A STUDY ON VOLATILITY IN INDIAN STOCK MARKET WITH

REFERENCE TO SELECT NIFTY COMPANIES

Introduction
Economic status of a country is greatly reflected by the introduction of new economic
policy in the middle of the year 1991; the Indian Capital Market has witnessed a tremendous
growth. There was an eplosion of in!estor interest during the nineties and an e"uity cult
emerged in the country. To eperience sustained growth statutory legislations ha!e helped the
capital market. #oreign Echange regulation act is one such legislation in this direction. $n
important recent de!elopment has been the entry of #oreign Institutional In!estors as participants
in the primary and secondary markets for industrial securities. In the past se!eral years%
in!estments in de!eloping countries ha!e increased remarkably. $mong the de!eloping countries
India has recei!ed considerable capital inflows in recent years. The liberali&ation policy of the
'o!ernment of India has now started yielding results and the country is poised for a big leap in
the industrial and economic growth. The Economy of the country is mainly based on the
de!elopment of the corporate sectors. #unds may be raised through securities market for
financing corporate growth. The Indian capital market has witnessed radical changes% especially
during the last decade. (a!ing discarded the age old practices like open outcry trading system%
physical form of shares and new settlement procedure% and others% the markets are now operating
with world class practices and products. The reforms in the capital markets ha!e helped to
impro!e efficiency in many aspects namely% the dissemination of information% transparency in
operations% prohibiting unfair trade practices.
The stock market is one of the most important sources for companies to raise money. This
allows businesses to be publicly traded% or raise additional financial capital for epansion by
selling shares of ownership of the company in a public market. The li"uidity that an echange
affords the in!estors gi!es them the ability to "uickly and easily sell securities. This is an
attracti!e feature of in!esting in stocks% compared to other less li"uid in!estments such as real
estate. )ome companies acti!ely increase li"uidity by trading in their own shares. (istory has
shown that the price of shares and other assets is an important part of the dynamics of economic
acti!ity% and can influence or be an indicator of social mood. $n economy where the stock
market is on the rise is considered to be an up*and*coming economy. In fact% the stock market is
often considered the primary indicator of a country+s economic strength and de!elopment. )tock
prices are changed e!ery day by the market. ,uyers and sellers cause prices to change as they
decide how !aluable each stock is. ,asically% share prices change because of supply and demand.
If more people want to buy a stock than sell it * the price mo!es up. Con!ersely% if more people
want to sell a stock% there would be more supply than demand * the price would start to fall.
-olatility in the stock .rice is an integral part of stock market with the alternating bull and bear
phases. In the bullish market% the share prices soar high and in the bearish market share prices
fall down and these ups and downs determine the return and !olatility of the stock market.
-olatility is a symptom of a highly li"uid stock market. .ricing of securities depends on !olatility
of each asset. $n increase in stock market !olatility brings a large stock price change of ad!ances
or declines. In!estors interpret a raise in stock market !olatility as an increase in the risk of
e"uity in!estment and conse"uently they shift their funds to less risky assets. The issues of price
!olatility ha!e become increasingly important in recent times to the Indian in!estors% regulators%
brokers% policy makers% dealers and researchers. )hare prices also affect the wealth of households
and their consumption.
Volatilit o! Ma"or Indic#$ in India
Y#ar%Ind#&
'SE
SENSE(
'SE)*++ 'SE),++
S-P CN(
NIFTY
CN( NIFTY
.UNIOR
S-P CN(
,++
/001*02
1.2 1.3 1.3 1.2 1.4 1.3
/002*03
1.3 1.3 1.4 1.4 1.5 1.6
/003*04
1.0 1.0 1.0 1.0 1.1 1.0
/004*06
1.5 1.5 1.6 1.5 /.1 1.6
/006*05
1.9 /.0 /.0 /.0 /.2 /.0
/005*09
/.5 /.6 /.4 /.6 /.5 /.3
/009*10
1.9 1.5 1.5 1.9 /.0 1.5
/010*11
1.1 1.1 1.1 1.1 1.1 1.0
/011*1/
1.1 1.1 1./ 1.1 1.1 1./
7 -olatility is calculated as the standard de!iation of the natural log of returns in indices for the
respecti!e period.
)ource8 ,)E % 9)E.
Indian Ca/ital Mar0#t
The Indian capital market is one of the oldest capital markets in the world. It dates back
to the 15th century when the securities of the East India Company were traded in Mumbai and
:olkata. (owe!er% the orderly growth of the capital market began with the setting up of The
)tock Echange of ,ombay in ;uly 1563 and $hmedabad )tock Echange in 1952. E!entually
// other )tock Echanges sprang up in !arious parts of the country. In this chapter an attempt
has been made by the researcher to re!iew the Capital Market <e!elopments that has taken place
in India in two phases such as8
i. Indian Capital Market = ,efore 1990>s
ii. Indian Capital Market = $fter 1990>s
Pro1l#2 Stat#2#nt
$ general problem pre!ailing in most of the de!eloping countries are the growth of
financial markets. It is not healthy instead debatable. The financial market is playing !ital role in
the de!elopment of economic growth of a country because it is one of the medium to collect the
in!estments from sa!ers or in!estors and disseminate the funds to needy !ia proper channel.
(owe!er financial markets in the de!eloping countries are !olatile.
The stock market !olatility is considered to be essential for making in!estment decision.
Many countries are not able in epanding their operations due to the economic slowdown but
few countries ha!e managed by implementing effecti!e strategies. India>s concern% this study
found impressi!e growth in economy but it is con!entional in nature. Interestingly% the !ariability
and !olatility of economic growth was worrying e!en before the crisis i.e. before liberali&ation.
-arious studies ha!e been conducted by de!eloping countries to test the !olatility. They
ha!e chosen !arious factors pertaining to !olatility and its relationship with !olatility like trading
!olume% trading mechanism% di!idend payout and arri!al of information etc.% Crestmont ?esearch
@?eport /011A eamined the historical relationship between stock market performance and the
!olatility in )tandard B .oor>s 300. Their research tells us that higher !olatility corresponds to a
higher probability of a declining market. Cower !olatility corresponds to a higher probability of a
rising market.
There is a relationship between stock market !olatility and introduction of deri!ati!es.
'olaka C 9ath @/001A !olatility of the market was measured by benchmark indices like )B.
C9D 9I#TE and )B. C9D 9I#TE ;F9IG? ha!e fallen after in the post deri!ati!es period.
The finding is in line with the earlier findings of Thenmo&hi @/00/A% )henbagaraman @/001A%
'upta and :umar @/00/A and ?aHu and :arande @/001A.
It is important to test the stock market !olatility because it is the one which hinders the
performance of the stock market and consumer spending. Most of the research works on stock
market !olatility in India were on stock market indices.
$part from market indices% the indi!idual stocks which ha!e potential to make changes in
the market indices also needs to be considered. $s stock market !olatility is the una!oidable
issue% so it is important to re!isit the topic stock market !olatility in de!eloping countries. The
present study is an attempt to accomplish the abo!e mentioned issue and eamine some
important factors in relation with !olatility in "uantitati!e terms.
O1"#cti3#$ o! t4# $tud
1. To study the growth and de!elopment of Capital Markets in India.
/. To measure the !olatility of selected companies in Indian stock market.
1. To identify the suitable model for forecasting the !olatility of stock prices in India.
2. To summari&e the findings and pro!ide suggestions for the policy makers%
$cademicians and research community.
H/ot4#$i$
In an attempt to study the price !olatility in Indian stock market and to identify a suitable
model for forecasting !olatility the following hypothesis are set;
1. 9(18 There is no stationary in the returns of sample companies are not significant.
/. 9(/8 There is no significant difference among !arious sectors and !olatility of stock
market.
Data and Mod#l S/#ci!ication ado/t#d !or t4# Stud
The study is purely based on the secondary data drawn from the website of 9)E% India.
The sample of data was collected from ;anuary /002 to <ecember /012. <uring the sample
period% the securities trade from 9813 $.M to 1810 ..M. $ll the re"uired information for the
shares trade on the 9ational )tock Echange @9)EA details were retrie!ed from their website
@www.nseindia.comA. The data were analy&ed by using the econometric software package.
1. Measurement and analysis Monthly closing prices were used by adopting the base model by
,essembinder and )eguin @1991A with modification of Mahmood and )alleh @/004A. $n adHusted
continuously compounded return was calculated as ?t I @.tJ.t*1A where .t and .t*1 are natural
logarithms of adHusted return on day t and t*1 respecti!ely. The logarithm of the price relati!e
was used to calculate the price change. It is understood that the use of logarithmic price changes
pre!ents non*stationarity of the price le!el of the data being affected by the price !ariability.
/. )econd% modeling and forecasting stock price !olatility was attempted by using !arious
statistical and econometrical models% for this methodology de!eloped by 9aHand @/00/A and
)adorsky @/004A was adopted in the futures market return series. The daily !olatility of stock
futures returns were estimated by the model de!eloped by )chwert @1990A and )chwert and
)eguin @1990A.
Sa2/lin5 D#$i5n
The sampling design selected for the study is simple random sampling. This is one of the
techni"ues of probability sampling% this is also known as chance sampling. $s this sample is
controlled by probability random number table used here% for selecting the samples. The
population of this study is the 9)E listed Companies6 The sample of this study is 16 companies
taken from 9ifty 30 companies. )tudy period from ;anuary /002 to <ecember /012 @e!ery
month ending closing priceA.These are the companies selected for the study.
$)I$9 .$I9T (CCTEC( ;I9<$C )TEEC ),I9
$DI) ,$9: (<#C :GT$: ,$9: )E)$'G$
,$9: G# ,$?G<$ (<#C ,$9: CT )IEME9)
,(EC (E?G MGTG?) CF.I9 )F9 .($?M$
,.CC (I9<$CCG MBM T$T$ MGTG?)
CI.C$ (I9< F9ICE-E? G9'C T$T$ .GKE?
<??E<<E ICICI ,$9: ?ECI$9CE I9#?$ T$T$ )TEEC
'$IC I9#G)E) ?$9,$DE KI.?G
'?$)IM ITC ?ECI$9CE
Tool$ U$#d !or Anal$i$
1. <escripti!e )tatistics
/. Fnit ?oot Test
$ugmented <ickey #uller @$<#A test
.hillips*.eron @..A testA
1. 9onlinear Models
'$?C( Model