Volatility patterns of stock returns in India


This paper analyzes the time variation in volatility in the Indian stock market during 2009 – 2014. Analysis has been done to examine if there has been an increase or a decrease in volatility persistence in the Indian stock market on account of the process of financial slowdown in India after the global crisis. Further, an attempt to characterize the evolution of the stock market cycles over time in India has been made; for this purpose, monthly stock returns have been used for analysis. Asymmetric GARCH model has been used to estimate the element of time variation in volatility. A descriptive design has been adopted to conduct the research work. It is evident from the study that the adoption of liberal norms and allowing foreign investment in the form of FIIs does not impact or add to the volatility of returns of the stock market. There is no structural shift due to heavy trading of stocks by the foreign investors; it is revealed that it just adds to the volume of the shares traded by the investors which may be a cause of abnormal distribution of returns on stocks traded.


After witnessing a major crisis during the last decade, many economists are now in favour of returning to the basics of investment where they propose a controlled and restricted flow of investment and stringent policy making to ensure the safety of the investment. There has been a very strong demand from proponents of this school of thought for restricting capital inflow which was allowed to move freely after the adoption of liberalized norms in the 1990s; this is based on the notion that this free movement of capital investment causes an excessive and unexpected surge and fall in the market thereby creating an excessively volatile financial environment.

A volatile financial environment not only affects the investor but also has a very significant impact on the economy as a whole that results in uncertainty and thereby shaking the investor’s confidence. However, it also has a positive side; it provides the policy makers a tool to gauge the sentiments of the market thereby predicting and taking a position just when the market becomes vulnerable. It also assists knowledgeable investors to estimate the intrinsic value of a particular stock by considering the public sentiments, which helps him take the right decision just when it is needed.

Thus, the estimation of volatility has become almost a mandatory part of forecasting the prices of stocks. It provides an opportunity to risk managers to advise investors to take technically correct decisions not only at the individual level but also helps economies to set the right course for the future path of the nation. Therefore, it is the core function of economies to understand volatility in order to manage risk. Referring to the theory of asset pricing models, volatility simply means the variability of the asset price. There are different approaches to measuring the price volatility; one approach could be by measuring the daily movement in the price of the share and the second approach is by taking simple or moving averages of the prices over a period of time by making use of econometric models.

The recent approach which can be considered is modelling volatility by making use of the GARCH model. It makes use of a large data size which can be further regressed to estimate the volatility and create a pattern to identify the trends of persistent volatility shock.

Here an attempt has been made to study volatility and persistent variation in the returns of the stock markets of India during the period of 2009 – 2014 which was the time when the global economies were striving to overcome the shocks of the 2008 crisis. Also it has been examined whether the liberalization reforms played any role in volatility of returns of the Indian stock market. Further, the shifts in volatility of stock prices and the causes of such shifts have been studied.

This gives an opportunity to examine whether there exists a correlation between volatility of stock returns in India and the global financial crisis; also through this, it can be identified whether during the last five years the stock market volatility has shown greater amplitude or not.

Further, this paper will assist in determining the behaviour of the bull and bear market over a period of time and will give a trend of stability during the abovementioned phases. The overall aim of this paper is to give a solid base to any significant pattern or a change in the returns of stock markets of India after the global crisis.

In order to figure out the variation of time in volatility, the asymmetric GARCH model has been used. Also to study the persistence in volatility, this asymmetric GARCH model has been augmented with dummy /fake variables which have resulted from the structural change. From the study of volatility of this period, we may be able to identify the causes of sudden increased volatility in the returns of the stock market after the onset of the economic slowdown in India.

A major shift in policy making causes a structural change in volatility of the stock returns which is mostly augmented by any further major change in course of action of the policy makers. Policy making has a major impact on the consequences of excessive increase or decrease in the returns of the market.

When talking about the Indian market and its returns, another big influence is the political and bureaucratic events rather than global events since India is a mixed economy with major emphasis on socialist reforms which makes it a conservative country by and large. There is a preconceived notion that there is almost no correlation between volatility of stock returns in India and the global economic turnarounds as the Indian political system always takes conventional, conservative steps when it comes to free capital flow in the Indian market from abroad.

It has been observed that even after the adoption of liberalized reforms almost two decades ago, it did not have a major impact on intensifying the stock market cycle. However, governments claim that there has been relatively less instability in the stock returns after the adoption of the liberalized reforms in India. It is also to be noted that this phenomenon was prevailing in almost every emerging economy around the world; especially the BRICS nations. This thought is further strengthened by the fact that there was no significant link between the foreign markets and the Indian markets prior to the reforms.

On the other hand, when we observe the stock returns of US markets and the Indian markets in the 2000s, both the markets were almost at the peak at that point of time. So it can be said that after liberalization, there has been an existence of longer bull runs and the stock returns cycles have further extended. When we take the recent example of the month of August to December of 2014, there has been an incredibly longer bull run in the Indian stock markets. It is also observed that the recent bull runs are relatively stable when compared to the pre-liberalization era.

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