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Corporate Governance and Indian Stock Market: A Study with Asymmetric

Conditional Volatility Models

Article  in  Asian Journal of Management · May 2018

DOI: 10.5958/2321-5763.2018.00012.4

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 Asian Journal of Management. 9(1): January- March, 2018

ISSN 0976-495X (Print) Available online at

2321-5763 (Online) www.anvpublication.org
DOI:

Vol. 09| Issue-01|

January- March 2018 Asian Journal of Management
Home page www.ajmjournal.com

Corporate Governance and Indian Stock Market:

A Study with Asymmetric Conditional Volatility Models
Nikhil Kaushik
Research Scholar, Fellow Programme Management, Indian Institute of Forest Management, Bhopal, 462003
*Corresponding Author E-mail: nikhil.iifm14@gmail.com

ABSTRACT:
An efficient capital market needs improved quality as well as the quantity of information available to investors,
which is possible by raising the principles of good corporate governance. Numerous studies showed its
importance in the development of the stock market. To strengthen the trust of investors in companies Securities
Exchange Board of India (SEBI) revised Clause 49 of the Listing Agreement of the Indian Stock Market which
gets operationalized in October 2014. This study investigates the impact of revised Clause 49 on Indian stock
market volatility using asymmetric conditional volatility models. For analysis, author considered return pattern
of five indexes; S&P BSE SENSEX, S&P BSE AllCap, S&P BSE LargeCap, S&P BSE MidCap and S&P BSE
SmallCap. The study is divided into two phases keeping revised Clause 49, 2014 as a benchmark; Pre-CG
regulation period from January 1st, 2006 to September 30th, 2014 and Post-CG regulation period from October
1st, 2014 to March 31st, 2017. Results show that the revised Clause 49, 2013 helps to build the trust of investors
for Small-Cap companies in Indian Stock Market.

KEYWORDS: Corporate Governance, Indian Stock Market, Asymmetric Conditional Volatility Model, Stock
Market Volatility JEL Classification: C22, C58, G34

INTRODUCTION: It is crucial for the stability of the capital market,

Corporate governance works as an instrument which
balances the interests of company’s stakeholders such as
shareholders, managers, employees, suppliers, financers,
community and the government. Corporate governance
is the unified set of internal and external control
apparatuses that harmonize shareholder-manager
conflicts of interest (Berle & Means, 1986; Williamson,
1984). It is just like company administration which
refers to fair and transparent functioning of the system.
Corporate governance increases accountability of the
company and helps in avoiding massive disasters before
they occur.
Received on 30.08.2017 Modified on 10.09.2017
Accepted on 26.09.2017 ©A&V Publications All right reserved
Asian Journal of Management. 2018; 9(1):
DOI:
1
economy as well as for the protection of investors.
Investors value good corporate governance, and
corporate governance practices are recognized and
esteemed by investors (Pae and Choi, 2011). Moreover,
investors are ready to pay more for shares of a company
which is practicing good corporate governance
principles.
In India, corporate governance was popularized when
Government of India (GoI) formed a Working Group in
1996 to review the Companies’ Act to encounter the
modern day requirements of the industrial sector;
liberalization, privatization, and globalization (LPG). At
the same time, under the chairmanship of Rahul Bajaj,
Confederation of Indian Industry (CII) took an initiatory
step to develop and endorse Code of Corporate
Governance. In 1999, Security Exchange Board of India
(SEBI) under the chairmanship of Kumar Mangalam
Birla, took a second major initiative to encourage and
 Asian Journal of Management. 9(1): January- March, 2018
raise the principles of good corporate governance in
India. The Birla Committee emphasis on inclusion of
independent directors in the board and importance of
board audit committees. In 2000, SEBI incorporated
recommendations of Birla committee into Clause 49 of
the Listing Agreement of the Indian Stock Exchange.
Department of Company Affairs formed Naresh Chandra
Committee in 2002 to inspect various corporate
governance issues in India. After submission of the
report by the committee, two important aspects of
corporate governance were made mandatory;
independent directors in the audit board, and financial
and non-financial disclosures. Further to strengthen the
trust of investors in the companies and to meet the
international market needs Narayana Murthy Committee
was constituted by SEBI whose chairman was Mr. N.R.
Narayana Murthy. The committee mentioned the
significance of director remunerations, independent
directors in the board, audit reports, and audit
committees, related party transactions, and risk
management. Based on recommendations of Birla
Committee and Naresh Chandra Committee, SEBI
reformed Clause 49 in October 2004 which was executed
from 1st January 2006.
But Satyam Computer scam in 2009 shocked Indian
stock market and diffuse a wave of fear in India as well
as across the world which crushed Indian outsourcing
sector. SEBI was forced to rethink on corporate
governance codes in India. Guidelines for corporate
governance comprising of board of directors’
independence, board responsibilities, auditors’
qualification, audit committee independence, and
whistleblowing were released by the Ministry of
Corporate Affairs in late 2009. Later in Lok Sabha,
Companies Bill, 2009 was presented where numerous
suggestions for revisions were projected to improve
corporate governance code for companies. The bill was
posed several times in Lok Sabha till it was taken to
2012 budget session for authorization. Then SEBI
introduced revised Clause 49 in the Companies Act,
2013 which is valid to all listed companies with effect
from 1st October 2014, except from the clause related to
Constitution of Risk Management Committee which is
related to top 100 listed companies based on market
capitalization. This study tries to analyse the impact of
corporate governance regulations which were introduced
in 2006 and 2014 on the return pattern of S&P BSE
SENSEX, S&P BSE AllCap, S&P BSE LargeCap, S&P
BSE MidCap and S&P BSE SmallCap. For the study,
performance of Indian stock market is divided into two
phases keeping revised Clause 49 in Companies Act,
2013 as a benchmark; Pre-CG regulation period (January
1st, 2006 to September 30th, 2014) and Post-CG
regulation period (October 1st, 2014 to March 31st,
2017).
2
S&P BSE SENSEX, which is also known as Barometer
of Indian Capital Markets was launched in 1986 by
Bombay Stock Exchange (BSE) It is calculated on
Weighted Market Capitalization methodology
considering 30 stocks of large, well-established and
financially sound companies across vital sectors. S&P
BSE AllCap encompasses S&P BSE LargeCap, S&P
BSE MidCap, and S&P BSE SmallCap, which is a rules-
based index that pursues to measure the performance of
the Indian stock market. While S&P BSE LargeCap
signifies the top 70 percent of total market cap of the
S&P BSE AllCap. In 2005, BSE announced two new
indexes S&P BSE MidCap and S&P BSE SmallCap to
monitor the performance of companies having
comparatively smaller market capitalization. Over the
years it was seen that S&P BSE MidCap and S&P BSE
SmallCap indices have greater utility to the investing
community.
Investors’ belief in mid and small sized companies gets
stronger in the past couple of years. 2015 was the bad
year for Indian stock market, as Nifty 50 fell 4.8 percent
and Sensex slipped by 5.06 percent. Although, it is
unusual for mid-cap and small-cap to outclass their
large-cap peers, but they do with an astonishing jump of
6.75 percent and 5.46 percent respectively. The
contribution of mid-cap funds was 11 percent of overall
equity funds assets in 2014 (Adajania, 2017). But in
2015, it jumped to 16 percent and presently it stands at
20 percent. The story is somewhat the same for small-
cap funds as in 2016 return was around 16 percent, 33
percent in three years and 26 percent in five years
(Bazaz, 2017). Even small-cap companies are getting
more inflows as compared to large-cap companies.
However, research on mid and small-cap companies in
India are fairly untouched.
Empirical studies showed that there is a significant
impact of information on the stock market. The
fundamental relationship among information and stock
market performance was first accomplished by
Grossman and Stiglitz in 1980. They elucidated that
transparency in information or cost-benefit trade off in
information collection results in more informed trading
and more informative pricing. Companies which give
less importance to information transparency and
disclosure practices have higher costs of liquidity (Chen
et al, 2007). Furthermore, such companies face serious
information asymmetry and confront significant negative
impact on their stock prices.
Better disclosure quality effects less trading by insider
traders or privately informed traders and in turn
diminishes information asymmetry (Brown & Hillegeist,
2007). It is also found that there is a negative
relationship between annual report disclosures and
information asymmetry. There is an asymmetric
 Asian Journal of Management. 9(1): January- March, 2018
influence of news on stock volatility which is termed as
leverage or asymmetric effect. The leverage effect is
discovered by Black in 1976 stating that bad news
results in an increase in stock market volatility while
good news decreases stock market volatility.
Additionally, an increase (decrease) in market tremors
will also increase (decrease) beta of the firms, which
eventually rise (fall) the expected market returns and
results in the drop of stock price of the firm (Braun et al.,
1995; Ball & Kothari, 1989). Mitchell and Mulherin in
1994 studied the relationship between news
announcements reported daily (Dow Jones and
Company) and volume traded and market returns of the
securities. Their study suggests that market activities
directly influenced the financial markets.
Effective corporate governance practices assist in
structuring vibrant and proficient capital markets.
Corporate governance codes improved quantity as well
as the quality of information available to investors in the
capital market. This strengthens investors belief in
investing in stock market. It is evident from the study
that corporate governance directly affects firms’ stock
prices (Gompers et al., 2003). Good corporate
governance is an essential to an enthusiastic equity
market (Gilson, 2000). The association between good
corporate governance and transparency should be
evident. Transparency in terms of operating
performance, as well as ownership is critical to effective
corporate governance for an economic condition for
those companies which want to shape growth in
succeeding decades. Furthermore, pricing efficiency of a
capital market is governed by the level of equity market
development and regulatory framework that is confluent
to transparent corporate governance (Kim and
Shamsuddin, 2008). Bae and Goyal (2010) quoted the
example of Korea, where better governed firms
experience higher stock returns and increase equity
market liberalization. Moreover, study of Central and
Eastern Europe countries proposes that the
implementation of financial regulations is very important
in defining better or worse performing stock markets.
In other words, firms following good corporate
governance practices perform well than that of firms
with weak governance.
Table 1: Unit Root Test Results
Augmented Dickey-Fuller Test
Index Intercept
S&P BSE SENSEX -49.18575***
S&P BSE AllCap -47.3232***
S&P BSE LargeCap -48.88592***
S&P BSE MidCap -43.559***
S&P BSE SmallCap -24.66197***
Notes: *** indicates significance at 1% level.
Source: Author’s calculation
The author employed following model to inspect 2014 which is applicable to all listed companies with
whether there is any impact of amendments to Clause 49, effect from 1st October 2014 on all five indexes:
Numerous research papers in India examined the change
in market behaviour and volatility patterns across
various time periods. When stock derivatives were first
announced in India it was found that there was
significant volatility in the stock market (Thenmozhi and
Thomas, 2004; Hetamsaria and Deb, 2004; Joshi and
Pandya, 2008). Prasanna (2013) examined the impact of
corporate governance regulation (Clause 49) introduced
in 2000 on volatility of Indian stock market. It was
observed that there was considerable reduction in market
volatility in the post-corporate governance period. This
study investigates the effect of revised Clause 49 in 2014
on volatility pattern of Indian Stock market.
Methodology:
The study uses daily closing market values of all five
indexes (SandP BSE SENSEX, S&P BSE AllCap, S&P
BSE LargeCap, S&P BSE MidCap and S&P BSE
SmallCap) which are collected from BSE website from
the period between January 1st, 2006 and March 31st,
2017. After data collection, coding and tabulation are
done in Microsoft Excel 2013 and analysis is performed
through Eviews 9.
Daily market returns are computed by the formula given
below:
(1)
Where,
Rt = percentage return of market on day t,
It = closing market value on day t,
It-1 = closing market value on day t-1 and
ln is natural logarithm.
Model Construction:
A common assumption of the time series is the data to be
stationary. A stationary data means it exhibits time
independent mean and autocovariance. Augmented
Dickey-Fuller Unit Root Test is used to know stationary
of the daily returns of five indexes. The results of the
unit root test are shown in Table 1 and it strongly rejects
the null hypothesis of non-stationarity.
With intercept & trend Without intercept & trend
-49.17925*** -49.15997***
-47.31481*** -47.29327***
-48.87849*** -48.85878***
-43.55563*** -43.53775***
-24.66561*** -24.65305***
3
 Asian Journal of Management. 9(1): January- March, 2018

Rt = θ1D1 + θ2D2 + et, (2)

means error terms are unequally spread or has unequal
variance. The existence of heteroscedasticity is checked
Where, through ARCH LM test. The result of the test is shown
Rt is daily percentage return of S&P BSE100 index on in Table 2. The author strongly rejects the null
day t, hypothesis (H0) stating that residuals are homoscedastic
D1 = 1, before September 30th, 2014 or model is not suffering from ARCH effect. There is a
0, after September 30th, 2014 presence of clustering volatility i.e. periods of low
D2 = 0, before September 30th, 2014 volatility are followed by periods of low volatility and
1, after September 30th, 2014 and periods of high volatility are followed by periods of high
et is a random error term. volatility. Such clustering volatility can be captured by
θ1 quantifies the impact on the market return before ARCH family.
amendments to Clause 49, 2014 while θ2 measures
impact on market return after amendments. Table 2: Heteroscedasticity Test for Model 2
Heterosce S&P S&P S&P S&P S&P
dasticity BSE BSE BSE BSE BSE
In a time series data, generally, future values are Test SENS AllCap LargeC MidCa Small
predicted by past values of the time series data as well as EX ap p Cap
past values of a white noise disturbance (error) term. ARCH 54.733 100.487 65.6082 312.31 231.4
Therefore, there is a need to check the series dependency LM Test 29*** 4*** 3*** 26*** 707**
*
on its own previous values, and combination of current Notes:***indicatessignificanceat1%level
and previous values of a white noise disturbance term.
Such model is known as Autoregressive Moving The ARCH model is also famous as conditional
Average (ARMA) model. Such model gives true heteroscedastic model given by Engle (1982) to describe
estimates of both goodness-of-fit measures and the gradual increase in variance over time. ARCH term
significance levels of independent variables. in variance equation is a conditional variance of the error
Correlogram-Q-statistics or Ljung-Box Q-statistics is term, σt2, which depends on previous values of the
used to know the order of ARMA impacting the base squared error term.
model (Model I). The p-value of Correlogram Q-
statistics at different lags are checked to identify the
presence of autoregressive (AR) or moving average (4)
(MA) or both components in the model. Moreover,
Autocorrelation Function (ACF) and Partial Where, εt = σtzt and zt has zero mean and constant
Autocorrelation Function (PACF) plots help in variance.
recognizing whether the model is AR, MA or mixed
(ARMA) process. There are certain guidelines for ARCH model was further extended by Bollerslev (1986)
identifying the process, to overcome the requirement of several parameters and
 For AR process, ACF declines exponentially to zero higher order of ARCH. Generalized Autoregressive
and spikes in the lags of PACF. The spikes in the Conditional Heteroscedasticity model, GARCH (p, q),
lags of PACF plot directs the order of AR. where p is lagged terms of the squared error term
 For MA process, PACF declines exponentially to (ARCH term) and q is term of the lagged conditional
zero and spikes in the lags of ACF. The spikes in the variances (GARCH term).
lags of ACF plot directs the order of MA.
 ARMA process shows exponential declines in ACF (5)
and PACF plots.
σt2 = variance of residual derived from model II, also
After keeping above guidelines under consideration the known as current day’s variance or volatility of indices
earlier model (Model I) is improved which is as follows: return (Rt),
(3)
σ2t-i = previous period’s squared residual derived from
model II. It is also known as previous day’s return
This is model II.
information about volatility, it is an ARCH term and
Where,Rt-p = Lagged value of the dependent variable of
order p and ϕ is its coefficient
σ2t-i = previous day’s residual variance or volatility of
et-q = Lagged value of the error term of order q and γ is
indices return (Rt). It is a GARCH term
its coefficient
To know whether past positive and negative shocks
It is necessary to check the presence of
(asymmetry) have any impact on volatility, Sign Bias
heteroscedasticity in the model. Heteroscedasticity
Test is used. If test proves that a given series need an
4
 Asian Journal of Management. 9(1): January- March, 2018

asymmetric model for analysis then higher model will be S&P BSE MidCap
used, Above models were further improved to measure Mean 0.041259 0.035161 0.062893
Maximum 11.11127 11.11127 3.413577
the informational asymmetry and leverage effect. Nelson Minimum -12.07639 -12.07639 -7.99549
(1991) developed the EGARCH; Ding et al. (1993) Standard Deviation 1.444845 1.53501 1.065817
formulated the asymmetric power ARCH (APARCH) Variance 2.087577 2.356256 1.135966
model and the TARCH developed by Glosten at al. S&P BSE SmallCap
(1993). The selection of best suited model is based on Mean 0.031571 0.026784 0.048556
Maximum 8.660121 8.660121 3.340945
the comparative value of Akaike information criterion,
Minimum -10.83569 -10.83569 -9.219285
Schwarz criterion and Hannan–Quinn statistics. Standard Deviation 1.472717 1.555922 1.130003
Variance 2.168895 2.420893 1.276906
RESULT AND DISCUSSION: Source: Author’s calculation
Table 3 reports descriptive statistics of all five indexes
return, in which results are shown for three-time period; But results from S&P BSE MidCap and S&P BSE
whole period (January 1st, 2006 to March 31st, 2017), SmallCap indexes are very different from their
pre-CG regulation period (January 1st, 2006 to counterparts. Average mean of S&P BSE MidCap is
September 30th, 2014) and post-CG regulation period 0.041259 for the whole period, whereas the average
(October 1st, 2014 to March 31st, 2017). mean of the index increases from 0.035161 in the pre-
CG regulation period to 0.062893 for the post-CG
The average return for S&P BSE SENSEX in whole regulation period. Likewise, the average mean return of
period is 0.041208, which is comparatively lower than S&P BSE SmallCap index in post-CG regulation period
the average return of pre-CG regulation period is double (approximately) of average mean return in the
(0.04778), but higher than the post-CG regulation period pre-CG regulation period. Volatility in returns for both
(0.01789). Furthermore, the standard deviation in the the indexes decreases from pre-CG regulation period to
pre-CG regulation period decreases from 1.628588 to post-CG regulation period. It can be concluded from the
0.930582 in the post-CG regulation period, indicating descriptive statistics of return of these five indexes that
that volatility in returns reduced after amendments to amendments to Clause 49, 2014 impacted S&P BSE
Clause 49, 2014. Similar outcomes are discovered for the MidCap and S&P BSE SmallCap more than other three
S&P BSE AllCap and S&P BSE LargeCap indexes indexes. However, after the revised Clause 49, 2014
where average return in whole period is lower than the volatility get reduced drastically for all the indexes.
pre-CG regulation period and higher than the post-CG
regulation period. Table 4 shows Sign Bias Test results. The table depicts
that sign bias is statistically significant so higher ARCH
Table 3: Descriptive Statistics of Returns for Whole Period and model should be used for analysis or there is a need to
Sub-periods capture the informational asymmetry and leverage effect
Whole Pre-CG Post-CG
for these models.
Period regulation regulation
Period Period
S&P BSE SENSEX Table 5 depicts comparative information criteria for all
Mean 0.041208 0.04778 0.01789 indexes. The value of AIC, SC and HQC is smallest in
Maximum 15.98998 15.98998 3.323639 APARCH(1,1.1) for S&P BSE SENSEX, S&P BSE
Minimum -11.60444 -11.60444 -6.119712
AllCap and S&P BSE LargeCap. AIC, SC and HQC
Standard Deviation 1.503077 1.628588 0.930582
Variance 2.259240 2.652299 0.865982 have lowest value in TARCH (1,1.1) and EGARCH (1)
S&P BSE AllCap for S&P BSE MidCap and S&P BSE SmallCap
Mean 0.043481 0.045092 0.037764 respectively.
Maximum 14.47287 14.47287 3.152194
Minimum -11.07457 -11.07457 -6.958776 Table 4: Sign Bias Test for Indexes
Standard Deviation 1.446024 1.558109 0.947754 Indexes t-statistics p-value
Variance 2.090985 2.427703 0.898238 S&P BSE SENSEX 2.12041 0.0341
S&P BSE LargeCap S&P BSE AllCap 4.63816 0.0000
Mean 0.041877 0.046272 0.026284 S&P BSE LargeCap 2.67268 0.0076
Maximum 15.68286 15.68286 3.177326 S&P BSE MidCap 6.69306 0.0000
Minimum -11.81822 -11.81822 -6.215911 S&P BSE SmallCap 7.03497 0.0000
Standard Deviation 1.490358 1.61346 0.93124 Source: Author’s calculation
Variance 2.221167 2.603253 0.86721

Table 5: Comparative Information Criteria

GARCH (1,1) EGARCH(1) TARCH (1,1.1) APARCH(1,1.1)
S&P BSE SENSEX
AIC 3.249649 3.23155 3.23227 3.22938
SC 3.262417 3.24645 3.24717 3.2464

5
 Asian Journal of Management. 9(1): January- March, 2018

HQC 3.254258 3.23693 3.23765 3.23552

S&P BSE AllCap
AIC 3.187301 3.16892 3.17051 3.16758
SC 3.20007 3.18382 3.18541 3.1846
HQC 3.191911 3.1743 3.17589 3.17372
S&P BSE LargeCap
AIC 3.240849 3.22336 3.22433 3.2216
SC 3.255746 3.24038 3.24135 3.24035
HQC 3.246228 3.22951 3.23047 3.22851
S&P BSE MidCap
AIC 3.194743 3.1888 3.18777 3.18807
SC 3.211768 3.20795 3.20692 3.20935
HQC 3.20089 3.19572 3.19469 3.19575
S&P BSE SmallCap
AIC 3.219191 3.20945 3.21358 3.2109
SC 3.236216 3.2286 3.23273 3.23218
HQC 3.225338 3.21636 3.22049 3.21858
Note: AIC: Akaike information criterion, SC: Schwarz criterion and HQC: Hannan–Quinn statistics
Source: Author’s calculation

Table 6 presents estimated parameters for all five indexes from their respective models.
Table 6: Estimated Parameters
θ1 θ2 ω α Β γ
S&P BSE SENSEX 0.059369** -0.016946 0.028556*** 0.09502*** 0.90112*** 0.46883***
(2.5222) (-0.4491) (7.9087) (14.5025) (8.5851) (10.5676)
S&P BSE AllCap 0.069222*** 0.010007 0.035586*** 0.11127*** 0.88317*** 0.4579***
(2.7466) (0.2418) (9.0065) (13.411) (7.755) (10.556)
S&P BSE LargeCap 0.067165*** -0.00778 0.031996*** 0.10354*** 0.89217*** 0.45799***
(2.8622) (-0.2094) (8.2498) (14.474) (8.3378) (10.2339)
S&P BSE MidCap 0.070943** 0.066644 0.056473*** 0.08672*** 0.83733*** 0.09108***
(2.5611) (1.3829) (9.453) (6.5893) (93.729) (5.9277)
S&P BSE SmallCap 0.043382 0.113327** -0.215525*** 0.31023*** 0.94652*** -0.071***
(1.2851) (2.3743) (-16.623) (17.711) (174.866) (-7.3105)
Notes: *** indicates significance at 1% level and ** indicates significance at 5% level.
APARCH (1,1.1) is used for S&P BSE SENSEX, S&P BSE AllCap and S&P BSE LargeCap while TARCH (1,1.1)and EGARCH (1) for S&P
BSE MidCap and S&P BSE SmallCap respectively.Values in brackets are t-statistics
Source: Author’s calculation

S&P BSE SENSEX Index: more than |2|. The coefficient of γ shows leverage effect
The index showed significant positive impact of pre-CG as it is positive and significant
regulations on market returns (t-statistics = 2.5222 and .
p-value < 0.05). The variance equation estimates of S and P BSE MidCap Index:
APARCH(1,1.1) are significant with t-statistics greater The model for S&P BSE MidCap Index is analysed
than the modulus of two or |2|. The estimate of γ is through TARCH (1,1.1), an asymmetric conditional
positive and significant which shows leverage effect. volatility model. The result is repetitive as of above three
model, θ1 is significant at five percent (t-statistics =
S and P BSE AllCap Index: 2.5611 and p-value < 0.05) signifying the impact before
There is no significant impact after the implementation the implementation of revised Clause 49, 2013.
of revised Clause 49, 2013 but effect is noticed in pre- Similarly, the variance equation estimates are significant
CG regulations on market returns (t-statistics = 2.7466 and greater than |2| and γ is positive and significant
and p-value < 0.01). Moreover, t-statistics of variance indicating leverage effect.
equation estimates of APARCH(1,1.1) are significant
and greater than |2| and γ is positive and significant S and P BSE SmallCap Index:
indicating leverage effect. The result for S&P BSE SmallCap Index is different
from its counterpart as there is a significant positive
S and P BSE LargeCap Index: impact after CG regulations in 2014 or after the revised
The result is same as that of S&P BSE SENSEX and Clause 49, 2013 on market returns (t-statistics = 2.3746
S&P BSE AllCap as there is a highly positive significant and p-value < 0.05). The variance equation estimates of
impact (t-statistics = 2.8622 and p-value < 0.01) before EGARCH(1) are significant with t-statistics greater than
the implementation of revised Clause 49, 2013 but no |2| and the estimate of γ is negative and significant
impact after that. The estimates in variance equation of showing leverage effect. As coefficient is negative, so
APARCH(1,1.1) are significant and t-statistics being there is an effect good news that decreases stock market
volatility.
6
 Asian Journal of Management. 9(1): January- March, 2018
Overall it can be summarised that there is no impact of betting-on-small-and-midcap-funds-in-2017-should-you-
post-CG regulations on market returns S&P BSE invest/articleshow/56517055.cms
5. Berle AA and Means GGC. The modern corporation and private
SENSEX, S&P BSE AllCap, S&P BSE Large Cap and property. Transaction Publishers. 1991
S&P BSE MidCap except for S&P BSE SmallCap 6. Black F. Studies of Stock Market Volatility Changes. Proceedings
CONCLUSION:
The paper examines the volatility in Indian stock market
caused due to the inclusion of revised Clause 49, 2014
taking five indexes; S&P BSE SENSEX, S&P BSE
AllCap, S&P BSE LargeCap, S&P BSE MidCap and S&P
BSE SmallCap daily returns. Asymmetric conditional
volatility models were found suitable based on Sign Bias
Test for the period January 1st, 2006 to March 31st, 2017.
The sub-period was decided by keeping revised Clause
49, 2014 as a benchmark; Pre-CG regulation period from
January 1st,2006 to September 30th, 2014 and Post-CG
regulation period from October 1st, 2014 to March 31st,
2017. The GARCH output confirms the existence of
varying conditional variances over time and their ultimate
influence to unconditional variances on indexes’ returns.
Moreover, after the inclusion of revised Clause 49, 2014
the volatility in all indexes reduced significantly.
However, the return pattern of the indexes was very
different from each other. The return in the post-CG
regulation period dropped considerably in comparison
with the pre-CG regulation period for the S&P BSE
SENSEX, S&P BSE LargeCap, and S&P BSE AllCap.
Nonetheless, return pattern for the S&P BSE MidCap and
S&P BSE SmallCap indexes showed contrary outcome
from their counterparts. The analysis through asymmetric
conditional volatility models revealed that the impact of
post-CG regulations on market returns are found
insignificant for S&P BSE SENSEX, S&P BSE AllCap,
S&P BSE LargeCap and S&P BSE MidCap at five
percent significance level, but is significant for S&P BSE
SmallCap index. The amendments in Clause 49, 2014 that
were made mandatory proved to be important for S&P
BSE SmallCap only. These findings lead to the
conclusion that amendments in Clause 49, 2014 assists
price formation process and helps to build trust of
investors for Small-Cap companies in Indian Stock
Market.
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