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I take this opportunity to pay my gratitude to all those people who have
helped me carry out this project. This project could not have been complete
without the contribution and support of few individuals. They helped me a
lot in giving us a foresight of how to start, carry on and complete this
I am grateful to my project guide Prof. Tamal Dutta Chaudhary for
the guidance, inspiration and constructive suggestions that helped me in
the preparation of this project.
I am thankful to all our teaching and non-teaching staff of IBS for
their constructive suggestions.
Last but not the least, I also thank all my friends and seniors who have
helped me in all possible ways and made this work a heavenly toil.

Executive Summery

This project mainly aims at the analyzing the current stock market
volatility. The Indian stock market benchmark index BSE Sensex has
witnessed some of the landmark events in the recent past. Sensex
reached its highest point ever around the same time last year and this
year the picture is just reversed. The current economic recession has
affected the Indian Stock Market or not has been analyzed in this
The volatility for two time phases has been measured in the report
and some conclusions have been drawn. On the basis of results
obtained by the use of some statistical methods like calculation of
variance and standard deviation, we came to know that the volatility
has increased in the second time phase.
Also in this report, it has been tried to obtain the relationship
between the Sensex values and the prices of Crude Oil. Again with the
use of regression analysis we came to know that there is not a very
significant relationship between Sensex and Crude Oil prices. Thus
this report gives a statistical outlook to both the macro-economic

Table of Content

Topic Page No.

Acknowledgement 2

Executive Summary 3

1. Introduction 5

2. Motivation 6

3. Hypothesis 7

4. Methodology 8-12

5. Reasons For High Volatility in Phase II 13-16

6. Conclusion 17

7. References 18

1. Introduction

Volatility refers to the a statistical measure of the dispersion of returns

for a given security or market index. Volatility can either
be measured by using the standard deviation or variance between
returns from that same security or market index. Commonly, the higher
the volatility, the riskier the security. Volatility is easily the most
common risk measure, despite its imperfections, which include the fact
that upside price movements are considered just as "risky" as downside
movements. We often estimate future volatility by looking at historical
Looking at the Indian stock market benchmark index BSE Sensex we in
this report are looking forward to calculate the historical volatility in two
time Phases and will try to establish a relationship between the volatility
in these two time phases. Another thing we will be doing in this report is
to establish a relationship between the value of Sensex and Crude Oil
prices so also find out a reason for change in volatility.

2. Motivation:

The current Economic downturn has created a sense of panic in the

minds of savers. The stock markets world over have taken a serious
impact on themselves and almost all of them have seen a series of steep
falls. India, being the second fastest growing economy after China has
also faced the impact of this global meltdown. The Indian Stock Markets
have also shown a steep decline in their values for last one year or so.
This global meltdown and its impact on Indian Stock Market is the
source of motivation for me in doing this project

One of the key indicators of Indian Economy is the Bombay Stock

Exchange Sensitivity Index (BSE Sensex). BSE Sensex as it is popularly
known as is a value-weight index composed of 30 stocks with the base
April 1984 = 100. It consist of 30 largest and most actively traded
stocks, representative of various sectors, on the Bombay Stock
exchange. As these companies are from different sectors they combined
together can give a broad idea about the Indian Economy as a whole.
Thus a study of volatility of Sensex can give us a idea about the volatility
of Indian Economy.

3. Hypothesis:

While preparing this report on the Stock Market benchmark index

Sensex and its volatility, I have taken two hypothesis about the volatility
of Sensex.

a. Null Hypothesis: The Stock Market benchmark index Sensex is

less Volatile during the period of recession.

b. Alternate Hypothesis: The volatility of Sensex has increased in

the period of recession.

These are the basic hypotheses which have been taken to carryon this
report. This hypothesis will be tested with a number of statistical tools
and conclusion will be drawn on the basis of the result obtained.

c. Assumptions: There are a few assumptions which have been taken

for the purpose of preparing this report.

1. While preparing this report it has been assumed that the period of
recession has started from 1st of January 2007 and is still not over.
2. The period of economic upswing is assumed to have started from 1stof
January 2005 and has continued till December 2006.
3. It has been assumed that the volatility is market only market driven
without the effect of any extraneous factor working behind it.

Volatility refers to the deviation from a normal mean. Volatility is
critical for risk measurement. Generally volatility refers to standard
deviation. From the mean. If the volatility is high then there is a higher
risk of value of a index moving up or down.
We often predict future volatility calculating the historical volatility.
This is very much important for future forecasting. For the purpose of
calculating the volatility of an index we need to take two steps
1. Compute a series of periodic returns for eg. Daily returns.
2. Choose a weighting scheme. This includes the decision on the length
or the size of the historical sample. In this report I have taken a
period of four years, which is from 2005 to 2008. This time period
has been divided into two phases

a. Economic upswing (bull phase) from 1/1/2005 to 31/12/2006.

b. Economic downswing (bear phase) from 1/1/2007 to 31 12/2008.

The periodic returns could be calculated by the formula given below
Ui = ln (Vi / Vi-1 )
a. Ui = Return from sensex in period ‘I’
b. Vi = Value of Sensex in period ‘I’
c. Vi-1 = Value of Sensex in period prior to ‘I’

The volatility can be calculated by calculating the variance of Ui by the

formula given below.

a. σ2n = variance rate per period
b. m = number of observations
c. ū = the mean of periodic returns

After calculating the variance we calculate the standard deviation of

that variance and we get the volatility of the Sensex.

Volatility = (σ2)½

Now we calculate the descriptive statistics figures of the daily closing

sensex values of both the time periods by using various statistical
packages like MS Excel and SPSS
Descriptive Statistics
N Range Minimum Maximum Mean Std. Deviation

PHASE_I 501 7869.29 6102.74 13972.03 9412.4296 2328.85961

PHASE_II 496 12422.32 8451.01 20873.33 15020.5225 2809.66986

Valid N 496

Looking at the descriptive statistic of both the Phases first thing we can
see that the range in Phase II has increased by 4553.03 points. Along
with that the standard deviation has also increased in the second Phase.
These are very clear indicators about the increased volatility of Sensex in
the second Phase.

a. Calculation of Volatility:
Using the above mentioned method for calculation the volatility and
taking the two different time frames as mentioned above we can get the
two different volatilities.

Phase I Phase II
Variance 0.00019 0.000527
Standard 0.013779 0.022962
Volatility 0.013779 0.022962

b. Analysis: Looking at the above mentioned volatility of both the
Phases we can clearly see that the Volatility of Sensex has increased
in Phase II. This concludes that the null hypothesis which we have
taken is false and we have to reject the null hypothesis and accept the
alternate hypothesis that is “The volatility of Sensex has
increased in the period of recession.”

The above phenomenon could be clearly shown in the graphs shown in

the next page.

A. Graph Showing the daily movement of Sensex in Phase I

B. Graph Showing the daily movement of Sensex in Phase II

Here from both the graphs we can see that the movement of the
Sensex has increased a lot in the second phase. We can clearly see
that in the first Phase the movement of Sensex has majorly been
upward moving. On the other hand the movement of Sensex has been
quite dynamic in the Phase II and it has moved both upward and
downward. This shows the volatility of Sensex has increased in the
Phase II.
5. Reasons for high volatility in Phase II:
As we clearly saw that the volatility of Sensex has increased in the phase
II, we should look about the possible reasons for increase in volatility of
Sensex. For this purpose we again need to carry out some statistical
tests depending upon the results of which we could give any conclusion
about the increase in volatility of Sensex.
1. Hypothesis: For finding out the reasons for high volatility of
Sensex, let us take Sensex values and crude oil prices as two
variables. We assume the value of Sensex as the dependent variable
and the crude oil prices as the independent variable. We now try to
find out that is there a relationship between the two variables by
taking two hypothesis.
2. Null Hypothesis: There is no relationship between the value of
Sensex and the crude oil prices and the increase in volatility of
Sensex is caused by some extraneous variable.
3. Alternate Hypothesis: There is some relationship between the
value of Sensex and crude oil prices and the increase in volatility of
Sensex is caused by the increase in volatility of crude oil prices.

4. Methodology: For the testing of above formulated hypothesis I will

be using the regression analysis. For the regression analysis I have
assumed that the sensex values are dependent on the crude oil prices
values. For this purpose I have taken the monthly closing values of
both BSE Sensex and crude oil prices. the movement of both the
variables in last 24 months have been shown in the graph below.
After taking the monthly values of both the variables and operating
them on SPSS for the calculation of correlation and regression I got
the following results.

A. Graph showing movement of Sensex and Crude Oil for last

24 month

Descriptive Statistics
Mean Std. N
SENSEX 14965.1025 2992.70006 24

CRUDEOIL 81.7100 25.22409 24

From the above given figures we can see the mean and standard
deviation of both the variables.


Pearson SENSEX 1.000 .456

CRUDEOIL .456 1.000

Sig. (1-tailed) SENSEX . .013


N SENSEX 24 24

From the fig. given above we can see that the correlation between the
sensex values and the crude oil prices is o.456 This is though
correlated is not significant enough for concluding anything about
the relationship between the sensex volatility and crude oil prices.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate

1 .456 .208 .172 2723.04569

a Predictors: (Constant), CRUDEOIL

b Dependent Variable: SENSEX

From the values given above we get the value of adjusted R Square. R
Square value identifies the proportion of variance in Sensex values
which is accounted by variance in Crude oil prices. We can clearly see
that the Adjusted R Square value is 0.172. This indicates that the
variance of sensex values is very less to do with the variance in the
Crude oil price. Thus we can say that only 17.2% of the variance in the
value of sensex is explained by the values of Crude Oil Prices.

Model Sum of df Mean F Sig.
Squares Square
1 Regression 42864321.9 1 42864321.9 5.781 .025
35 35
Residual 163129511. 22 7414977.81
916 4
Total 205993833. 23
a Predictors: (Constant), CRUDEOIL
b Dependent Variable: SENSEX

From the figures above we can see that though the F statistic is 5.781 but
still the Sig F is also high (2.5 %) thus the value of F statistic is possible
by chance. Thus we can conclude that the value of volatility of Sensex
could be related to the Crude oil price movement by chance. Thus we
can say that the Volatility of Sensex has increased in the period of
recession but the reason for the increase in volatility could not be
attributed to the Crude Oil price movement only. There could be some
extraneous variables which are working behind this phenomenon.

5. Result:

Thus from the help of above statistical calculation we can see that the
there is a significant difference between the correlation of Sensex values
and the Crude Oil Prices. Thus we accept the null hypothesis that is
“There is no relationship between the value of Sensex and the

crude oil prices and the increase in volatility of Sensex is
caused by some extraneous variable”

6. Conclusion:

From the above shown analysis of the results obtained from statistical
tools we can conclude that the Volatility of Sensex has increased in the
period of recession. Indian Stock Markets have also suffered the impact
of the global meltdown and the risk has increased for the savers who
allocate their savings in the Stock Markets.

The other conclusion we can draw from this project report is that the
reason for the increased volatility could not be solely attributed to the
Volatility in the prices of Crude Oil. There are some extraneous variables
operating in the market which might have higher impact on the stock
markets. These could be attributed to various macroeconomic indicators
like expected growth rate (GDP growth), unstable inflation rates, and
lastly one of the most important reasons for Volatility of Sensex could be
the fluctuating movement of Foreign Institutional Investors (FII’s)

7. References:

a. Stock market index, from Wikipedia

b. Article by David Harper, CFA, titled “Using Historical Volatility To
Gauge Future Risk”
c. BSE Sensex, from Wikipedia
d. “SPSS for windows step by step” by Darren George and Paul
e. Marketing Research by Naresh K. Malhotra