CHRIST (DEEMED-TO-BE) UNIVERSITY,

DELHI NCR

Bachelors Of Business Administration

Time series analysis

CIA 3

Submitted To: -

Dr Tapas das

Submitted By: -

Riya Soni (21211143)

Yash Khanchandani (21211207)

Kunal Kapoor (21211105)

Vansh Dawar (21211192)

Tanishq Wadhwa(21211181)
What is volatility?

Volatility in a financial market refers to the degree of variation or fluctuation in the price of
a financial asset, such as stocks, bonds, currencies, or commodities, over time. It is a
measure of the degree of uncertainty or risk in the market and is a key concept in finance
and investment. Here are some important points to understand about volatility in financial
markets:

1. Causes of Volatility: Volatility can be caused by a variety of factors, including

economic data releases, geopolitical events, company earnings reports, interest rate
changes, and market sentiment. Sudden and unexpected news or events often lead to
increased volatility.

2. Measuring Volatility: Volatility is commonly measured using statistical metrics,

with the most well-known measure being standard deviation. In finance, the most
commonly used measure of volatility is the historical or realized volatility, which
looks at past price movements, and the implied volatility, which is derived from
options prices.

3. Volatility Index: The CBOE Volatility Index (VIX), often referred to as the "fear
gauge," is a popular index that measures the market's expectation of future volatility.
It is calculated based on the prices of S&P 500 index options and is often used as an
indicator of market sentiment.

4. Impacts on Investments: High volatility can present both risks and opportunities
for investors. While it can lead to significant price swings and potential losses, it can
also create opportunities for profit, particularly for traders who can take advantage
of short-term price movements.

5. Risk Management: Volatility is a crucial factor in risk management. Investors often

use diversification, hedging strategies, and position sizing to mitigate the risks
associated with volatile markets.

6. Market Sentiment: Volatility can also be influenced by market sentiment. Positive

news can lead to lower volatility, while negative news can cause higher volatility as
investors react to changing expectations.
 7. Volatility and Options: Options traders often benefit from volatility. When markets
are more volatile, options tend to be more expensive due to the increased uncertainty,
providing opportunities for option writers and buyers alike.

8. Market Cycles: Volatility is a natural part of market cycles. It can be relatively low
during bull markets when prices are generally rising and can spike during bear
markets when prices are falling.

9. Historical Events: Some historical events, such as the 2008 financial crisis or the
COVID-19 pandemic, have led to extreme levels of volatility in financial markets,
impacting investors and the global economy.

10. Regulation and Intervention: In some cases, government authorities and central
banks may intervene in financial markets to reduce excessive volatility, especially
during times of financial crises.

Understanding and managing volatility is crucial for investors and traders, as it directly
impacts investment strategies, risk tolerance, and decision-making in the financial markets.
It's important to have a well-thought-out investment plan and risk management strategies in
place to navigate the challenges and opportunities presented by market volatility.

Volatility and risk exposure?

Volatility and risk exposure are intricately linked in the world of investing. Volatility,
represented by the fluctuation in asset prices, serves as a key indicator of the inherent risks
associated with an investment. Investors must understand that a high level of volatility typically
signifies a greater potential for both gains and losses. In this context, risk exposure refers to the
degree to which an investor is susceptible to adverse price movements. Portfolios with high
risk exposure are more likely to be affected by volatile market conditions, while those with
lower risk exposure are generally less sensitive to such fluctuations. Investors need to strike a
balance that aligns with their risk tolerance and investment objectives, as a high-risk exposure
may lead to greater returns in favorable conditions but also heightened vulnerability during
turbulent market periods. Managing this relationship effectively is a critical aspect of building
a diversified and resilient investment portfolio.

Variance and volatility modeling are fundamental concepts in the field of finance and statistics,
with applications ranging from risk assessment and investment strategies to asset pricing and
portfolio management. Variance refers to the statistical measure of how much a dataset's values
deviate from their mean, while volatility specifically pertains to the degree of price fluctuations
in financial markets. Both of these concepts are crucial for understanding and quantifying
uncertainty, risk, and potential rewards in various financial contexts.

Variance modeling focuses on assessing and managing the spread or dispersion of data points
within a dataset, enabling analysts and investors to gauge the potential variability of returns or
prices. In contrast, volatility modeling delves into the dynamics of asset price movements over
time, aiming to capture the magnitude and frequency of price changes. By utilizing
mathematical models and statistical tools, professionals in finance can develop strategies and
make informed decisions that account for the inherent unpredictability and fluctuation observed
in financial markets.

Whether it's the evaluation of a stock's risk, the optimization of a portfolio, or the pricing of
financial derivatives, both variance and volatility modeling play pivotal roles in modern
financial analysis. These models serve as essential tools for risk management and investment
planning, providing valuable insights to individuals, businesses, and institutions navigating the
dynamic and ever-evolving world of finance.

Nifty 50

The Nifty 50, often referred to as the Nifty, is a prominent stock market index in India. It is
managed and maintained by the National Stock Exchange of India (NSE) and represents the
performance of the 50 largest and most actively traded companies listed on the NSE. These 50
companies come from various sectors of the Indian economy, making the Nifty 50 a diversified
and comprehensive benchmark for the Indian stock market. The Nifty 50 serves as a crucial
barometer for the overall health and performance of India's equity markets and is widely used
by investors, traders, and financial professionals to track and analyze the country's stock market
trends. It provides valuable insights into the Indian economy's strength, investment
opportunities, and market sentiment, making it an indispensable tool for anyone interested in
the Indian financial landscape.

Variance/Volatility modelling

a. Data collection and clean up

Firstly we have downloaded 5 year data of NIFTY 50.

The data has been cleaned and unnecessary data has been removed in Excel.

The data is then transported to E views.

b. Volatility clustering

In this step we need to cluster the volatility, for further steps and to see how large changes
tend to be followed by large changes, of either sign, and small changes tend to be followed
by small changes.
 c. Model selection- Correllogram

Date: 11/07/23 Time: 23:23

Sample: 11/07/2018 11/06/2023
Included observat
Date: 11/07/23 Time: 23:23
Sample: 11/07/2018 11/06/2023
Included observations: 1231

Autocorrelation Partial Correlation AC PAC Q-Sta... Prob

1 0.008 0.008 0.0800 0.777

2 0.000 0.000 0.0801 0.961
3 -0.02... -0.02... 0.6390 0.887
4 0.035 0.035 2.1232 0.713
5 0.096 0.096 13.618 0.018
6 -0.07... -0.07... 20.612 0.002
7 0.033 0.037 21.999 0.003
8 -0.00... 0.002 22.000 0.005
9 -0.01... -0.02... 22.421 0.008
1... 0.023 0.022 23.082 0.010
1... -0.04... -0.03... 25.690 0.007
1... 0.035 0.023 27.226 0.007
1... -0.02... -0.02... 28.102 0.009
1... -0.01... -0.01... 28.502 0.012
1... 0.038 0.036 30.305 0.011
1... -0.02... -0.01... 31.006 0.013
1... 0.048 0.038 33.927 0.009
1... 0.003 0.016 33.941 0.013
1... -0.01... -0.02... 34.240 0.017
2... 0.028 0.023 35.188 0.019
2... 0.010 0.020 35.309 0.026
2... 0.008 -0.01... 35.393 0.035
2... -0.03... -0.02... 36.797 0.034
2... -0.01... -0.01... 37.100 0.043
2... 0.044 0.034 39.556 0.032
2... -0.01... -0.01... 39.933 0.040
2... 0.009 0.006 40.041 0.051
2... 0.034 0.048 41.537 0.048
2... -0.03... -0.03... 42.741 0.048
3... -0.04... -0.05... 45.255 0.037
3... -0.03... -0.01... 46.541 0.036
3... -0.02... -0.04... 47.467 0.038
3... -0.04... -0.05... 50.530 0.026
3... 0.037 0.057 52.254 0.023
3... 0.061 0.058 56.925 0.011
3... -0.02... -0.02... 57.544 0.013

ions: 1231

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

| | | | 1 0.008 0.008 0.0800 0.777

| | | | 2 0.000 0.000 0.0801 0.961
| | | | 3 -0.021 -0.021 0.6390 0.887
| | | | 4 0.035 0.035 2.1232 0.713
|* | |* | 5 0.096 0.096 13.618 0.018
*| | *| | 6 -0.075 -0.078 20.612 0.002
| | | | 7 0.033 0.037 21.999 0.003
| | | | 8 -0.001 0.002 22.000 0.005
| | | | 9 -0.018 -0.029 22.421 0.008
| | | | 10 0.023 0.022 23.082 0.010
| | | | 11 -0.046 -0.035 25.690 0.007
| | | | 12 0.035 0.023 27.226 0.007
| | | | 13 -0.027 -0.020 28.102 0.009
| | | | 14 -0.018 -0.018 28.502 0.012
| | | | 15 0.038 0.036 30.305 0.011
| | | | 16 -0.024 -0.016 31.006 0.013
 | | | | 17 0.048 0.038 33.927 0.009
| | | | 18 0.003 0.016 33.941 0.013
| | | | 19 -0.015 -0.022 34.240 0.017
| | | | 20 0.028 0.023 35.188 0.019
| | | | 21 0.010 0.020 35.309 0.026
| | | | 22 0.008 -0.012 35.393 0.035
| | | | 23 -0.033 -0.023 36.797 0.034
| | | | 24 -0.016 -0.015 37.100 0.043
| | | | 25 0.044 0.034 39.556 0.032
| | | | 26 -0.017 -0.013 39.933 0.040
| | | | 27 0.009 0.006 40.041 0.051
| | | | 28 0.034 0.048 41.537 0.048
| | | | 29 -0.031 -0.039 42.741 0.048
| | | | 30 -0.045 -0.053 45.255 0.037
| | | | 31 -0.032 -0.013 46.541 0.036
| | | | 32 -0.027 -0.044 47.467 0.038
| | | | 33 -0.049 -0.054 50.530 0.026
| | | | 34 0.037 0.057 52.254 0.023
| | | | 35 0.061 0.058 56.925 0.011
| | | | 36 -0.022 -0.021 57.544 0.013

Arima estimation

Dependent Variable: D(CLOSE)

Method: Least Squares
Date: 11/07/23 Time: 23:25
Sample (adjusted): 11/20/2018 11/06/2023
Included observations: 1224 after adjustments
Convergence achieved after 12 iterations
MA Backcast: 11/09/2018 11/19/2018

Variable Coefficient Std. Error t-Statistic Prob.

C 7.116998 4.397055 1.618583 0.1058

AR(7) -0.967257 0.007865 -122.9782 0.0000
MA(7) 0.985186 0.003870 254.5388 0.0000

R-squared 0.009910 Mean dependent var 7.065645

Adjusted R-squared 0.008288 S.D. dependent var 153.0928
S.E. of regression 152.4571 Akaike info criterion 12.89409
Sum squared resid 28379911 Schwarz criterion 12.90662
Log likelihood -7888.184 Hannan-Quinn criter. 12.89880
F-statistic 6.110378 Durbin-Watson stat 1.985097
Prob(F-statistic) 0.002288

Inverted AR Roots .90-.43i .90+.43i .22-.97i .22+.97i

-.62-.78i -.62+.78i -1.00
Inverted MA Roots .90-.43i .90+.43i .22-.97i .22+.97i
-.62-.78i -.62+.78i -1.00

HETERSCEDASTICITY TEST

d.
Heteroskedasticity Test: ARCH
F-statistic 36.36972 Prob. F(1,1221) 0.0000
Obs*R-squared 35.37557 Prob. Chi-Square(1) 0.0000

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 11/07/23 Time: 23:28
Sample (adjusted): 11/21/2018 11/06/2023
Included observations: 1223 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 19259.33 1912.368 10.07093 0.0000

RESID^2(-1) 0.170070 0.028201 6.030731 0.0000

R-squared 0.028925 Mean dependent var 23201.23

Adjusted R-squared 0.028130 S.D. dependent var 63753.55
S.E. of regression 62850.46 Akaike info criterion 24.93654
Sum squared resid 4.82E+12 Schwarz criterion 24.94489
Log likelihood -15246.69 Hannan-Quinn criter. 24.93968
F-statistic 36.36972 Durbin-Watson stat 2.080176
Prob(F-statistic) 0.000000

e. ARCH MODEL ESTIMATION

Dependent Variable: D(CLOSE)

Method: ML - ARCH (Marquardt) - Normal distribution
Date: 11/07/23 Time: 23:31
Sample (adjusted): 11/16/2018 11/06/2023
Included observations: 1226 after adjustments
Convergence achieved after 15 iterations
MA Backcast: 11/09/2018 11/15/2018
Presample variance: backcast (parameter = 0.7)
GARCH = C(4) + C(5)*RESID(-1)^2

Variable Coefficient Std. Error z-Statistic Prob.

C 9.198303 3.948584 2.329519 0.0198

AR(5) -0.978846 0.005982 -163.6242 0.0000
MA(5) 0.991964 0.001555 637.9706 0.0000

Variance Equation

C 16050.06 491.1111 32.68113 0.0000

RESID(-1)^2 0.327500 0.032250 10.15517 0.0000

R-squared 0.008460 Mean dependent var 7.173776

Adjusted R-squared 0.006839 S.D. dependent var 152.9915
S.E. of regression 152.4675 Akaike info criterion 12.80331
Sum squared resid 28430278 Schwarz criterion 12.82416
Log likelihood -7843.430 Hannan-Quinn criter. 12.81116
Durbin-Watson stat 1.987371

Inverted AR Roots .81+.59i .81-.59i -.31-.95i -.31+.95i

-1.00
Inverted MA Roots .81-.59i .81+.59i -.31+.95i -.31-.95i
-1.00

f. FORECASTING

40,000
Forecast: CLOSEF
35,000 Actual: CLOSE
Forecast sample: 11/07/2018 11/06/...
30,000 Adjusted sample: 11/16/2018 11/06/...
25,000
Included observations: 1226
Root Mean Squared Error 1988.585
20,000 Mean Absolute Error 1583.391
Mean Abs. Percent Error 11.85066
15,000 Theil Inequality Coefficient 0.063034
Bias Proportion 0.564204
10,000
Variance Proportion 0.000272
5,000
Covariance Proportion 0.435525
IV I II III IV I II III IV I II III IV I II III IV I II III IV
2019 2020 2021 2022 2023

CLOSEF ± 2 S.E.

24,000

23,000

22,000

21,000

20,000

19,000

18,000

17,000
IV I II III IV I II III IV I II III IV I II III IV I II III IV
2019 2020 2021 2022 2023

g. Forecast of Variance