A study on impact of FII¶s and market trend during and post financial crisis era: Case of Indian stock

market

Manorama1, Rajesh Joshi2, Amardeep Singh3, Jairaghuveer Bawa4

Abstract

Market dynamics has completely changed after recession of 2008. Various forecasting techniques were unable to predict downtrend which came in 2008.The challenge now is to predict stock market trends in such volatile condition and analyze it for better decision making. Hence this, study focuses upon basic trend and seasonality analysis techniques to predict markets in post downturn era. Research is empirical in nature and utilizes trend analysis techniques to forecast CNX Nifty returns for next 100 days. Moreover impact of FII investment over market returns is also studied by studying basic statistics. Results show that Nifty index is strongly following quadratic trend and forecast is highly close to observed results. Data under consideration is from 4-May07 till 1-Nov-10 which covers downtrend period findings. Data is divided into two parts one part to train models and other to cross check the forecast results. Comparisons shows markets strongly follow quadratic trend while though FII investment increased during downturn but still is not highly correlated to market condition. Keywords: Trend Analysis, Forecasting, Downturn

Corresponding author, Lovely School of Business, Lovely Professional University, Phagwara, Punjab ± 144401, email: manorama.guchhait9@gmail.com Lovely School of Business, Lovely Professional University, Phagwara, Punjab ± 144401, email:joshiraj87@gmail.com Lovely School of Business, Lovely Professional University, Pha gwara, Punjab ± 144401, email: - amarsonug@gmail.com Lovely School of Business, Lovely Professional University, Phagwara, Punjab ± 144401, email- jailpubawa@gmail.com
4 3 2

1

1

With globalization and innovation in the financial markets at its peak . (IISL). The Indian stock market has been assigned an important place in financing the Indian corporate sector. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. index and funds. Delhi. Calcutta.923 Rupees. the dollar-linked version of the BSE-100 was launched in May of 2006. IISL has Marketing and licensing agreement with Standard & Poor's (S&P). this would consistently predict the trends of the dynamic stock market. Thus.600 company listings and has a current market capitalization of 47. And what is the nature of the stock market and what factors are affect to the securities and fund in the stock market. There are n factors which affect the Indian stock price. The Indian stock market today is actually comprised of two key entities and over 20 other exchanges. India witnessed the launch of the BSE National Index. If any system be developed. regression over increasing plethora of events followed the security market crisis. Today. Additionally. It is used for a variety of purposes such as benchmarking fund portfolios. which was a stock index. S&P CNX Nifty is a well diversified 50 stock index accounting for 23 sectors of the economy. Times are really quite and applying the Minitab model and correlation. it has grown to nearly 1.1. Over the years. It was predicted that the NSE would be the largest stock exchange in India where market capitalization was considered when 2009 ended. Three years later. Through this report analysis the need of investor when they are invest in the stock market. or NSE as it is called.it is very essential to study the market risks and requirements. forecasting stock market return is gaining more attention. the BSE implemented SENSEX. These 5 major markets were Ahmedabad. is an Indian stock market based in the city of Mumbai and was originally established only 18 years ago in 1992. IISL is India's first specialized company focused upon the index as a core product. who world leaders are in index services. the predicted trends of the market will help the investors and the regulators of the market in making corrective decision. However. 01. which is a joint venture between NSE and CRISIL. the India stock 2 . keeping in mind the risks involved returns have to be estimated and thus the forecasting of the future stock prices so that our risks are minimum and returns maximize. the stock markets have become very volatile and are majorly affected by the sentiments of the investors. INTRODUCTION Recently. From the investment prospective. make owner of the system wealthy. The National Stock Exchange of India Limited. Up until the 1980¶s there were no way to measure or scale the ups and downs in stock values. Moreover. These 2 primary entities are the Bombay Stock Exchange Limited and the NSE or the National Stock Exchange of India Limited. It was renamed the BSE-100 Index in October of 1996 because it was comprised of 100 different stocks listed with India's 5 major stock exchanges. profitability of investing and trading in the stock market to a great extent depends on the forecasts and predictability. In that short period of time. in 1986. and Mumbai. Madras.

This model is simple to understand and easy to apply. seasonality are potentially the stock price determinants. The result showed that hybrid GA-SVM system outperforms the SVM system. Garg Kumkum (2008) used hybrid machine learning system and support vector machines for the stock market predictions. Various indicators from the technical analysis field have been used as inputs. momentum. In the short run stock prices for the long run do diverge from the long run fair value. Abdullah Yalama and Guven Sevil (2008) specified that volatility forecasting is important for option pricing. Inflation is seen as negative news by stock market as it tends to curb consumer spending and thus company¶s earnings. risk management and portfolio management. With global trade and finance getting more dynamic day by day. Kumar 3 . The exchange rates. Ajayi & Mougoue (1996) propounded that a depreciating currency causes a decline in stock prices because of expectations of inflation.De (2008) stated that determination of stock prices is of great importance for forecasting future stock price movements and thus propounded a simple model called the Stock Price Model for major economies to determine stock prices.market has undergone major changes to remain at par with the global peers. and long run equity risk premium. 2 LITERATURE REVIEW Various studies on Investment pattern & Investment behavior of investors had been conducted in foreign countries. This has helped the financial structure of India and got more innovative for the Indian economy after analysis the stock market factors through the Minitab modal. Bondt Gabe J. The impact of change in exchange rate will be determined by relative dominance of import and export sectors of the economy as a depreciating home currency will increase export earnings and decrease import profits and thus affects the stock prices and in turn the index. the number is quite few. The non fundamental factors also play a role in the short run determination of the stock prices. The second step focuses on short run stock price movements around estimated long run value and changes in the fundamental factors. However. Choudhary Rohit. They concluded that based on RMSE non linear ARCH class model dominate the linear model in out of sample forecasting technique exercises for the stock price index volatility. The various forecasting models are considered ranging from naïve model to realtively complex ARCH class model. They have also used the correlation between stock prices of different companies to predict the prices of the stock. commodity prices. risk free interest rate. Ahmed Shabbir (2008) evaluated the performance of linear and non linear methods to forecast stock index volatility covering data of periods from January 2001 to November 2007.Kumar Paritosh (2008) made a study to establish and validate the long term relationship between of stock prices with exchange rates and inflation in India. the India stock market is not far behind to experience these developments. in Indian context. There are 7 different GARCH class model were employed to forecast in sample of daily stock market volatility in 10 different countries. The first step in the model is to estimate the long run equilibrium fundamental value of stock price on the basis of earnings. Rashid Abdul. The various political and economic factors can be taken into consideration other than the technical indicators as inputs and thus obtaining better results. The model assumes a long run fair stock market value and short run deviations from their fair value.

With globalization and innovation in the financial markets at its peak it is very essential to study the market risks and requirements. The suggested uses of k.(2006) attempted to evaluate the ability of ten different statistical and econometric volatility forecasting model in the context of Indian stock and the forex market and these models are evaluated on the basis of symmetric and asymmetric error statistics. It has shown that many methods exibit good performance when stock price fluctuations are small and the underlying trends are smooth. Hellstrom Thomas (2000) used the concept of trends as predictor variables on Swedish Stock exchange. With global trade and finance getting more dynamic day by day.NN algorithm with explicit homogeneity measure have have applicability in other areas other than stock predictability. which are responsible for large and sharp variations.S. Times are really quite and applying the Minitab model and correlation. The size of the neighbourhood could be determined in ways other than fixed values of k.S. Zopounidis C. Using data of prices of five share price indices of Bombay Stock Exchange during the period. linear multiple regression. regression over increasing plethora of events followed the security market crisis. And what is the nature of the stock market and what factors are affect to the securities and fund in the stock market. forecasting accuracy seems to be related to forecasting horizon as an increase in latter leads to more accurate predictions.. 4 .P. However the results were weak and further tests hace to be conducted to statistically significant results. Diakoulakis I. However. Therefore it is said that markets are efficient even if the information environment differs substantially.E. Economic information environment prevalent in the country is quite different from that available in the advanced countries. the India stock market has undergone major changes to remain at par with the global peers. This has helped the financial structure of India and got more innovative for the Indian economy after analysis the stock market factors through the Minitab modal. Thus Bombay Stock Exchange may be termed as competitive and ³weakly efficient´ in pricing the shares while the market efficiency help in determining the stock prices reflecting information containing past historic records. the India stock market is not far behind to experience these developments.. Holmstrom Kenneth. This study analyzes the need of investor when they are investing in the stock market.S. Gupta O. (1988) study aimed at studying the appropriateness of random walk model in the Indian stock market for a period 1979-1987. In parallel..algorithm. (2002) did behavioristic analysis and comparative evaluation of the intelligence methodologies for the short time stock price forecasting. Over the years. Emiris D.E. Kouloriotis D.. generalized regression and exponential smoothing models are suggested as most efficient and reliable methods for specific application.M. an analysis and prediction of long periods entails the elimination of temporary agents affecting stock prices and lasting only for a brief period of time like rumors. expectations etc. The efficiency of the Indian stock market should be undertaken to test the strong and semi strong form tests of Efficient Market Model. The technical analysis is used only in limited manner.both serial correlation and run analysis have generally supported the independence assumption of the random walk model. The fundamental analysis though popular in other countries is not so popular in Indian markets. Forecasting errors increase significantly because of specific periods where price trend changes dramatically.

The model is: Yt = (10a) / (b0 + b1 b2t) (4) 3. This accounts for the case where the series follows an S-shaped curve. petroleum/natural gas. It starts with certain assumption based on the experience. or Mean Absolute Percentage Error.3 3. 2. (5) 5 . 3. The quadratic trend model which can account for simple curvature in the data is: Yt = b0 + b1 * t + (b2 * t2) + et (2) The exponential growth trend model accounts for exponential growth or decay. and causal models. The model is: Yt = b0 * b1t * et (3) The S-curve model fits the Pearl-Reed logistic trend model. Causal models are based on the analysis of time series data or cross-sectional data. In this model. which are based exclusively on time series data. banking. b1 represents the average change from one period to the next. aluminum. or the auto industry. These estimates are projected for the future period using one or more forecasting techniques Various Forecasting Techniques Qualitative models These models are RESEARCH METHODOLOGY constructed using surveys of ³experts´ in specific areas such as residential construction. measures the accuracy of fitted time series values. Quantitative models: There are two types of quantitative models time series models. a savings account might exhibit exponential growth. knowledge and judgment.2 Trend Models Trend analysis by default uses the linear trend model: Yt = b0 + (b1 * t) + et (1) 1.3 Measures for Accuracy MAPE. For example.1 Forecasting Techniques Methodology Forecasting is a planning tool in management which attempts to cope with uncertainty in the future. It expresses accuracy as a percentage.

(7) where yt equals the actual value. A lot of data analysis is used in the project. website materials like reports. Can market data of downturn be utilized to predict future market trend. t equals the forecast value.4 DATA The database used in the project is primarily secondary data which consists of newspapers.where yt equals the actual value. which helps conceptualize the amount of error. journals. 3. Focus of all thje analysis is recent downtrend. MSD is always computed using the same denominator. MSD is a more sensitive measure of an unusually large forecast error than MAD. articles. It expresses accuracy in the same units as the data. past figures of NSE and FII. The procedure using which researcher has to use facts or already available information and analyze these to make a critical evaluation of the performance. so you can compare MSD values across models. (6) where yt equals the actual value. and n equals the number of MAD. regardless of the model. done with the help of minitab and MS Excel analytics software. observations. and n equals the number of The research design used in this project is analytical in nature. equals the fitted value. n. 6 . t equals the fitted value. The data consists of historical figures of NSE from 4-may-2007 till 29-0ctober-2010 and FII inflows from 4-may-2007 till 3-november-2010 downloaded from the NSE websites. which stands for Mean Absolute Deviation. observations. Through this project we might be able to identify the trend in stock market time series during recession of 2008. forecasts. Cross verification of model is also done by analyzing the comparing the forecaster results with the observed data which gave highly motivating results. measures the accuracy of fitted time series values. etc. and n equals the number of MSD stands for Mean Squared Deviation. magazines.

158 -0.0000 0. 7 .528 Fig-1 Figure 1 shows the NSE Index from 3-may-2007 to 1-november-2010.021 Pearson P Value 0. The time line around 348 to 450 is showing a downtrend in the NSE index due to recession in the year 2008.4 DATA OBSERVATIONS AND ANALYSIS The data for FIIS and NSE are taken from the period 3rd May 2007 to 1st November 2010 and the trend is observed for the FII inflows and outflows and its impact on the NSE index. Data from 3ed May 2007 till 10 June 2010 is used to train the model while next 100 days forecast is made and compared with observed results Table (1) Correlation Analysis of FII and NSE index Correlation coefficient NSE-FII NSE Returns ± FII Returns 0.

Fig-2 The above figure shows the FII investment in Indian stock market i. 8 . the FII started investing in developing markets like India in NSE.S. Correlation coefficient of FII and CNX Nifty (Table 1) comes out to be 0.e. NSE.158.As there was recession in the U. thus leading to FII investment in the time line around 435 to 522 which lead to the rise in the NSE index. Market. It means FII and stock market are not too correlated.

Fig-3 Plot of linear trend and observed results from 4-may-2007 till 10 june-2010 Above figure depicts fitted results when linear model is regressed with historical data over last 3 year. Here Yt is index values while t is time elapsed from 4-may-2007 9 . With the help of software a linear trend line is fitted with the equation.

Fig.4 Plot of Quadrratic trend with observed market value Above figure shows a quadratic model being fitted to time series data of indes of last 3 years Table (2) Accuracy measures of Models MAPE Linear Trend Model Quadratic Trend Model 17 16 MAD 802 771 MSD 1170492 882853 MAPE = Mean Absolute Percentage Error MAD = Mean Absolute Deviation MSD = Mean Squared Deviation 10 .

6 Comparison of Quadratic trend forecast and observed results for next 100 days 11 . Fig.5 Comparison of linear forecast and observed result for next 100 days Fig.1 Comparison plot of actual and forecasted results For comparison data is spitted into two parts of total 868 observations first 768 observations are used to train model and remaining 100 is used to compare forecast results.4.

34 2519.3 40.4 -4265.1 -66.9 6389. 12 .09 Minimum 3095.008444 -0.7 -0.3 3.2 4792.177449 5445.Table (3) Descriptive Statistics Variable NSE Close NSE Return Date 4 May 2007 to 10 June 2010 4 May 2007 to 10 June 2010 Mean 5510.9 Conclusion Correlation analysis shows that after analyzing the data it has been found that net foreign investment in a day are negligibly related with NSE index value.9 0.38 624.42 586. Further trend analysis shows that quadratic trend model fits the observed data during pre and post downtrend era better than the linear trend model and the comparison of the observed and forecasted result for next 100 days is highly motivating.9 0.7 414.001782 0.7 -0.3 5577.3 1.001422 0.3 forecast (for 2010 next 100 days FII Inflow FII Return FII Return 4 may 2007 to 10 June2010 4 may 2007 to 10 June2010 11 June 2010 to 3 november 2010 -110.021889 3.0 6837.2 -291.023482 NSE Close 11 June 2010 to 29 October 5570.5 5570. This concludes that changes in FII did not directly affect NSE index or change is not visible immediately.2 7810.5 Maximum 7642.68 631.018567 0.1 835.8 11 June 2010 to 29 October 5440.000545 St Dev 1065.122021 5435.8 0. even change in FII is negatively correlated with NSE index return.3 Median 5648.5 0.000985 5440.52 -950.5 NSE Return 2010 Forecast (for next 100 days) NSE Close 2 NSE Return 2 11 June 2010 to 29 October 2010 11 June 2010 to 29 October 2010 7030.99 5563.6 950.7 0.

Gay (2008) ³Effect of macroeconomic variables on stock market returns for four emerging economies: Brail. 2 13 . Ahmad Shabbir (2008). 67 6) Rashid Abdul. (2003) ³Relationship Between Exchange Rate and Stock Prices in India ± An Empirical Analysis´ Vol. pp. International Business and Economics Research Journal. Engineering and Technology. 10. 7.34 p.7. vol. Vol 9. No. Vol. Vol. 225 4) Holmstorm Kenneth (2000) ³Relevance of trend for the prediction of stock returns´. Delhi Business Review. 142Z 7) Robert D.3 8) M. Thenmozhi (2006) ³Forecasting Stock Index Returns using Neural Networks´.REFERENCES 1) Bondt Gabe J de(2008) ³ Determinants of Stock Prices: New International Evidence´ Journal of Portfolio Management. Vol 7. India. 20. Russia. 315 3) Gupta O. Garg Kumkum (2008) ³A Hybrid Machine Learning System for StockMarket Forecasting´ World Academy of Science. Finance and Marketing. ³Predicting Stock Returns Volatility: An Evaluation of Linear vs. pg. pp. pp. International Journal of Intelligent Systems In Accounting. Nonlinear Methods´ International Research Journal of Finance and Economics. China´.81 2) Choudhry Rohit. Iss. pp.23 5) Nath Golaka C.P. pp.(1988) ³Stock Market Efficiency And Random Character Of Share Price Behaviour In India´ Asia Pacific Journal of Management.