TERM PAPER

ON

SUB : SECURITY ANALYSIS AND PORTFOLIO MGT

TOPIC : Dynamic relationship between stock returns, trading volume &

volatility: evidence from Indian stock market

SUBMITEED TO: SUBMITTED BY:

Asst.Lect MANOJ KUMAR RAJVINDER DEOL

SENIOR LECTURER M.B.A. 3rd SEM

DEPART OF MGT SERIAL NO: A38

LPU REG NO: 10811496

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CONTETNTS PAGE NO

INTRODUCTION……………………………………………………………………3

OBJECTIVE OF THE STUDY……………………………………………………………4

LITERATURE REVIEW………………………………………………………………………5

ANALYSIS OF CORRELATION……………………………………………………….6-8

DESCRIPTION OF EVENTS……………………………………………………………9-11

CONCLUSION…………………………………………………………………………………12

BIBLIOGRAPHY……………………………………………………………………….

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Dynamic relationship between stock returns, trading volume
& volatility: evidence from Indian stock market

INTRODUCTION
3Return on stock prices and trading volume are two prime indicators of trading
activity in a stock market. These factors are jointly determined by the same market
dynamics and may contain valuable information about a security. While the return on
stock prices are widely studied for the purpose of forecasting and analyzing information
contained in the historical prices, there is little agreement on interpretation of past trading
volume. Blume, Easley, and O’Hara (1994) have highlighted that volume captures the
important information contained in the quality of the traders’ information signals and
may be useful in interpreting information contained in prices. Gallant, Rossi, and
Tauchen (1992) show that more can be learned about the stock market through studying
the joint dynamics of stock prices and trading volume than by focusing only on the
univariate dynamics of stock prices.

STOCK RETURN : means the return to a portfolio in excess of the return to a market
portfolio. Contrast excess returns which means something else.
Example: Suppose average market return to a stock was 10% for some calendar year, meaning
stocks overall were 10% higher at the end of the year than at the beginning, and suppose that
stock S had risen 12% in that period. Then stock S's abnormal return was 2%.

TRADE VOLUME: The number of shares, bonds or contracts traded during a given period,
for a security or an entire exchange. Also called volume a technical indicator that measures the
amount of money flowing in and out of an asset. Unlike many technical indicators, the TVI is
generally created using intraday price data. The underlying assumption of this indicator is that
there is buying pressure when the price trades near the asking price and selling pressure when it
trades near the bid.

VOLATILITY : It is the rate at which the price of a certain security moves. A security with
high volatility has bigger fluctuations in price compared to a security with low volatility. The
more quickly a price changes up and down, the more volatile it is. As such, volatility is often
used as a measure of risk.

For example: A stock whose price went up 10% yesterday and went down 25% today is
more volatile than a stock which increased 2% in both days. Volatility can be observed by
looking at past changes in stock price. The standard deviation of percentage changes in price is
used to calculate observed volatility.

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OBJECTIVE OF THE STUDY

• This paper examines the relationship between aggregate stock market trading volume and
daily stock returns during which the events are happened.

• To study the instability in the stock market due to the events & the dependency of
fluctuations in stock returns due to the change in trading volume.

METHODOLOGY

The study is used to tell the correlation between the stock returns and trading volume and
various statistical tools are used to analyze the data.

DATA COLLECTION

SECONADARY DATA

The data is collected from NSE 50 index; it is collected from S&P CNX NIFTY from JAN 01
2000 to DEC 01 2009.

The event that I have taken is SATYAM FRAUD, TECH MAHINDRA TAKE OVER
Satyam AND BHARTI AIRTEL DEAL COLLAPSE.

And find the results that what effect occur on the trading volume & Stock return and also find
the correlation that whether it is negative or positive.

All the 3 events predict different value between trading volume & stock return. I have taken 19
days window before and after the occurrence of event.

METHOD USED FOR CALCULATION

I have collect the data from NSE & SPS CNX on daily basis & it is analysis is done on excel
sheet i.e. I have attached. In this I also calculate the value of Correlation after and before the
events occur between the trading volume & stock return. The method involves Pearson
Correlation.

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 Literature Review

Guduz and Hatemi (2005): determined that there is a co integrating relationship

between stock price changes and volume in stock market indicating a long term relationship
between these variables resulting from the information based effect of volume on price changes
as well as the encouraging impact of positive price changes on trading volume.

McKenzie and Faff;2003 have shown that the conditional autocorrelation of stock
returns is highly dependent on trading volume for individual stocks but not for the index,
reflecting the fact that liquidity disparity for stocks has a significant impact at individual level
but not at aggregate level. Regarding other few studies including Turkish stock market, (Guner
and Onder; 2002) have found out a significant relationship between volatility and trading
volume. Specifically, they have found out that even though higher volatility is associated with
low
volume stocks in general, for morning session, high volume stocks also exhibit
high volatility stemming from the intensity of information-based trading for high
volume stocks in stock market opening.

Grossman and Wang (1993) examined the relationship between aggregate stock
market trading volume and the serial correlation of daily stock return. They found that a stock price
decline on high volume day is more likely than a stock price decline on low volume day to be
associated with an increase in the expected stock return. The fluctuation in trading
activity is not only explained by publicly available information but also by non information
trade due to events

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CORRELATION: It is a measure of the statistical relationship between two comparable time
series. For investors, these series may be two commodities, two stocks, a stock and an index or even
a stock and commodity.

PRE EVENTS PEARSON CORRELATION

SATYAM FRAUD ( EVENT 1) 0.099782

MAHINDRA TAKE OVER SATYAM 0.147703
(EVENT 2)
AIRETL DEAL CANCEL 0.013415

TABLE 1
0.16
0.14
0.12
0.1
CORRELATION
0.08
3-DColumn2
0.06
3-DColumn3
0.04
0.02
0
PE1 PE2 PE3

ANALYSIS
• The pre event 1 (SATYAM SCAM) shows the value of Pearson Correlation of
(0.099782) which mean that the relationship between trading & stock return are
positively correlated before the period of event happening.

• The Second pre event (MAHINDRA TAKE OVER SATYAM) shows the value of
Pearson Correlation (0.147703) it means that the .relation is Positive & they are highly
correlated to Event 1.

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 • The Third pre event (AIRTEL DEAL CANCELLATION) shows the value of Pearson
Correlation is (0.013415) it shows the relation is strong & positive correlated before the
of event.

POST EVENTS PEARSON CORRELATION

SATYAM FRAUD (EVENT1) -0.044764

MAHINDRA TAKE OVER SATYAM 0.071721

(EVENT2)
AIRTEL DEAL CANCEL 0.24844

TABLE 2
0.8
0.6
0.4
0.2 CORRELATION
0
-0.2
-0.4
-0.6
P1 P2 P3

ANALYSIS
The Table 2 shows the condition of STOCK MARKET

• Event 1 shows the value of Pearson Correlation of (-0.0447564) which is highly negative
& it shows that the pre event 1 when compare with the happening of the event, the value
of correlation become very less & it effects strongly the relationship between trading
volume and stock return.
• Due to this scam the market was strongly affected and suddenly goes down.

• Event 2, when compare with pre is (0.071721) it show the positive response & it has also
increased it is because Satyam had been acquired by Mahindra, due to this market
situation become stable and it also go up for some extent.

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 • Event 3, the post event value of correlation is (0.24844) shows that market has negative
correlated mean that due to the cancellation of deal AIRTEL suffer huge loss and its price
value had been decreased day by day. But the relationship between trading volume and
stock return is positive.

EFFECT
Financial institutions face five major risks: credit, interest rate, price, currency, and liquidity.
The development of the derivatives markets prior to 2008 provided financial institutions with
efficient vehicles for the transfer of interest rate, price, and currency risks, as well as enhancing
the liquidity of the underlying assets. However, it is only in recent years that the market for the
efficient transfer of credit risk has developed. Credit risk is the risk that a debt instrument will
decline in value as a result of the borrower's inability (real or perceived) to satisfy the
contractual terms of its borrowing arrangement. In the case of corporate debt obligations, credit
risk encompasses default, credit spread, and rating downgrade risks

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 DESCRIPTION OF THE EVENTS
EVENT 1: SATYAM SCAM (7th JAN 2009)

Market

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have announced
the index-based, market-wide circuit breaker for the quarter January-March 2009.The circuit
breaker system is applicable at three stages of the index movement either way at 10 %, 15% and
20%. Accordingly the percentages are calculated on the closing index value of the quarter.

NSE Nifty closed at 2959.15 on 31 December 2008, the last trading day of the previous quarter,
the market-wide circuit breaker for any day in the quarter between January and March 2009
would be triggered only if the index moves by 300 points (10%), 440points (15%) and 590
points (20%).

Institutional Activity

FIIs: Foreign institutional investors (FIIs) sold Rs 1855.70 crore more shares than they bought
from 5 to 15 January 2009. Foreign funds bought Rs 1750.10 crore more shares than they had
sold in December 2008. FIIs had sold Rs 52987.10 crore more shares than they had bought in
calendar 2008 to raise resources amid a global financial sector crisis.

DIIs: As per the provisional figures released by the stock exchanges, domestic institutional
investors (DIIs) including insurance firms, bought 647.50 crore more shares that they sold from 5
to 16 January 2009. Within DIIs, as per SEBI data, mutual funds sold Rs 2236.20 crore more
shares than they bought during the period from 5 to 15 January 2009.

ECONOMY

Inflation based on the whole price index rose 5.24% in the year through 3 January2009 — lower
than previous week’s 5.91% rise.

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EVENT 2: TECH MAHINDRA TAKE OVER SATYAM (13TH APRIL 2009)

• Tech Mahindra Ltd. placed the highest bid to acquire Satyam Computer Services Ltd.
On 13 April 2009. This is just over four months after the massive accounting scandal
was made public when the founder, Ramalinga Raju, confessed to inflating the books
to over $1 billion above their worth.

The takeover bid is only a month after Satyam announced it was up for sale. Tech
Mahindra bid Rs 58 per share, above what Larsen & Toubro and billionaire tycoon
Wilbur Ross offered.

Tech Mahindra will own 31% of the IT mammoth at a cost of Rs1, 757 crore, or
slightly more than US $350 million.

“It looks like Mahindra got a bargain considering the firm is worth a reported $2.1
billion. Who knows what the real value is, but it’s surely more than Rs 1,757 crore for
almost a third of the firm,” commented Francesco Gopalakrishnan.
• Tech Mahindra plans to extend its ownership up to 51% by purchasing an additional
20% at the same value. This brings Satyam’s valuation in Mahindra’s eyes to $1.1
billion. Tech Mahindra bid 20% more than the next-highest bidder and more than
double the lowest bidder.

Satyam has offices in a dozen countries and employs 40,000. It has more than 650
clients around the world, and 185 of them are Fortune 500 corporations.

Tech Mahindra is an Indian conglomerate famous for its SUVs, tractors, and financial
services. This foray into IT and outsourcing demonstrates the firm’s eagerness to
diversify and expand.

Tech Mahindra was comfortable placing such a high bid in part because it and
Satyam have almost no overlap. The bulk of Tech Mahindra’s software business is in
telecommunications, a sector Satyam has largely kept out of.

EVENT 3: AIRTEL DEAL CANCEALLTION(1st OCT 2009)

The shares of Bharti Airtel surged in reaction to the collapse of the company’s deal with MTN

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Investors saw short-term opportunity in the scrip as concerns regarding equity dilution in Bharti
have receded, now that the deal has been called off. The Indian telecom major and the South
African MTN Group called off their complex merger to form the third largest telecom company
in the world.

Bharti-Airtel closed up four per cent after charting an intra-day gain of 11 per cent. On the BSE,
the share price of Bharti rose 11.5 per cent to touch an intraday high of Rs 467, but closed at Rs
435.35 – a gain of 4 per cent over the previous day’s close.

A total of 4.06 crore shares changed hands on the BSE and NSE.

“The uncertainty which surrounded the deal is now over with the deal being called off. This is
good for the company in the short-run. The stock is being recommended by brokers as it has
been underperforming the Sensex for a while now. With the deal called off, it is a good stock to
invest in the short run,”

Though the deal being called off maybe positive for Bharti in the short-term, it is negative from a
long-term perspective, say many brokerage reports. From a long-term view, this will cloud
growth visibility given the head winds in the Indian market, which is rapidly moving towards a
period of slow growth,” said an Angel Broking report. It added that the MTN deal would have
given Bharti strategic benefits, including access to more than 21 growth markets.

On the Johannesburg Stock Exchange, MTN Group shares too surged. They closed up 657 rand
at 12872 rand on JSE.

CONCLUSION

The term paper determine the relationship between trading volume and fluctuations in

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Stock returns of S&P CNX due to events and after analysis I draw the conclusion that events
significantly affect the trading volume and stock returns of S&P CNX Study indicates that due to
events changes in the trading volume occurs through which fluctuations in the stock returns take
place. The results show that due the nature of event the relation between the trading volume and
the stock return fluctuate, from my study I am concluded that the event effect the value of
Pearson correlation and due to event the value is decrease from their pre event value. And the
fluctuations in the value of correlation can not be reducing because the happening of event can
not be stop. And in second event the post happening has increased because when Mahindra take
over Satyam than the market become stable up to some extent.

BIBLIOGRAPHY
• http://www.igidr.ac.in/~money/mfc_08/A%20Markov-Switching%20VEC

%20Model...Alok%20Kumar.pdf
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• http://www.wikinvest.com/index/Volatility_Index_%28VIX%29

• http://economics.about.com/cs/economicsglossary/g/abnormal_return.htm

• http://www.investopedia.com/terms/t/tradevolumeindex.asp

• http://www.domain-

b.com/companies/companies_s/Satyam_Computers/20090120_receivables.html

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