304, p.101 Vaidya Nathan .S., FIIs :Winning streak in Indian Equities, The Hindu Business Line,2005 Campbell, J.Y., A.W. Lo, and A.C. Makinlay, The Econometrics of Financial Markets, Princeton University Press, Princeton, NJ, 1997. Khan Masood et al, An Empirical Investigation of FIIs Role in the Indian Market: A Firm Level Analysis The ICFAI Journal of Applied Finance, September 2005

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