CHAPTER V

FINDINGS, SUGGESTIONS AND CONCLUSION

Volatility is a natural phenomenon in the stock markets around the world and
it is the most basic statistical measure of risk. Without volatility the stock market will
lose its charm and importantly it is not unnatural or unwanted. However excessive
volatility caused by irrational behavior of the traders and investors affects the
economy of the country to a great extent. There is also a perception that high level of
volatility can lead to a general erosion of investor confidence in the stock market.
Stock market volatility being a vital issue systematic study has been done on the
magnitude and pattern, titled “Volatility of the Indian stock market during the post
liberalisation period”. The objectives of the study are:

1. to measure the extent and pattern of stock market volatility in India.

2. to identify the tolerance zones of volatility that can be embedded into
investment decision by the investors.
3. to examine the effect of macroeconomic factors in the volatility of Indian
stock market.
4. to find out which Sector or industry group is highly volatile and transmission
of volatility to sectors in the Indian stock market.
5. to arrive at a volatility model for the Indian stock market.

5.1 FINDINGS
The summary results of the analysis done for the objectives of the study are
given below:

5.1.1 EXTENT AND PATTERN OF VOLATILITY IN INDIAN STOCK

MARKET
To address the objective of finding out the extent and pattern of stock market
volatility in India the two major stock market indices have been selected, BSE Sensex
and NSE CNX Nifty. To understand in depth the amplitude of fluctuations in the
Indian stock market, volatility based on monthly returns in a year, volatility of daily

211
returns in a year and volatility of daily returns in a month have been computed. The
amplitude of fluctuations is measured by applying the rate of return and the standard
deviation. To address the objective of extent and pattern of stock market volatility, the
study period from 1992 to 2011 has been classified into two decades namely, first
decade (1992 to 2001) and second decade (2002 to 2011). Such classification
addresses the behaviour of Indian stock market following liberalisation in each
decade. The findings are given in the following:

Extent and pattern of volatility for BSE Sensex in the first decade

 The highest average monthly return of 4.69 percent is shown by the year 1999 and
the lowest average monthly return is scripted in the year 2000 (-2.86 percent) for
BSE Sensex during the first decade of the study period. Volatility of monthly
return in a year is very high in 1992 (15.87 percent) and low in the year 1994
(6.86 percent). Violent changes in stock prices occurred in 1992, during which the
securities scam took place, the first major scam to hit the Indian stock market.
 Daily returns in a year for BSE Sensex during the first decade of the study period
was high in the year 1999 (0.20 percent) and low in the year 1995 (-0.10 percent).
The years 1992 (3.36 percent), 2000 (2.20 percent), and 1998 (1.90 percent) have
recorded higher volatility of daily returns compared to other years. The average
volatility of daily returns for Sensex during the first decade of the study period is
1.87 percent. The corresponding annualized volatility is 28.35 percent.
 The average volatility of daily returns in a month for BSE Sensex during the first
decade of the study period is 1.77 percent. April month (2.44 percent) is found to
be highly volatile during the first decade of the study period. The next highly
volatile month is March (2.25 percent). The volatility of daily returns in a month
is found to be low in the month of August (1.40 percent).

Extent and pattern of volatility for NSE CNX Nifty in the first decade

 During the first decade of the study period for NSE CNX Nifty, the average
monthly return in a year is high in the year 1999 (4.92 percent) and low in the year
1995(-2.34 percent). The volatility of monthly returns in a year was very high in
the year 1992 (16.32 percent) due to Harshad Mehta securities scam and this is
comparatively higher than that of the BSE Sensex (15.87 percent). The average

212
 monthly volatility of NSE CNX Nifty during the first decade of the study period is
8.38 percent, which is quite low to that of the Sensex (8.46 percent).
 Daily returns in a year for NSE CNX Nifty during the first decade of the study
period was high in the year 1999 (0.20 percent) and low in the year 1995 (-0.11
percent). The daily returns in a year for NSE CNX Nifty is similar to the daily
return of BSE Sensex. The average daily return is 0.03 percent and the
corresponding annualised return is 6.15 percent. The years 1992 (3.32 percent),
2000 (2 percent), and 1999 (1.84 percent) have recorded higher volatility of daily
returns compared to other years. The average volatility of daily returns for Sensex
during the first decade of the study period is 1.83 percent. The corresponding
annualized volatility is 27.84 percent.
 The average volatility of daily returns in a month for NSE CNX Nifty during the
first decade of the study period is 1.72 percent. April month (2.37 percent) is
found to be highly volatile during the first decade of the study period followed by
the month March (2.31percent). The volatility is found to be low in the month of
August (1.31 percent) for NSE CNX Nifty during the first decade of the study
period.

Extent and pattern of volatility for BSE Sensex in the second decade

 The year 2009 shows the highest average monthly return of 4.48 percent and the
lowest average monthly return is scripted in the year 2008 (-6.16 percent). The
global financial crisis in the year 2008 has had a deep impact on Indian stock
market. The volatility was also high in the year 2008 (11.97 percent). There was
biggest fall in the Sensex during the year 2008. The volatility of monthly returns
in a year is low in the year 2010 (4.72 percent). The average monthly return and
average monthly volatility during the second decade of the study period is 0.85
percent and 7.01 percent respectively. The annualised monthly return (10.21
percent) is higher than the annualised monthly return (3.28 percent) of first
decade, whereas the volatility of monthly return in the second decade
(24.28 percent) is less than the volatility in the first decade (29.30 percent).
 Daily returns in a year for BSE Sensex during the second decade of the study
period was high in the year 2009 (0.24 percent) and low in the year 2008 (-0.30
percent). The average daily return is 0.06 percent and the corresponding

213
 annualised return is 15.55 percent, this is comparatively higher than the returns in
the first decade. The years 2008 (2.85 percent), 2009 (2.19 percent), 2006 (1.63
percent) and 2004 (1.61 percent) have recorded higher volatility compared to
other years. The average volatility of daily returns for Sensex during the second
decade of the study period is 1.55 percent. The corresponding annualized
volatility is 24.47` percent. The average volatility of daily returns of Sensex in
the second decade is less than the first decade of the study period.
 The volatility of daily returns in a month is found to be high in the month of May
(1.83 percent) during the second decade of the study period followed by October
(1.69 percent). The volatility of daily returns in a month is found to be low in the
month of September (1.22 percent) for BSE Sensex during the second decade of
the study period.

Extent and pattern of volatility for NSE CNX Nifty in the second decade

 During the second decade of the study period for NSE CNX Nifty, the average
monthly return in a year is high in the year 2009 (4.36 percent) and low in the
year 2008 (-5.93 percent). The average monthly return during the first decade of
the study period is 0.82 percent which is comparatively higher than the average
monthly return in the first decade (0.35 percent). The volatility of monthly returns
in a year was very high in the year 2008 (12.45 percent) due to the Global
financial crisis. The average monthly volatility of NSE CNX Nifty during the
second decade of the study period is 7.19 percent. The corresponding annualized
volatility is 24.90 percent.
 Daily returns in a year for NSE CNX Nifty during the second decade of the study
period was high in the year 2009 (0.23 percent) and low in the year 2008 (-0.30
percent). The average daily return is 0.06 percent and the corresponding
annualised return is 14.74 percent. The average volatility of daily returns for NSE
CNX Nifty during the second decade of the study period is 1.57 percent. The
years 2008 (2.81 percent), 2009 (2.14 percent), 2004 (1.76 percent), 2006
(1.65 percent) and 2007 (1.60 percent) have recorded higher volatility compared
to other years. The corresponding annualized volatility is 24.80 percent. The
average volatility of daily returns of NSE CNX Nifty in the second decade
(1.57 percent) is less than the first decade (1.83 percent) of the study period.

214
 The result of daily returns in a month for NSE CNX Nifty during the second
decade of the study period is found to be highly volatile in May month (1.87
percent) followed by October (1.71 percent). The volatility is found to be low in
the month of September (1.24 percent) for NSE CNX Nifty during the second
decade of the study period. Similar pattern is shown by BSE Sensex in the second
decade of the study period.

Thus it is found that the return volatility pattern exhibited by the two major
market indices viz. BSE Sensex and NSE CNX Nifty is that the monthly volatility
was highest in the year 1992 of the first decade and 2008 of the second decade. This
result is confirmed by the findings based on the volatility of daily as well as monthly
returns.

During first decade of the study period for BSE Sensex the years 1992, 2000 and
1998 have recorded higher volatility of daily returns compared to other years. For
NSE CNX Nifty the years 1992, 2000 and 1999 have recorded higher volatility of
daily returns compared to other years in the first decade of the study period. In the
second decade of the study period the years 2008, 2009, 2006 and 2004 have recorded
higher daily volatility compared to other years in BSE Sensex. The years 2008, 2009,
2006, 2004 and 2007 have recorded higher volatility compared to other years for NSE
CNX Nifty in the second decade.

Thus it is found that in both the bench mark indices the years 1992, 2000 of the
first decade and the years 2004, 2006, 2008 and 2009 of the second decade exhibited
higher volatility of daily returns.

Daily volatility in the month for both the indices in the first decade was found to
be high in the month of April and low in the month of August. The daily volatility in a
month for both the indices in the second decade was found to be high in the month of
May and low in the month of September.

The annual return was comparatively higher and the volatility pattern was
comparatively lower in the NSE CNX Nifty compared to BSE Sensex in the first
decade of the study period. However the scenario has changed in the second decade of
the study period as there was meager increase in the return and decrease in the
volatility in the BSE Sensex than the NSE CNX Nifty. Another important aspect is

215
that the return has increased and the volatility has decreased in the second decade of
the study period compared to the first decade of the study period. This reveals that
with the liberalisation of the Indian economy, though not immediately, the stock
market has shown a good sign of increased returns and reduced volatility in the
second decade.

5.1.2 TOLERANCE ZONES OF VOLATILITY

Extreme variations interrupt the normal rhythm of stock price movements

temporarily and increase the concern of investors. Thus current study not only
measures volatility but have also tried to analyse the various acceptable level of
volatility so that the same can be considered into the investment decisions by the
investors. Shewhart chart is applied to indentify the tolerance zones of volatility that
falls beyond the boundary limits which can be embedded in the investor’s decisions.
Considering the data as normally distributed, three zones are defined as:

Mean ± 1 S.D (First band)

Mean ± 2 S.D (Second band)

Mean ± 3 S.D (Third band)

Daily returns lying outside the first band (Mean ± 1 S.D) are termed as Spikes
(1), daily returns lying outside the second band (Mean ± 2 S.D) are Spikes (2) and
daily returns lying outside the third band (Mean ± 3 S.D) are Spikes (3). Thus Spikes
accounts for those special days when extreme variation occurs. Actually the three
Spikes or the control lines make a continuum of risk: From a risk averse to risk
seeking investor. An investor can decide his/her area of operation.

To address the objective of identifying the Tolerance zones of volatility the

study period has been classified into two decades, namely, first decade (1992-2001)
and second decade (2002-2011).Three tolerance zones are made for each year of
study for BSE Sensex and NSE CNX Nifty for the first decade and second decade
respectively. Average daily return and mean standard deviation for each decade are
taken into account for the purpose.

216
 The upper and lower limit of the three bands in the tolerance zones of volatility
are 1.94 percent and -1.89 percent (Spikes 1), 3.85 percent and -3.80 percent
(Spikes 2) and 5.76 percent and -5.71 percent (Spikes 3) respectively for BSE
Sensex during the first decade of the study period.
 For the second decade of the study period three bands are 1.71 percent and -1.58
percent (Spikes 1), 3.35 percent and -3.23 percent (Spikes 2) and 5.00 percent and
-4.87 percent (Spikes 3) respectively for BSE Sensex.
 The upper and lower limit of three bands in the tolerance zones of volatility for
NSE CNX Nifty are 1.89 percent and -1.84 percent (Spikes 1), 3.76 percent and
-3.70 percent (Spikes 2) and 5.62 percent and -5.57 percent (Spikes 3) during the
first decade of the study period.
 In the second decade of the study period of NSE CNX Nifty, the upper and lower
limit of these three bands are 1.74 percent and -1.62 percent (Spikes 1), 3.42
percent and -3.30 percent (Spikes 2) and 5.10 percent and -4.98 percent (Spikes 3)
respectively.
 The total number of Spikes 1, Spikes 2 and Spikes 3 for the first decade of the
study period for BSE Sensex is 467, 85 and 29 respectively. The total number of
Spikes 1, Spikes 2 and Spikes 3 for the first decade of the study period of NSE
CNX Nifty is 471, 76 and 30 respectively.
 In the second decade of the study period observed number of Spikes for BSE
Sensex is 420 in Spikes 1, 90 in Spikes 2 and 40 in Spikes 3. The total Spikes for
NSE CNX Nifty during the second decade of the study period are 419 in Spikes 1,
89 in Spikes 2 and 36 in Spikes 3.

Thus it is found that the Spikes 1 has decreased in the second decade of the
study period. Whereas the Spikes 2 and Spikes 3 has increased in the Indian stock
market during the second decade in comparison to the first decade of the study period.

Comparison of Mean returns in the Tolerance zones of volatility

The intensity of spikes is not equal in each decade hence it is vital to

understand if the mean returns during these spikes are homogenous. On employing
the Levene’s t test the following findings were arrived.
 Levene’s T Test for equality means for BSE Sensex Spikes (1) exhibited that
there is no significant difference in the mean return of Spikes (1) for BSE Sensex

217
 during the first and second decade of the study period. In regard to the NSE Nifty
Spikes (1) Levene’s T Test exhibited that there is no significant difference in the
mean return of Spikes (1) for NSE Nifty during the first and second of the study
period.
In both BSE Sensex and NSE CNX Nifty, at the tolerance level of Spikes 1, the
positive shocks are higher than the negative shock in the first decade. Whereas
in the second decade the negative shocks are comparatively higher than the
positive shocks for NSE CNX Nifty.
 The results of Levene’s T Test for equality means for BSE Sensex Spikes (2)
stated that there is no significant difference in the mean return of Spikes (2) for
BSE Sensex during the first and second decade of the study period. The Levene’s
T Test for equality means NSE Nifty Spikes (2) resulted that there is no
significant difference in the mean return of Spikes 2 for NSE Nifty during the
first and second decade of the study period.
In both BSE Sensex and NSE CNX Nifty, at the tolerance level of Spikes 2, the
negative shocks are comparatively higher than the positive shocks in both the
first and second decade of the study period.
 The Levene’s T test for BSE Sensex in Spikes (3) resulted that there is no
significant difference in the mean return of Spikes (3) for BSE Sensex during the
first and second decade of the study period. The result of Levene’s T Test for
equality means for NSE Nifty Spikes (3) revealed that there is no significant
difference in the mean returns of Spikes (3) for NSE Nifty during the first and
second decade of the study period.
In both BSE Sensex and NSE CNX Nifty, at the tolerance level of Spikes 3, the
negative shocks are higher than the positive shock in the first decade. In the
second decade the negative shocks and positive shocks remains the same for BSE
Sensex. The negative shocks are comparatively lower than the positive shocks for
NSE CNX Nifty in the second decade.
Thus it is found that the returns in the tolerance zones of volatility during the
first decade and second decade for both BSE Sensex and NSE CNX Nifty remains the
same. The reaction of Indian stock market to the positive and negative shocks varies
in each decade. However of late the reactions of Indian stock market to the negative
shocks are high in Spikes 2 and the reaction to the positive shocks are high in
Spikes 3.
218
Intraperiod Comparison of Mean and Variance in the Tolerance zones of
volatility

 For BSE Sensex in the first decade of the study period the mean daily return in all
the Spikes is less than the mean daily return of the entire period except spikes 1.
In the second decade of the study period for BSE Sensex the return in all the
Spikes is less than the mean daily return of the entire period.
 The variances in all the tolerance zones of volatility are higher than the variance
of the overall period in the first decade. In the second decade the variances in all
the tolerance zones of volatility are higher than the variance of the overall period
except spikes 1. The variances of different spikes returns are not only different
from the variance of daily return in the entire period but the differences have kept
increasing.
 While comparing the mean daily return and variance between the first and second
decade of the study period it is found that the overall mean return has increased in
the second decade. Whereas the mean daily return in the tolerance zones of
volatility has decreased in the second decade compared to the first decade except
spikes 3. On the other hand the variance in the overall period and tolerance zones
of volatility has decreased in the second decade compared to the first decade.
Thus it is found in the intra period comparison of mean and variance of
BSE Sensex that the returns have decreased with the increase in the risk measured
in the tolerance zones of volatility.

 For NSE CNX Nifty in the first and second decade of the study period the mean
daily return in all the Spikes is less than the mean daily return of the entire period
except for spikes 1.
 The variances in all the tolerance zones of volatility of NSE CNX Nifty are higher
than the variance of the overall period in both the decades. The variances of
different spikes returns are not only different from the variance of daily return in
the overall period but the differences have kept increasing.
 While comparing the mean daily return and variance between the first and second
decade of the study period it is found that the overall mean return has increased in
the second decade. Whereas the mean daily return in the tolerance zones of
volatility has decreased in the second decade compared to the first decade. On the

219
 other hand the variance in the overall period and tolerance zones of volatility has
decreased in the second decade compared to the first decade.
Thus it is found in the intra period comparison of mean and variance of
NSE CNX Nifty that the returns have decreased with the increase in the risk
measured in the tolerance zones of volatility similar to that of BSE Sensex.

On comparing the mean daily return of the entire period with the mean daily
return on Spikes 1, Spikes 2 and Spikes 3, it is found that spikes mean return is
different from the normal mean daily return. The overall period’s mean return has
increased in the second decade compared to the first decade, whereas the returns in
the tolerance zones of volatility has decreased in the second decade compared to the
first decade of the study period. The mean daily return has decreased with the increase
in the risk measured in the tolerance zones of volatility. Thus it is found that the high
risk is not compensated with high returns in the tolerance zones of volatility. The
belief of “high risk high return” does not seem to hold good.

An investor wherever he/she operates, whether in a highly volatile market,

moderately volatile market or in a stable market condition, the risk factor is certainly
changed and the return is not compensated for the risk borne by the investor in the
tolerance zones of volatility.

Factors affecting Volatility

The present study proves that the Indian stock market changes are associated
with the majority of the information from economic events in the first decade of the
study period and the market reacts to economic events along with the International
events in the second decade of the study period. Hence there is likelihood that the
Indian stock market is undergoing transformation from reacting to the International
events along with the Economic events after liberalisation. The volatility of the stock
market returns may be partly explained by psychological factors, fads and
incorporation of private information. Thus the panic drives the market now and then
as it is revealed in the spikes. It is concluded that the volatility of the stock market is
driven by the simultaneous interactions with the numerous factors like political,
economic news, international events etc... and also with unobserved factors.

220
5.1.3 EFFECT OF MACROECONOMIC VARIABLES ON THE VOLATILITY
OF INDIAN STOCK MARKET

To address the objective of finding the effect of macroeconomic factors on the

volatility of the Indian stock market, sixteen initial variables have been considered.
The variables namely , Inflation (Average Consumer Prices percent change), Money
supply (M3), Bank Rates , BOT (Net Import), Foreign exchange rate of Indian rupee
against US Dollar, Foreign Direct Investment (FDI), Foreign Institutional Investment
(FII), Foreign Exchange Reserve of Government, Gross Domestic Product (GDP at
Constant Prices), Gold Price, Index of Industrial Production(IIP), Call/Notice money
rates, Yield on 91 day T-bill , MSCI (Morgan Stanley Capital International World
index) , Oil prices (International Crude oil prices per barrel) and Prime Lending Rate
( PLR) were gathered for the study. Cointegration test is employed to study the effect
of macroeconomic variables on the volatility of Indian stock market.

 Augmented Dickey Fuller (ADF) test was employed to check the existence of
Unit root and non stationary at levels and the unit root existed and confirmed that
the series are non-stationary at Levels for all the variables except BOT.
 Chow break test was employed in the time series data to test if there is any
significant break. The result revealed that the calculated p-value is less than 5
percent significance level hence the exogenous variable need not be introduced in
the model.

Cointegrating Regression

 The first iteration cointegration for Sensex shows that the minimum ADF
criteria is shown by FII, hence this variable is eliminated in the first iteration
to obtain the optimisation.
 The second iteration cointegration for Sensex is done after eliminating FII. In
this step the minimum ADF was exhibited by M3, hence further attempt is
made to optimize the cointegration between the macro economic variables and
the Sensex after eliminating FII and M3 in the next iteration.
 The minimum ADF test criterion is shown by PLR in the third iteration , hence
this variable is eliminated in the third iteration to obtain the optimisation. Thus
further attempt is made to optimize the cointegration between the macro

221
 economic variables and the Sensex after eliminating FII, M3 and PLR in the
next iteration.
 In the fourth iteration cointegration test for Sensex, the minimum ADF test
criterion is shown by BOT. The minimum ADF obtained in the fourth iteration
is lesser than the minimum ADF obtained in the third iteration. Hence the
optimal cointegration between the macroeconomic variables and Sensex is
obtained from the following variables Bank rate, Exchange Rate, FDI, Forex
rate, GDP, Gold price, IIP, Inflation, Call money rate, MSCI, Oil price and
T-Bill.
 The effect of macroeconomic variables on the volatility of Sensex results
revealed that volatility of Sensex is negatively and significantly related to the
level of the Inflation and Call money rate.
 The coefficient values of Bank rate, Oil price, Forex rate, GDP, FDI and Gold
price is positive. These variables are cointegrated and have positive
relationship with the Sensex but they are insignificant in explaining the
volatility of the Sensex in the long run. On the other hand the coefficient of IIP
is positive and statistically significant and is cointegrated with the volatility of
the Sensex.

It is found that the macroeconomic variables namely IIP, Inflation and Call
money rate are statistically cointegrated in explaining the volatility of the Sensex.

 In the first iteration cointegration for NSE CNX Nifty the minimum ADF test
criterion is shown by BOT hence this variable is eliminated in the first
iteration to obtain the optimisation.
 The second iteration cointegration test for Nifty is done after eliminating BOT.
The minimum ADF test criterion is shown by FDI hence this variable is
eliminated in the second iteration to obtain the optimisation. Since the
minimum ADF obtained in the second iteration is greater than the minimum
ADF obtained in the first iteration, further attempt is made to optimize the
cointegration between the macro economic variables and the Sensex after
eliminating BOT and FDI in the next iteration.
 The minimum ADF test criterion is shown by PLR in the third iteration
cointegration , hence this variable is eliminated in the third iteration to obtain

222
 the optimisation. The minimum ADF obtained in the third iteration is lesser
than the minimum ADF obtained in the second iteration further attempt is not
made to optimize the cointegration between the macro economic variables and
the Nifty. As the optimisation achieved after eliminating BOT, FDI and PLR
in the next iteration will end up in obtaining the sub optimal cointegration.
Thus the optimal cointegration between the macroeconomic variables and
Nifty is obtained from the following variables Bank rate, Exchange Rate, FII,
Forex rate, GDP, Gold price, IIP, Inflation, M3, Call money rate, MSCI, Oil
price and T-Bill.
 The cointegration between macro economic variables and volatility of Nifty
exhibited negative coefficient values for Bank rate, Exchange rate, FII, Gold
price, Inflation, Oil price, Call money rate, and T Bill. These variables are
found to be insignificant in explaining the volatility of Nifty in the long run as
the t-value is less than the critical value.
 The coefficient values of Forex rate, GDP, MSCI, M3 and IIP is positive.
Though these variables are found to be cointegrated with the Nifty only M3
and IIP is statistically significant in explaining the volatility of the Nifty in the
long run.
Hence the macroeconomic variables namely IIP and M3 are statistically
cointegrated in explaining the volatility of the Nifty.

Thus it is found that macroeconomic variables namely IIP, Inflation, Call

money rate and M3 are statistically cointegrated in explaining the volatility of the
Indian stock market. This clearly depicts that the Indian stock market is affected more
by the domestic factors rather than by global influences.

5.1.4(a) VOLATILITY OF SECTOR / INDUSTRY GROUP IN INDIAN

STOCK MARKET

The investors normally identify the most promising sectors and review its
performance, nowadays there are numerous sectoral indices which aids the investors
to select the sectors for making their investment. All the sectoral indices of BSE and
NSE have been selected to study their volatility. Following are the major findings by
studying which sector or industry group is highly volatile in the Indian stock market.

223
Descriptive statistics of BSE Sectoral indices

The series of BSE sectoral indices is mean reverting as the mean return is very
close to zero and is positive. The BSE Realty index exhibited higher deviation from
the mean indicating higher volatility. The mean series is non-symmetric as the return
series is negatively skewed. Jarque-Bera statistics that test the assumption of
normality rejects the hypothesis of normal distribution at 1 percent significance level.

Descriptive statistics of NSE Sectoral indices

The mean return of all the NSE sectoral indices exhibited positive returns
except Realty index. The Realty index showed higher volatility as their standard
deviation is high. Similar to BSE Sectoral indices, NSE sectoral indices revealed that
the mean series is non-symmetric as the return series is negatively skewed. The
assumption of normality of the return series in Jarque-bera statistics rejects the
hypothesis of normal distribution at 1 percent significance level.

Volatility of daily returns of BSE sectoral indices

The BSE Bankex sector exhibited highest returns and the next highest return is
given by the Metal sectoral index. The average daily return is lowest for the BSE
realty sector index followed by BSE Power. In case of the daily volatility on the BSE
sectoral indices the BSE Realty sector shows the highest volatility and the volatility is
lowest for the BSE Healthcare sectoral index.

Volatility of daily returns of NSE Sectoral Indices

Among all the NSE sectoral indices the average daily return is high for the NSE
CNX Energy sector and the next highest return is exhibited by the Bank sectoral
index. The average daily return is lowest for the NSE realty sector index followed by
NSE Media. In case of the daily volatility on the NSE sectoral indices the NSE CNX
IT shows the highest volatility followed by NSE CNX Realty and the volatility is
lowest for the NSE CNX Pharma.

224
Year wise comparison of annual returns and annualised volatility of BSE
Sectoral indices

 In the year 1999 the annual return is highest for BSE IT due to the increased
software export and services in the country. The lowest return is recorded for
BSE FMCG as there was stagnation of necessity products except in the rural
areas. The volatility was high for BSE IT and lowest for BSE Capital Goods.
 All the BSE Sectoral indices showed negative returns in the year 2000. Due to
several reversals in the year 2000 there was sharp decline in stock prices. The
volatility was high for BSE IT and low for BSE Capital Goods.
 In the year 2001 too, BSE IT was highly volatile. Except BSE Auto the
remaining sectoral indices showed negative return. There was huge demand
for the Automobile manufacturers from the middle income groups which in
turn increased the profit of the companies.
 The annual return and annualized volatility of BSE sectoral indices in the year
2002 was highest for BSE PSU and BSE IT respectively. Likewise the annual
return and annualized volatility of BSE sectoral indices in the year 2002 was
lowest for BSE FMCG and BSE Capital Goods respectively.
 In the year 2003 all the sectoral indices had positive and higher returns
compared to the previous year. BSE Metal exhibited higher return .BSE IT
showed lower return and higher volatility in the year 2003. Similar to the
previous years BSE Capital Goods showed lower volatility.
 In the year 2004 the annual returns were positive for all the sectoral indices
except BSE FMCG and BSE Oil & Gas. The return was high for BSE TECk.
The volatility was high for BSE Metal and low for BSE Capital Goods
respectively.
 In the year 2005 the Consumer durables sector outperformed other sectors due
to increase in demand and exports of consumer durables. Volatility was low
for BSE Capital goods sector and high for Consumer Durables in the year
2005.
 In the year 2006 annual return and volatility was high for BSE Realty.
Volatility was low for BSE Capital goods sector.

225
  In the year 2007 annual return was high and low for BSE Power and BSE IT
respectively. The annual volatility was high and low for BSE Realty and BSE
Capital goods.
 The year 2008 as stated earlier had the worse hit in the Indian stock market
which had pulled all the sectoral indices to negative returns. The volatility was
highest for BSE Realty and lowest for BSE Capital Goods.
 From the downturn in the year 2008 the sectors recovered to positive returns in
the year 2009 and the annual return and annualised volatility was high for BSE
Metal and BSE Realty respectively.
 In the year 2010 the consumer durable industry witnessed upcoming trends that
led to the highest returns compared to other sectors. The volatility of BSE
Sectoral indices in the year 2010 was high in Realty sector and low in BSE
Capital Goods.
 In the year 2011, the much affected sector compared to other sectors is the BSE
Realty index with lowest annual return and highest annualised volatility of
-73.86 percent and 33.56 percent respectively. The volatility was low for BSE
Capital Goods.

It is found that the following sectors had highest returns and the figures in the
parantheses represents the year. BSE IT (1999) , BSE Auto (2001), BSE PSU(2002),
BSE Metal (2003), BSE TECk (2004) , BSE Consumer Durables (2005), BSE Realty
(2006), BSE Power (2007), BSE Metal (2009), BSE Consumer Durables (2010), BSE
FMCG (2011) . The following sectors had the lowest returns, FMCG (1999),
IT(2001), FMCG (2002), IT (2003), FMCG (2004), Healthcare (2005), Consumer
Durables (2006), IT (2007), FMCG (2009), Realty (2010,2011).

One interesting aspect is that in the year wise comparison of annualised

volatility of BSE sectoral indices is that in all the years BSE Capital Goods had
lowest volatility. The volatility was high for BSE IT from the year 1999 to 2003. BSE
Metal and BSE Consumer Durables had highest volatility in the year 2004 and 2005
respectively. From the year 2006 to 2011 BSE Realty had highest volatility. Thus in
most of the years the BSE IT and BSE Realty is found to be highly volatile.

226
Year wise comparison of annual returns and annualised volatility of NSE
Sectoral indices

 In the year 1995 the only sectoral indices that existed is NSE CNX MNC. In
the year 1996, the annualised return and annualised volatility was high for
NSE CNX FMCG and NSE CNX IT.
 In the years 1997, 1998 and 1999 the annualised returns and annualised
volatility was high for NSE CNX IT. Though the volatility was high the
impressive growth rates of Indian IT sector fetched higher returns for NSE
CNX IT.
 All the NSE sectoral indices showed negative returns in the year 2000.
Compared to other sectors the least affected is NSE CNX Bank. The volatility
of NSE Sectoral indices in the year 2000 was high for NSE CNX IT and low
for NSE CNX Bank.
 In the year 2001 all the NSE Sectoral indices showed negative annual returns
except NSE CNX Energy as there was increased investment in Energy
industry in India. The return was lowest and volatility was highest for NSE
CNX IT.
 The annual return for the year 2002 and 2003 was highest for NSE CNX
Energy. The high volatility for both years was exhibited by NSE CNX IT and
the volatility was low in both the years for NSE CNX Pharma.
 In the year 2004 the annual returns for NSE Sectoral indices was high and low
for NSE CNX PSU Bank and NSE CNX IT respectively. The volatility was
low in NSE CNX Pharma and high in NSE CNX IT.
 Due to increase in the consumption of FMCG products in the rural areas and
change in the consumption pattern of people in the semi urban areas the
highest return was shown by NSE CNX FMCG in the year 2005. The
volatility was high for NSE CNX Metal and low for NSE CNX MNC.
 In the year 2006, the returns and volatility was high for NSE CNX Media and
NSE CNX PSU Bank respectively. The return and volatility was low for NSE
CNX PSU Bank and NSE CNX Pharma respectively.
 There was large number of power projects in the year 2007 that had pulled
large investments in the energy sector. This led to highest return for NSE CNX

227
 Energy in the year 2007. The return was low for NSE CNX IT and the
volatility was high for NSE CNX Realty.
 As the year 2008 had a worst hit in the Indian stock market all the NSE sectoral
indices fetched negative return and the highest fall was witnessed by NSE
CNX Realty and NSE CNX Metal. The volatility was high for BSE Realty
index in the year 2008.
 The negative trend reversed in the year 2009 and thereby all the NSE sectoral
indices showed positive returns. The volatility was low and high for NSE
CNX FMCG and NSE CNX Realty.
 The spiraling demand for Automobile industry led to the highest return for NSE
CNX Auto in the year 2009. Compared to all the other NSE sectoral indices
NSE Infra showed lowest annual return. NSE CNX FMCG exhibited low
volatility and NSE CNX Realty showed highest volatility.
 In the year 2010 the NSE CNX Pharma outperformed other NSE sectoral
indices. NSE CNX Realty exhibited lowest annual returns and highest
annualised volatility in the year 2010. Likewise the NSE CNX Pharma was
found to have high returns and low volatility in the year 2010.
 NSE CNX Realty was the most affected sectoral indices in the year 2011 as it
fetched lowest return and highest volatility. Only NSE CNX FMCG sector
showed positive return in the year 2011 which stood at 8.11 percent. The
volatility was found to be low in the NSE CNX MNC.

It is found that the returns have varied across different sectors across different
years. The annualised return was found to be low for the following sectors and the
figures in the parantheses represents the years. NSE CNX IT (1996), NSE CNX MNC
(1997,1998), NSE CNX FMCG(1999,2002), NSE CNX IT (2001,2003,2004), NSE
CNX Pharma (2005), NSE CNX PSU Bank (2006), NSE CNX IT (2007), NSE CNX
Infra (2009), NSE CNX Realty (2010 and 2011). On the other hand the annualised
return is found to be high for NSE CNX MNC (1995), NSE CNX FMCG (1996),
NSE CNX IT (1997 to 1999), NSE CNX Energy (2001 to 2003), NSE CNX PSU
Bank (2004), NSE CNX FMCG (2005), NSE CNX Media (2006), NSE CNX Energy
(2007), NSE CNX Auto (2009) , NSE CNX Pharma (2010) and NSE CNX FMCG
(2011).

228
 The volatility is found to be low for the following sectors NSE CNX MNC
(1995 to 1998), NSE CNX Service (1999), NSE CNX Bank (2000), NSE CNX
MNC(2001), NSE CNX Pharma (2002 to 2004), NSE CNX MNC (2005), NSE CNX
Pharma (2006 to 2008), NSE CNX FMCG (2009), NSE CNX Pharma (2010) and
NSE CNX MNC (2011). The highly volatile NSE sectoral indices are as follows, NSE
CNX IT (1996 to 2003), NSE CNX PSU Bank (2004), NSE CNX Metal (2005), NSE
CNX PSU Bank (2006) and NSE CNX Realty (2007 to 2011).

5.1.4(b) TRANSMISSION OF VOLATILITY TO SECTOR/INDUSTRY

GROUP

Market integration leads to spillovers or transmission of volatility from one

market to other markets as well as within markets and causes the linkages between
stock markets around the world to be stronger.

Thus volatility transmission between countries or between exchanges in the

same country has grabbed the attention of the researchers. However, not much
attention has been given on the detection of the volatility spillover between sector
indices among financial markets and volatility transmission mechanism to the sector
returns. As there is cross listing of securities an investor can choose his/her portfolios
by diversification process, may find it beneficial for developing a correct asset pricing
models, forecasting volatility in sector return with the hypothesis of volatility
spillover and transmission of risk information, thereby enhancing the understanding
of the stock markets. To study the transmission of volatility from the major stock
indices to the sectoral indices Spillover GARCH(1,1) Model has been employed.

Descriptive statistics of BSE Sensex and NSE CNX Nifty

Both indices showed positive returns and is mean reverting as the return series
is close to zero. The return series is negatively skewed indicating that the distribution
is non-symmetric. Large values of kurtosis suggests that the underlying data are
leptokurtic. The hypothesis of normal distribution is rejected at 1 percent significance
level.

229
Autocorrelation test for BSE Sensex and NSE CNX Nifty

The return series is serially correlated as the coefficient of autocorrelation is

highly significant.

Spillover GARCH(1,1) model for BSE Sensex on BSE Sectoral indices

There is spillover of volatility from BSE Sensex on BSE Auto, BSE

Capital Goods, BSE Consumer Durables , BSE FMCG , BSE Healthcare, BSE IT,
BSE Metal, BSE PSU ,BSE Oil & Gas, BSE Bankex and BSE Realty. The result
revealed that there is no spillover effect on BSE TECk and BSE Power and hence
there appears the arbitrage opportunity in these sectors.

Spillover GARCH(1,1) model for NSE CNX Nifty on NSE Sectoral indices

There is volatility transmission from NSE CNX Nifty to NSE CNX FMCG, NSE
CNX IT, NSE CNX Energy, NSE CNX Pharma, NSE CNX Auto, NSE CNX Metal,
NSE CNX PSU Bank, NSE CNX Infra, NSE CNX Media and NSE CNX Realty.
Whereas the volatility does not spillover from NSE CNX Nifty to NSE Sectoral
indices like NSE CNX MNC, NSE CNX Service ,NSE CNX Bank and NSE CNX
Finance. Hence there appears the arbitrage opportunity in these sectors.

5.1.5 TO ARRIVE AT A VOLATILITY MODEL

Modeling the volatility will be useful in most finance decisions. However

from the perspective of an investor if the future stocks return volatility could be
predicted by modeling the volatility from the past data it would be immensely helpful.
It is generally said that 5 out of 10 volatilities are predictable. Thus in the present
study an attempt is made to arrive at a volatility model. The volatility has been
modeled for all the indices selected for the study. Different GARCH models viz.,
GARCH(1,1), GARCH-M, GJR GACRH(1,1),GARCH(2,1) were adopted to model
the volatility unless the indices satisfy the stability requirement of the model.

Autocorrelation of daily returns for BSE and NSE Sectoral indices

Autocorrelation existed for BSE and NSE Sectoral indices as the coefficient of
autocorrelation is statistically significant.

230
GARCH (1,1) Model

The volatility for BSE Sensex, BSE Auto, BSE Consumer Durables, BSE IT,
BSE Metal, BSE PSU, BSE Oil & gas, BSE Bankex, BSE Power, BSE Realty, NSE
CNX Nifty, NSE CNX Service, NSE CNX Energy, NSE CNX Pharma, NSE CNX
Auto, NSE CNX Finance, NSE CNX Metal, NSE CNX Infra, NSE CNX Media and
NSE CNX Realty is structured using GARCH (1,1) model. It is found that historical
information for the above mentioned indices affect the stock market in a significant
way and shocks to conditional variance take a long time to die in these indices.

Mean (Rt) and Variance equation (ℎ𝑡 ) of GARCH(1,1) is as follows:

Rt=µt + et
𝑝 2 𝑞
ℎ𝑡 = 𝛼0 + 𝑖=1 𝛼1 𝑒𝑡−1 + 𝑗 =1 𝛽1 ℎ𝑡−1

GARCH-M model

The volatility for NSE CNX IT is structured using GARCH-M model. The
parameter λ (risk premium) is positive for NSE CNX IT that indicates that the return
is positively related to its volatility. The specification of Mean (Rt) and Variance
equation (ℎ𝑡 ) of GARCH-M is as follows:

𝑅𝑡 = µ𝑡 + 𝜆𝜎𝑡−1 + 𝑒𝑡

𝑝 2 𝑞
ℎ𝑡 = 𝛼0 + 𝑖=1 𝛼1 𝑒𝑡−1 + 𝑗 =1 𝛽1 ℎ𝑡−1

GJR-GARCH(1,1) Model

The volatility is structured for BSE Capital goods, BSE TECk, NSE CNX
MNC, NSE CNX Bank and NSE CNX PSU Bank using GJR-GARCH (1,1) model.
The parameter γ (gamma) that captures the asymmetric effect is positive for the above
mentioned indices. Thus it is found that the volatility is not symmetric for the above
mentioned indices i.e. good and bad news has the different impact on future volatility
on these indices.

231
Mean (Rt) and Variance equation (ℎ𝑡 ) of GJR GARCH(1,1) is as follows:
Rt=µt + et
𝑝 𝑞
2 2
ℎ𝑡 = 𝛼0 + 𝛼1 𝑒𝑡−1 + 𝛽1 ℎ𝑡−1 + 𝛾𝑒𝑡−1 𝑖𝑡−1
𝑖=1 𝑗 =1

GARCH (2,1) Model

The volatility for BSE FMCG, BSE Healthcare and NSE CNX FMCG is
structured by applying the GARCH (2,1) model. It is found that for the above
mentioned indices the past news as indicated by GARCH(1) as well as the recent
news of previous day (t-1) and the day before previous day (t-2) indicated by
ARCH (2) has a significant bearing on the volatility. The specification of the mean
and variance equation is as follows:

Rt=µt + et
𝑝 𝑞
2 2
ℎ𝑡 = 𝛼0 + 𝛼1 𝑒𝑡−1 + 𝛽1 ℎ𝑡−1 + 𝛾𝑒𝑡−1 ℎ𝑡−2
𝑖=1 𝑗 =1

5.2 SUGGESTIONS

 The extent and pattern in the volatility of Indian stock market exhibited
comparatively higher returns and lower volatility in the second decade than the
first decade. Though the Indian stock market experienced volatility shocks, it was
able to regain stability. This is a good sign for the investor’s to gain more
confidence to invest in the Indian stock market.
 The volatility has shown fluctuating trend in the daily returns in a month, it is
found from the study that the April month of the first decade followed by the
month of March is found to be highly volatile. This could probably be the major
and significant economic event of the country that is the presentation of Union
budget. However in the second decade, May month is found to be highly volatile.
Thus relevance of the budget on the stock market volatility is diminishing in
recent years because of the critical policy decisions being taken on a regular basis
by the Government. However the investor should plan wisely on investing
around these months if he can bear the heightened risk.

232
 The three tolerance zones of volatility have been identified. The investors have to
identify if the extreme variation is due to what particular factor, based on that
he/she can plan their trading strategy. If the variation is due to fundamental factor
(industry/firm specific) then go for it , else the control limits can be used for
decision making. The acceptable limits can be identified and make the decision
accordingly based on their risk appetite. In the study it is proved that the returns
have decreased with the increase in the risk measured in the tolerance zones of
volatility, thus the “high risk high return” does not hold good. Hence whenever
there are extreme variations, the investor with the wrong perception of earning
high returns during these periods would probably go wrong.
 It is revealed from the study that the panic drives the stock market which is at
time unexplained by any factor, the long term investors need not change their
trading strategy during such episodes, while the short term investors need to
speculate carefully during those days.
 There is a wrong perception that these days the Indian stock market volatility is
largely influenced by the FII’s. It is resulted in the study that the effect of
macroeconomic variables in the Indian stock market volatility is largely
explained by the domestic factors rather than the global influences, thus the
emerging economies like India are domestic driven and in long term these
markets are less affected by the global changes and development. Thus the policy
makers need not exaggerate the power of FII to influence the stock market of the
country. For that reason they need not be aggressive to attract FII to keep the
market strong. Neither should they be much afraid of its withdrawal. The stock
market is guided by the performance of the country’s own economy.
 Investors select the sectors while making investment, it is exhibited in the study
that though the Indian stock market is largely explained by the movement of
Sensex and NSE CNX Nifty their fluctuations are not transmitted to sectors like
BSE TECk , BSE Power, NSE CNX MNC, NSE CNX Service ,NSE CNX Bank
and NSE CNX Finance. Hence while constructing a portfolio the investors can
have this in their mind to play safe with such stable sectors.
 The volatility is not that could be avoided, volatility is one phenomenon where
the investors meet opportunities in making returns by speculating carefully.
However excessive volatility caused by irrational behavior of the traders and
investors is not desirable. In general investors equate risk with volatility hence
233
 when the strategic decision on the macro economic variables are made, the policy
makers should concern that the volatility of the stock market in turn threatens the
economy of the country as well on reacting to the information received on such
policy changes.
 The volatility has shown excessive volatility during the years 1992 and 2008,
during such episodes the speculation resulted in excessive volatility. The stock
exchange management can focus upon the need of effective monitoring
mechanism to avoid dangers associated with excessive volatility. Any reform
measure cannot guarantee a complete safeguard from exogenously caused
volatility shocks. With increasing integration of world markets, the frequency of
such shocks is liable to increase. The stock exchange management can gauge the
acid-test of gaining maturity of the stock market as how easily it absorbs these
shocks with minimal destruction.

5.2.1 SUGGESTIONS FOR FURTHER RESEARCH

The study attempts to present a comprehensive analysis of the stock market

volatility in India during the last two decades of the study period. The scope for
further research may be done by conducting research on the duration of the volatility
and the time taken to recover from the extreme volatility. This will help both the
investors and the stock exchange management to take measures. The area of research
to investigate the effects of mechanisms to curb excessive volatility could bring the
effect of arbitrage opportunities across various sectors in India. Survey could be done
to determine the level of investors’ confidence during the volatility of Indian stock
market.

5.3 CONCLUSION

An attempt is made in this study to present an in depth analysis on the

volatility of the Indian stock market during the post liberalisation period. The study
highlighted the extent and pattern of Indian stock market volatility. The volatility
pattern exhibited by the two major market indices viz. BSE Sensex and NSE CNX
Nifty is that the volatility was high in the year 1992 and 2008 that occurred due to the
major securities scam and the Global financial crisis respectively. This result is
confirmed by the findings based on the volatility of daily as well as monthly returns.
The return has increased and the volatility has decreased in the second decade

234
compared to the first decade of the study period. This reveals that with the
liberalisation of the Indian economy, though not immediately, the Indian stock market
has shown a good sign of increased returns and reduced volatility in the second
decade.

The study has identified the tolerance zones of volatility for the Indian stock
market. It is found that the high risk is not compensated with high returns in the
tolerance zones of volatility and such that the belief of “high risk high return” does
not seem to hold good. On the effect of macroeconomic variables in the Indian stock
market, the macroeconomic variables namely IIP, Inflation, Call money rate and M3
are statistically cointegrated in explaining the volatility of the Indian stock market.
This clearly depicts that the Indian stock market is affected more by the domestic
factors than the global influences.

It is concluded that in both the BSE and the NSE sectoral indices, IT and Realty
sector are found to be highly volatile. There was no spillover effect on BSE TECk,
BSE Power, NSE CNX MNC, NSE CNX Service, NSE CNX Bank and NSE CNX
Finance and hence there appears the arbitrage opportunity in these sectors. While
making financial decision, from the perspective of an investor, the future stocks return
volatility could be predicted on the result obtained from the volatility model. To
conclude, volatility can be wealth maker as well as wealth killer too, hence while
framing strategy on profiting from volatility one need to make sure that they have
protected themselves from it.

235
 i

BOOKS

1. Agarwal R.N , Financial liberalisation in India: A study of banking system and

stock markets, B.R.Publishing Corporation ,1996.
2. Badgar and Kaffman, The complete Guide to Investment analysis, McGraw-Hill
book co,1967.
3. Badger and others, Investment principles and practices, Prentice Hall, 6th
edition,1969.
4. David Blake, Financial Market analysis, Wiley, 2nd edition,2010.
5. Dawn C Porter, Sangeetha Gunasekar, Damodar N. Gujarati, Basic Econometrics,
Tata McGraw-Hill Education, 5th edition,2011.
6. Frederic S.Mishkin,Stanley G. Eakins, Financial Markets and Institutions,
Pearson, 6th edition, 2011.
7. G.J.Alexander and W.F.Sharpe, Fundamentals of Investments, Prentice Hall, 3rd
edition,2009.
8. Gurusamy.S,Capital Markets, Tata Mc.Graw-Hill Education,2nd edition,2009.
9. Harvinder Kaur, Stock market volatility in India, 1st edition, Deep & Deep
Publications pvt.ltd, 2002.
10. Pinches,G.E., Essential of Financial Management, Harper Collins Publishers,
New York,1990.
11. Prasanna Chandra, Investment analysis and Portfolio Management, Tata McGraw
Hill Education,4th edition, 2012.
12. Rangarajan,C.,Indian Economy-Essays on Money and Finance,USB
Publishers,New Delhi,1998.
13. Richard, I.Levin and David,S.Rubin., Statistics for Management,Prentice Hall of
India, New Delhi,2001.
14. Saloni Gupta, Stock Market in India: working and Reforms, New Century
publications,2010.
15. Saunders,A.,Financial Institutions Management,McGraw Hill, London,2000.
16. Sharpe W.F., Portfolio theory and Capital markets, Mc.Graw Hill Book Co.,
Reprint edition, 2000.
 ii

17. Shaw,E., Financial Deepening in Economic Development,Oxford University

Press,New York,1973.
18. Tarapore,S.S., Issues in Financial sector Reforms,UBS Publishers,New
Delhi,2001.
19. Tarapore,S.S., Twists and Turns in Financial Reforms,UBS Publishers,New
Delhi,2002.

JOURNALS

1. Akgiray, V (1989). “Conditional Heteroscedasticity in Time Series of Stock

Returns: Evidence and Forecast,” Journalof Business, 62(1), 55-80.
2. Bae K H and Karolyi G A (1994), “Good News, Bad News and International
Spillovers of Stock Return Volatility Between Japan and the US”, Pacific-
Basin Finance Journal, Vol. 2, No. 4, pp. 405-438.
3. Ball R and Kothari S (1989), “Nonstationary Expected Returns: Implications for
Tests of Market Efficiency and Serial Correlation in Returns”, Journal of
Financial Economics, Vol. 25, No. 1, pp. 51-74.
4. Biswal, P. and Kamaiah, B. 2001. Stock market development in India: Is there
any trend break? Economic and Political Weekly, Jan 27, 377-2001.
5. Black F (1976), “Studies in Price Volatility Changes”, Proceedings of the 1976
Meeting of the Business and Economics Statistics Section, American
Statistical Association, pp. 177-181.
6. Blanchard,O. J and Watson, M Bubbles,rational expectations and financial
markets, NBER Working Paper, No.945, 639-660.
7. Bollerslev, T (1986). “Generalized Autoregressive Conditional
Heteroskedasticity,” Journal of Econometrics, 31(3),307-327.
8. Bollerslev, T and Mikkelsen, H O (1994). “Modeling and Pricing Long-Memory
in Stock Market Volatility,” Working Paper, University of Southern
California.
9. Bollerslev, T; Chou, Ray Y and Kroner, Kenneth F (1992). “ARCH Modeling in
Finance,” Journal of Econometrics,52(1/2), 5-59.
 iii

10. Booth G, Martikainen T and Tse Y (1997), “Price and Volatility Spillovers in
Scandinavian Stock Markets”, Journal of Banking and Finance, Vol. 21,
No. 6, pp. 811-823.
11. Brailsford, Timothy J and Faff, Robert W (1996). “An Evaluation of Volatility
Forecasting Techniques,” Journalof Banking and Finance, 20(3), 419-438.
12. Braun P, Nelson D and Sunier A (1995), “Good News, Bad News, Volatility and
Betas”, Journal of Finance, Vol. 50, No. 5, pp. 1575-1603.
13. Broca, D. S. 1994. Volatility shifts in stock market returns: A look at emerging
markets. Vikalpa, 19(1): 47-53.
14. Broca, D. S., 1995. Monitoring volatility changes on the Bombay bourse: A
control chart approach. Vikalpa, 20 (3): 43-51.
15. Brooks C and Henry O (2002), “The Impact of News on Measures of
Undiversifiable Risk: Evidence from the UK Stock Market”, Oxford
Bulletin of Economics and Statistics, Vol. 64, No. 5, pp. 487-507.
16. Brooks, C (1998). “Predicting Stock Index Volatility: Can Market Volume Help?”
Journal of Forecasting, 17(1), 59-80.
17. Brown, S. J. and T. Otsuki, 1990, Macroeconomic Factors and the Japanese
Equity Markets: The CAPMD project, in E. J. Elton and M. Gruber (eds.),
Japanese Capital Markets, New York: Harper&Row.
18. Canarella G, Sapra S K and Pollard S K (2007), “Asymmetry and Spillover
Effects in the North American Equity Markets”, Economic Discussion
Paper, available at http://www.economics-
ejournal.org/economics/journalarticles/2007-12/version_1/count(accessed
in February 2009).
19. Chen H and Lobo B J (2006), “Links Between the Indian, US and Chinese Stock
Markets”, National University of Singapore, Department of Economics,
Working Paper No. 0602, available at
http://nt2.fas.nus.edu.sg/ecs/pub/wp/wp0602.pdf (accessed in February
2009).
20. Chen, N. F.; Roll, R. and Ross, S. A., 1986. Economic forces and the stock
market, Journal of Business, vol. 59(3), pp. 383-403.
 iv

21. Choudhry T (2004), “International Transmission of Stock Returns and Volatility:

Empirical Comparison Between Friends and Foes”, Emerging Market
Finance and Trade, Vol. 40, No. 4, pp. 33-52.
22. Christie A (1982), “The Stochastic Behaviour of Common Stock Variance: Value,
Leverage and Interest Rate Effects”, Journal of Financial Economics, Vol.
10, No. 4, pp. 407-432.
23. Cochrane, H. 1991a. A critique of the application of unit root tests. Journal of
Economic Dynamics and Control, 15: 275-284.
24. Cochrane,J. H. 1991. Volatility tests and efficient markets: A review essay.
Journalof Monetary conomics, 27: 463-485.
25. Corhay, A and Rad, T (1994). “Statistical Properties of Daily Returns: Evidence
from European Stock Markets,” Journalof Business Finance and
Accounting, 21(2), 271-282.
26. Darrat, A.F. and T.K. Mukherjee, 1987, The Behavior of the Stock Market in a
Developing Economy, Economics Letters 22, 273-278.
27. De Bondt, W. F.M. and Thaler, R. 1985. Does the stock market overreact? The
Journal of Finance, 42: 557-581.
28. DeFina, R.H., (1991), “Does inflation depress the stock market”, Federal Reserve
Bank of Philadelphia Business Review, Nov., 3-12.
29. Dennis, P.J. and Strickland, D. 2002. Who blinks in volatile markets, individuals
or institutions? The Journal of Finance, 57 (5): 1923 -1949.
30. Diba, B. T. and Grossman, H.I. 1987. On the inception of rational bubbles.
Quarterly Decision, Vol. 32, No.1, January - June, 2005Journal of
Economics, Aug, 697-700.
31. Engle R F and Granger C W J (1987), “Co-Integration and Error-Correction:
Representation, Estimation and Testing”, Econometrica, Vol. 55, No. 2,
pp. 251-276.
32. Engle R F, Lillian D M and Robins R P (1987), “Estimating Time-Varying Risk
Premium in the Term Structure: ARCH-M Model”, Econometrica, Vol.
55, No. 2, pp. 391-407.
 v

33. Engle, R F (1982). “Autoregressive Conditional Heteroskedasticity with

Estimates of the Variance of United Kingdom Inflation,” Econometrica,
50(4), 987-1007.
34. Engle, R F and Bollerslev, T (1986). “Modelling the Persistence of Conditional
Variances,” Econometric Reviews, 5, 1-50.
35. Engle, R F and Ng, Victor K (1993). “Measuring and Testing the Impact of News
on Volatility,” Journal of Finance, 48(5), 1749-1778.
36. Erb C, Harvey C and Viskanta T (1994), “Forecasting International Equity
Correlations”, Financial Analysts Journal, Vol. 50, No. 6, pp. 32-45.
37. Eun C S and Shim S (1989), “International Transmission of Stock Market
Movements”, Journal of Financial and Quantitative Analysis, Vol. 24, No.
1, pp. 41-56.
38. Fabozzi F J, Tunaru R and Wu T (2004), “Modeling Volatility for Chinese Equity
Markets”,Annals of Economics and Finance, Vol. 5, pp. 79-92.
39. Fair, R C and Shiller, R J (1989). “The Informational Content of Ex-ante
Forecasts,” Review of Economics and Statistics,71(2), May, 325-332.
40. Fair, R C and Shiller, R J (1990). “Comparing Information in Forecasts from
Econometric Models,” American Economic Review, 80(3), 375-380.
41. Fama, E. F. 1990. Stock returns, expected returns,and real activity. The Journal of
Finance, 45,1089-1108.
42. Fama, E. F., and French, K. R. 1988. Permanent and temporary components of
stock prices., Journal of Political Economy, 96: 246-273.
43. Figleski, S (1997). “Forecasting Volatility,” Financial Markets,Institutions &
Instruments, 6(1), 1-87.
44. Flavin, M. 1983. Excess volatility in the financial market: A reassessment of the
empirical evidence. Journal of Political Economy, Oct, 929-956.
45. French, Kenneth R; Schwert, William and Stambaugh, Robert F (1987).
“Expected Stock Returns and Volatility,” Journalof Financial Economics,
19(1), 3-29.
 vi

46. Gagnon L and Karolyi G A (2006), “Price and Volatility Transmission Across
Borders”, Financial Markets, Institutions and Instruments, Vol. 15, No. 3,
pp. 107-158.
47. Gannon G (2005), “Simultaneous Volatility Transmissions and Spillover Effects:
US and Hong Kong Stock and Futures Markets”, International Review of
Financial Analysis,Vol. 14, pp. 326-336.
48. Glosten L R, Jagannathan R and Runkle D E (1993), “On the Relation Between
the Expected Value and the Volatility of Nominal Excess Return on
Stocks”, The Journal of Finance,Vol. 48, pp. 1779-1801.
49. Glosten, Lawrence R; Jagannathan, Ravi and Runkle, David E (1993). “On the
Relation between the Expected Value and the Volatility of the Nominal
Excess Returns on Stocks,” Journal of Finance, 48(5), 1779-1791.
50. Hamao Y, Masulis R and Ng V (1990), “Correlations in Price Changes and
Volatility Across International Stock Markets”, Review of Financial
Studies, Vol. 3, No. 2, pp. 281-307.
51. Hameed A and Kusnadi Y (2006), “Stock Return Cross-Autocorrelations and
Market Conditions in Japan”, Journal of Business, Vol. 79, No. 6, pp.
3029-3056.
52. Hilliard J (1979), “The Relationship Between Equity Indices on World
Exchanges”, Journal of Finance, Vol. 34, No. 1, pp. 103-114.
53. Jon, Vilasuso (2002). “Forecasting Exchange Rate Volatility,” Economics Letters,
76(1), June, 59-64.
54. Jorion, P (1995). “Predicting Volatility in the Foreign Exchange Market,” Journal
of Finance, 50(2), 507-528.
55. Kahneman D and Tversky A (1979), “Prospect Theory: An Analysis of Decision
Under Risk”, Econometrica, Vol. 47, No. 2, pp. 263-291.
56. Kanas A (1998), “Volatility Spillovers Across Equity Markets: European
Evidence”, Applied Financial Economics, Vol. 8, No. 3, pp. 245-256.
57. Karolyi G A and Stulz R M (1996), “Why Do Markets Move Together? An
Investigation of US Japan Stock Return Comovements”, The Journal of
Finance, Vol. 51, No. 3, pp. 951-986.
 vii

58. Kim S W and Rogers J H (1995), “International Stock Price Spillovers and
Market Liberalization:Evidence from Korea, Japan, and the United
States”, Journal of Empirical Finance,Vol. 2, No. 2, pp. 117-133.
59. King M A and Wadhwani S (1990), “Transmission of Volatility Between Stock
Markets”, Review of Financial Studies, Vol. 3, No. 1, pp. 5-33.
60. Koutmos G and Booth G (1995), “Asymmetric Volatility Transmission in
International Stock Markets”, Journal of International Money and Finance,
Vol. 14, No. 6, pp. 747-762.
61. Kumar K K and Mukhopadyay C (2002), “Equity Market Interlinkage:
Transmission of Volatility: A Case of US and India”, NSE Research
Initiative, available at :
http:// www.nseindia.com/content/research/Paper39.pdf
62. Laakkonen H and Lanne M (2008), “Asymmetric News Effects on Volatility:
Good vs. Bad News in Good vs. Bad Times”, Helsinki Centre of
Economic Research, Discussion The IUP Journal of Applied Finance, Vol.
15, No. 9, 2009.
63. Lee, Bong-soo, (1992) “Causal Relations Among Stock Returns, Interest Rates,
Real Activity and Inflation”, Journal of Finance 47, 1591-1603.
64. Lin W L, Engle R F and Ito T (1991), “Do Bulls and Bears Move Across
Borders? International Transmission of Stock Returns and Volatility as the
World Turns”, NBER Working Paper No. 3911.
65. Ljung, G M and Box, G P E (1978). “On a Measure of Lack for Fit in Time Series
Models,” Biometrika, 66, 66-72.
66. McMillan, D. G., (2001), “Cointegration Relationships between Stock Market
Indices and Economic Activity: Evidence from US Data”, Discussion
Paper, Issue No. 0104, Centre for Research into Industry, Enterprise,
Finance and the Firm (CRIEFF), University of St.Andrews, Scotland.
 viii

67. Mohanty, P. K. and Kamaiah, 1997. Volatility and its persistence in the Indian
stock market: A case study of 30 scrips. Journal of Foreign Exchange
andInternational Finance, 13(4): 289 - 303.
68. Mukherjee K N and Mishra R K (2008), “Stock Market Integration and Volatility
Spillover: India and Its Major Asian Counterparts”, MPRA Paper No.
12788.
69. Mukhopadhyay, D. & Sarkar, N. (2003), “Stock return and macroeconomic
fundamentals in modelspecification framework: Evidence from Indian
stock market”, Indian Statistical Institute,Economic Research Unit, ERU
2003-05 Discussion Paper, January 2003, 1-28.
70. Naka, Atsuyuki & Mukherjee, Tarun K. & Tufte, David R., (1998),
"Macroeconomic variables and the performance of the Indian Stock
Market," Working Papers 1998-06, University of New Orleans,
Department of Economics and Finance.
71. Nelson, D (1991). “Conditional Heteoskedasticity in Asset Returns: A New
Approach,” Econometrica, 59(2), 347-370.
72. Panda, C. and Kamaiah, B., (2001) “Monetary policy, Expected Wholesale price
index, real Activity and Stock Returns in India: An Empirical Analysis”,
Asian African Journal of Economics and Econometrics, Vol. 1, 191-200.
73. Poterba, J. M. and Summers, L. H. 1986. The persistence of volatility and stock
market fluctuations. American Economic Review, 76 (5): 1142-1151.
74. Sharma, J.L. and R.E. Kennedy (1977), “Comparative analysis of stock price
behavior on the Bombay, London & New York Stock Exchanges”, JFQA,
Sept 1977, pp. 391-403.
75. Singh P, Kumar B and Pandey A (2008), “Price and Volatility Spillovers Across
North American, European and Asian Stock Markets: With Special Focus
on Indian Stock Response Asymmetry in Return and Volatility Spillover
from the US to Indian Stock Market , Indian Institute of Management
Ahmedabad, Working Paper No. 2008-12-04, available at
http://www.iimahd.ernet.in/publications/data/2008-12-04Priyanka.pdf
 ix

76. West, K. D. 1988. Bubbles, fads and stock market volatility tests: A partial evaluation,
1986. The Journal of Finance, 43(3): 639-660
77. Wongswan Jon (2006), “Transmission of Information Across International Equity
Markets”, The Review of Financial Studies, Vol. 19, No. 4, pp. 1157-
1189.

WEBSITES

1. http://in.reuters.com
2. http://mospi.nic.in
3. http://www.finmin.nic.in
4. www.bloomberg.com/energy
5. www.bseindia.com
6. www.indiainfoline.com
7. www.indiastat.com
8. www.mcxindia.com
9. www.moneycontrol.com
10. www.mscibarra.com
11. www.nseindia.com
12. www.rbi.org.in
13. www.sebi.gov.in

**********