Volatility in Indian Stock Markets
OBJECTIVE
The movement of stock market has always been a puzzle. In past few years
stock market has become quite volatile. It has become quite difficult to
predict the erratic movement shown which is in not at all in tandem with the
information which is fed to stock market. Thus chaos prevails in the markets
with investor optimism at unexpected levels. Has the stock market volatility
increased? Has the Indian market developed into a speculative bubble due
to the emergence of "New Economy" stocks? Why is this volatility so
pronounced? The objective of this paper is try to analyze these questions in
the context of Indian stock markets. Its an attempt to unearth the rationale
for these weird movements.
METHODOLOGY
First of all we examine the fundamentalist view put forward by economists
who argue that volatility can be explained by Efficient Market Hypothesis. A
fundamentalist view says that the stock market react with information
flowing in the stock market. It is the micro and macro economic factors that
drives the market. Trying to examine this fact all the key macro and micro
economic factor growth is being observed with respect to growth in stock
market.
On the other hand, the view that volatility is caused by psychological factors
is also tested. A Psychology view states that stock market is more of
emotional driven. It is the perception of the investors that greatly affects the
stock market. So We try to study how the change in habits and perceptions
affected the price movements. What precipitating factors started this
remarkable surge, making it crazy? We try to prove how these perceptual
changes have changed volatility through empirical evidence.
After that an empirical study of BSE Sensex and a set of representative
stocks are carried out to find the changes in their volatility in the last two
years. The stock market regulation in introduction of rolling settlement and
Volatility in Indian Stock Markets
dematerialization as a measure of reducing volatility is put to test. The study
tries to correlate the economic growth concept with the growth of stock
market of India.
INTERPRETATION
FUNDAMENATALIST VIEW
It was found that during the period of 1998 to 2000, there was no such
spectacular growth which could have led to such a whooping growth in stock
market. Example the GDP growth for the year 1999-2000 was only 5.9%
coupled with the moderate growth in industrial sector. Even the corporate
profit grew by only 32% but the stock market grew amazingly high by
117%.Any erratic rise has to be followed by an steep fall. So is this case of
Indian economy.
PSYCHOLOGICAL PHENOMENON
In recent times media and IT has shown a tremendous growth .The news
feed provided by Reuters and Bloomberg keep the investor updated every
minute. Such increased reporting of stock movements generally increase the
demand for stocks. This has resulted in markets adjusting to such
information faster than before which in turn increase market volatility.
The ICE(Information, Communication and Entertainment) industry was also
overhyped in the period of 1998 to 2000.A study of volatility of IT stock
suggest how IT has to play a major part in the volatility of stock market.
The stock market also a feedback affect wherein the stock price increase
forms a vicious circle whereby the initial increase (decrease) propels further
price increase (decrease).A test was carried out to check the difference in
Volatility in Indian Stock Markets
volatility of stocks while they are rising as opposed to their fall. It is also
seen that these feedback loops have different intensities during a Bull Run
and a Bear run. It was seen that the price volatility was more when the stock
was falling as compared to when it was rising which shows that the feedback
was more during a bear run
Even the cultural change like new stock option plan to executives and
employees, brought a new set of investors in market leading to huge
demand of shares. A recent survey by ET, SEBI & NCAER has shown that
7.66 million households (total investor base of 12.1mn) invested in the
equity markets for the first time between March 1999 and March 200010.
This increase in the number of investors has increased the demand for
stocks. This excessive demand coupled with the "ICE" affect has taken
optimism to great heights leading to over valuation. This has increased the
speculative activities, which is seen by the delivery to trading volume ratio,
which is as low as 15% Ergo high volatility.
Rolling settlement was introduced to reduce the speculative activities in
volatile stocks
from 10th January 2000. A study was carried out to analyze the change in
volatilities
before and after the introduction of rolling settlement. We found that the
stocks had that
volatilities during the six-month period have gone up . This might be due to
the free-fall in the share prices that occurred after the introduction of rolling
settlement.
CONCLUSION
After doing the empirical analysis of data the research paper states that
there were many factors that affected stock market volatility. Though no
fundamental factors emerge for the existence of such high volatility we find
Volatility in Indian Stock Markets
that other perceptual factors have led to this mad rush for stocks leading to
volatility. Thus the research paper helped a lot in determining the reason
behind heavy fluctuations in stock market between 1998 to 2000.