Exploring the Volatility of Stock Markets: Indian Experience

Prashant Joshi Kiran Pandya .

Abstract
The main focus of this paper is to examine the nature of the volatility in the Indian stock markets. Analysis of stock market for the evaluation of risk has received lot of attention both from policy makers and researchers. The quality of risk measures very lar ely depends on ho! !ell the econometric model captures the behaviour of underlyin asset. "e employed A#$% and &A#$% models to study the behaviour of volatility. 'ur study sho!s that &A#$% ()* )+ model satisfactorily explains volatility clusterin and its hi h persistence. Key Words, -olatility* %eteroscedasticity* A#$%* &A#$% JEL Classification Code, $..* $/)* $/.

* 0rimad #a1chandra Institute of 2ana ement and $omputer Application* &opal -idyana ar* Tarsadi* Ta. 3ardoli* 4ist. 0urat. Ph.56)7.8./7.//9:6 ;mail, Prashant<m<1oshi=yahoo.com

* 4epartment of #esearch 2ethodolo y and Interdisciplinary studies in 0ocial 0ciences* -eer >armad 0outh &u1arat ?niversity* 0urat Ph.56)7.8)7../8@A) ;mail, kpcapricorn=yahoo.com

Exploring the Volatility of Stock Markets: Indian Experience

Introduction
Analysis of stock market for the evaluation of the risk has assumed reater si nificance in India after liberaliBation. ?sefulness of efficient stock market in mobiliBin resources is !ell7kno!n. -olatility in the prices of stock adversely affects individual earnin s and health of the economy. -olatility in the price of stock market can arise because of several reasons. It creates atmosphere of uncertainty and thus it hampers productive investment. 'nce a ain 0ensex has started movin in up!ard direction and everyone is up bit in their mood about the performance of Indian economy. It is pertinent at this 1uncture to understand the nature of volatility in Indian 0tock 2arket usin ne! sets of data and ne! methods of examinin behaviour of volatility. In this paper* !e have tried to examine the pattern of volatility usin closin prices of 0CP $>D >ifty and 30; 0ensex stock price index from 9rd July* )66@ to .E th 'ctober* .@@8. In the follo!in section* !e have discussed !hy the study of volatility in stock market is importantF Then* !e have succinctly presented discussion on merits and demerits of different models employed for studyin final section the brief summary of the paper is iven. volatility. 2ethods and data description are also presented in this paper !ith discussion on findin s of the study. In

Why Study Volatility?

;conomic ro!th is essential for improvin the quality of life. 0tandard classical and neo7classical theories emphasiBe the role of investment in enhancin economic ro!th. 2onetary and financial sectors play a key role in mobiliBin resources. Ginancial stability is crucial for promotin investment. In a situation of financial stability* financial institutions and markets are able to efficiently mobiliBe savin s* provide liquidity and allocate investment. The ro!in role of the financial sector in the efficient allocation of resources at appropriate prices could si nificantly enhance the efficiency !ith !hich our economy functions. If financial markets !ork !ell* they !ill direct resources to their most productive uses. #isks !ill be more accurately priced and !ill be borne by those !ho have appetite for absorbin risks. #eal economic activity !ith hi her investments* in .

both quantity as !ell as quality* !ould result in ro!th !ith macroeconomic stability and fe!er financial uncertainties. A stable financial system facilitates efficient transmission of monetary policy initiatives. There are t!o constants in the business7chan e and risk7that are manifest in financial asset volatility. Prediction of financial asset volatility is no! considerably improved due to the !ork of ;n le()6:.+ !hich ave birth to A#$% models that are capable of predictin the hitherto unpredictable heteroscedastic residuals from the mean equation (;n le )66)+. $onsequently* a critical question emer es, Is empirical study of volatility importantF If so* !ho !ill perceive it as importantF The study of financial assets volatility is important to academics* policy makers* and financial market participants for several reasons. Girst* prediction of financial market volatility is important to economic a ents because it represents a measure of risk exposure in their investments. 0econd* a volatile stock market is a serious concern for policy makers because instability of the stock market creates uncertainty and thus adversely affects ro!th prospects. #ecent evidence sho!s that !hen markets are perceived as hi hly volatile* it Hmay act as a potential barrier to investin I (Poshak!ale and 2urinde* .@@)* #a1u* 2.T.* &hosh and Anirban .@@E+. Third* the stock market volatility causes reduction in consumer spendin &arner ()66@+.. &arner found that the stock market crash in )6:A brou ht about a reduction in the consumer spendin in the ?.0.. Gourth* pricin of derivative securities and pricin of call option is a function of volatility. Ginally* stock return forecastin is in a sense volatility forecastin * and this has created ne! 1ob opportunities for the professionals those !ho are experts in volatility forecastin . Thus it can be seen that the study of stock market volatility is very important and can be helpful for the formulation of economic policies and framin rules and re ulations related to stock market volatility. The Indian 0tock 2arket is represented by t!o most prominent stock indices* i.e. 3ombay 0tock ;xchan eJs (30;+ 0ensitive Index (0ensex+ and >0;Js 0CP $>D >ifty. 30; is the older and the more often quoted index. %o!ever of late !ith the ro!in popularity of the >0;* due to its more transparent tradin mechanism and lo!er tradin cost* >0; is considered to be an important and broad7based market index. 9

-olatility in equity market has become a matter of mutual concern in recent years for investors* re ulators and brokers. 0tock return volatility hinders economic performance throu h consumer spendin ). 0tock #eturn -olatility may also affect business investment spendin .. Gurther the extreme volatility could disrupt the smooth functionin of the financial system and lead to structural or re ulatory chan es. %o!ever* increase in volatility per se is not a problem but increased volatility reflects underlyin problems in fundamental forces affectin economic activities and expectations about them. In fact the more quickly and accurately prices reflect the available informationK the more efficient !ould be pricin of securities and thereby allocation of resources. A market in !hich prices fully reflect available information is called HefficientI !here share prices fluctuate randomly around their HintrinsicI values. The stock market in India has had its fair share of crisis en endered by excessive speculation resultin in excessive volatility. ?ndoubtedly* the confidence of investors in the early )66@Js to some extent has been eroded by excessive volatility of the Indian 0tock 2arkets. The !ide spread concern of the exchan e mana ement* brokers and investors alike has realised the importance of bein able to measure and predict stock market volatility. Grom an investorJs vie! point* it !ould be immensely useful if the future stock return volatility could be predicted from the past data. 0uch forecastin capabilities are useful for pricin of sophisticated financial instruments such as futures and options. %ere in the present study an attempt has been made to understand the nature of volatility in the Indian 0tock 2arket from the past daily stock return data of 30; and >0;.

Modeling the Volatility

2any different types of models are bein used for the modelin financial data* some more complicated than others. These quite different types of models are the topic of this section.

&arner A.$.* )6::* %as 0tock 2arket $rash #educed $ustomer 0pendin F ;conomic #evie!* Gederal #eserve 3ank of Kanas $ity* April* 97)8. . &ertler* 2. and %ubbard* #.&.*)6:6* Gactors in 3usiness Gluctuations* Ginancial 2arket -olatility* Gederal #eserve 3ank of Kanas $ity* 997A..

-olatility clusterin !here tranquil periods of small returns are interspersed !ith the volatile periods of lon returns is one of the oldest noted characteristic of financial data. It tells somethin about the predictability of volatility. If lar e chan es in financial market tend to be follo!ed by more lar e chan es in either direction then volatility must be predictably hi h after lar e chan es. Traders are considered to predict volatility in this !ay. This behaviour of volatility clusterin is kno!n as autore ressive conditional heteroscedasticity (A#$%+ in the literature on financial econometrics. -ariance of stock market price is often used as risk measure in the analysis of stock market. 2odelin and forecastin of the variance has received a lot of attention in the investment community for the last t!o decades ;n le ()6:.+* for the first time* proposed to model the time varyin conditional variance !ith A#$% process that uses past disturbance to model the variances of the series and allo!s the variance of the error term to vary over time. 3ollerslev ()6:8+ eneraliBed the A#$% process by allo!in the conditional variance to be a function of prior periodJs squared errors and its past conditional variances. Thereafter* there have been refinements of approaches in modelin the conditional volatility that can capture the styliBed facts of the data. 0o far &A#$% models are found to be most appropriate discrete financial data. Plenty of literature is available that very stron ly advocates the use of the &A#$% family of models to forecast volatility. Ak iray ()6:6+* Pa an and 0ch!ert ()66@+* 3railsford and Gaff ()668+ and 3rooks ()66:+ used the ?0 stock data and found that the &A#$% models outperformed most competitors. ?sin data from ;uropean stock markets such as Grance* &ermany and Italy* the >etherlands and the ?K* $orhay and #ad ()66E+ 9 found that !ith the exception of Italy* the &A#$% ()* )+ enerally outperformed the other &A#$% model. Anderson and 3ollerslev ()66:+ substantiated !ith similar empirical !ork that the &A#$% models did provide more accurate forecasts compared to other models. Thou h* A#$% and &A#$% models are quite useful in forecastin and modelin

volatility but they lack in capturin Llevera e effectJ and information asymmetry. >elson ()66)+ proposed an exponential &A#$% (;&A#$%+ model based on a lo arithmic expression of the conditional variability of variable under analysis. Mater on the
9

$orhay* A and #ad T()66E+.I 0tatistical Properties of 4aily #eturn, ;vidence from ;uropean 0tock 2arkets*I Journal of 3usiness* Ginance and Accountin * .)(.+* .A)7.:..

Threshold A#$% (TA#$%+ model !as introduced by Nakoian ()66E+. The TA#$% model developed by &losten* Ja annathan and #unkle (&J#* )669+ is considered to be most suitable in estimatin (;n le and -ictor* )669+. Interestin ly all the models developed to study volatility focused on developed countries usin financial and economic data from those countries. Miterature on Ginancial econometrics classifies empirical re ularities into t!o broad cate ories, ()+ asymmetric or levera e effect and* (.+ leptokurtosis or fat7tail distribution. Gor detailed discussion on these issues refer to the studies of 3era and %i ins* )669* Pa an* )668K and 3ollerslev et al.* )66E. The rationale and underlyin lo ic of asymmetric or levera e effect is that the the impact of positive and ne ative shocks on volatility

distribution of stock return is hi hly asymmetric. 3ad ne!s is follo!ed by lar er increase in price volatility than ood ne!s (positive returns+ of the same siBe. The study by 3lack ()6A8+ notice this phenomenon and it is no! kno!n as the levera ed effect. It explains that as stock price falls* the debt7equity ratio of firms tend to rise and that !ill increase the volatility. 0ch!ert ()6:6+ also a reed !ith this explanation. 0ome scholars ar ue that the levera e effect (asymmetry+ may stem from the feedback from volatility to stock price as chan es in volatility tri er chan e in risk premiums ($ampbell and %entschel* )66.+. &lsosten* Ja anathan and #unkle ()66E+ illustrate ho! to allo! the effects of ood and bad ne!s to have different effects on volatility in their Threshold7&A#$% (TA#$%+ model. "e have not done any empirical analysis !ith T&A#$% model to examine levera e effect in our data set. ;xistin literature has not much focused on the analysis of emer in markets usin the A#$% and &A#$% models. Mittle !ork has been done in India to estimate and forecast stock markets volatility usin advanced models. %ere* some efforts are made to estimate conditional volatility in India to et ne! insi hts. The A#$% model !as introduced by ;n le ()6:.+ in his study HAutore ressive $onditional %eteroscedasticity !ith estimates of the -ariance of ?nited Kin dom InflationI as the first formal model !hich seemed to capture the phenomena of chan in

variance in time series data. It is most !idely used discrete time model for analysis of financial data. The formulation of his model is iven belo!,
t = vt + i + t i
i =) q .

"here vt OII4 (@* )+

t = @ + ) . t ) + . . t . + ...... + q . t q
"here . t is the variance at time t* number of la s.

.t

is the squared residual at time t* and q is the

The effect of a return shock i period a o (iPq+ on current volatility is overned by the parameter Q. In an A#$% model* old ne!s arrived at the market more than q period a o has no effect at all on current volatility. The A#$% model has many apparent advanta es but has some !eakness. a number of !eaknesses. Girst the model assumes that positive and ne ative shocks have the same effects on volatility because it depends on the square of the previous shock. 0econd* A#$% model hardly provides any ne! insi ht for understandin the source of variations of a financial time series. It only provides the mechanical !ay of describin the behavior of the conditional variance. Ginally* it over predicts the volatility because it responds slo!ly to lar e isolated shocks in time series data (Tsay* .@@.+. 3ollerslev ()6:8+ extended the basic A#$% model by introducin the &A#$% model !hich has proven to be quite useful in empirical !ork. %e su variance function be specified as follo!s, RtS Dt T5 Ut is the mean equation. "here Rt is the stock return* Dt is the exo enous variables or belon in to the set of information (Rt7)+* T is a fixed parameter vector and conditional variance is* ht = @ + i t i + i ht i
. i =) i =) q p

ested that the conditional

"here* Q@V@* Q)* Q.*WWWW. QqX@ and T)* T.* T9*WWW* TpX@ The &A#$% (p* q+ above defined as stationary !hen (Q) 5 Q. 5WW.5 Qq+ 5 (T)5 T)5WW.5 Tp+ Y). The &A#$% model is an improvement over A#$% model but it also has some limitations. Girst* similar to the A#$% model* it equally responds to ood and bad ne!s. A

0econd* based on the hi h frequency data* it is found that the tail behaviour of the &A#$% models remains too short even !ith standardiBed student t7innovations (Tsay* .@@.+. >either the A#$% nor the &A#$% models take the asymmetry into account. >elson ()66)+ developed ;xponential &A#$% (;&A#$%+ model to incorporate asymmetric effects bet!een positive and ne ative returns on assets. 0ymmetric &A#$% model fails to capture levera e effect and therefore* &A#$% model that can take care of asymmetry is needed. In response to this* ;n le and > ()669+ demonstrate that &losten* Ja annathan* and #unkle ()669+ T&A#$% model is the best parsimonious asymmetric &A#$% model available. The specification for the conditional variance in T&A#$% is iven by*

.t = @ + ) .t ) + .t )dt ) + .t )

"here d t = ) if t V@ * and @ other!ise.

In this model* ood ne!s* and bad ne!s* have differential effects on the conditional variance7 ood ne!s has an impact of Q* !hile bad ne!s has an impact of (Q5Z+. If ZV@* !e say that the levera e effect exists. If Z[@* the ne!s impact is asymmetric. 'ther extensions of A#$% model like inte rated &A#$% (I&A#$%+* A#$% in mean (A#$%7m+ and multivariate &A#$% !ere also used in some studies. All these models are used dependin upon the nature of data and !eakness found in other models but all are based on basic A#$% models. The present study attempts to study volatility pattern of Indian 0tock 2arkets and et some insi ht on volatility modelin usin A#$% and &A#$% kind of models.

Data Description, Analysis and indings

In this section* !e first describe the data set used in present study. The data set comprises of t!o market indices (30; and >0;+. In order to study pattern of time varyin volatility of daily returns* &A#$% model !as employed. "e collected data on daily closin prices of 0CP $>D >ifty and 30; 0ensex stock price index from 9rd July* )66@ to .Eth 'ctober* .@@8. The sample siBe comprises of daily

closin price* is of 9:@6 and 9:A9 observations for 30; and >0; indices respectively. The data is obtained from !!!.nseindia.com and $2I; Pro!ess online data base. -olatility has been estimated on return #t !hich is defined as* Rt = lo ( Pt \ Pt ) + "here #t is lo arithmic daily return at time t and P t7) and Pt are daily prices of an asset at t!o successive days* t7) and t respectively. In order to do time series analysis* transformation of ori inal series is required dependin upon the type of series !hen the data is in the level form. "e have transformed the series of return by takin natural lo arithm of the series. 0ome scholars (3ollerslev* )6:8K 0che!ert* )6:6K ;n le and Patton* .@@)K %arvinder Kaur* .@@)K 2.Karmakar* .@@/+ have pointed out t!o advanta es of this kind of transformation of the series. Girst* it eliminates the possible dependence of chan es in stock price index on the price level of the index. 0econd* the chan e in the lo of the stock price index yields continuously compounded series. The raph of #a! Price 0eries and the transformed series of 0CP $>D >IGTR is sho!n belo! in Gi ures ) to E. Figure 1-Graph of the Nifty a! "rice #eries

!SE "#I$E SE#IES

4000 3000 2000 1 000 0 Close

YEA R

Gi ure $-Graph of #%" CN& N'F() #eries % *escripti+e #tatistics

1200 1000 800 600 400 200 0 -0.10 -0.05 0.00 0.05 0.10

Series: DLNSE Sample 2 3873 Observatio s 3872 !ea !e"ia !a#im$m !i im$m St". Dev. S&e' ess ($rtosis )ar*$e-+era ,robabilit0.000665 0.001007 0.120861 -0.13053% 0.017623 -0.142210 8.721800 52%4.%42 0.000000

Figure ,-Conditional -olatility

.08 .07 .06 .05 .04 .03 .02 .01 .00 1000 2000 3000

Figure .-(he (ra/ectory of -olatility of eturns

S%" $!& !I
0.15

'( #E')#! SE#IES

#E')#! VA*)E

0.1

0.05 22-!a--%6 22-!a--03 14-!a--%8 16-Nov-%3 22-Nov-%% 1%-De.-%1 2%-Sep-%4 18-De.-%7 2%-Sep-%8 31-/$0-00 31-De.-02 30-Nov-04 28-1eb-%7 18-1eb-%% 20-!ar-02 24-1eb-04 -%1 10-)$ -%3 18-)a -01 -01 -06 25-)a 12-/pr-00 30-O.t-01 20-/pr-05 3-!a--%4 24-)$l-%7 13-)$l-04 16-)$l-%2 2-/$0-%5 7-/$0-02 5-Sep-05 3-!ar-%5 -%6 -%3 %-O.t-%6 8-O.t-03 -06 1%-)$

8-)$l-%1

25-)a

7-)$l-%%

Date

-0.05

11-)$

4-)a

1-)a

Series1
-0.1

-0.15 (EA#

In order to evaluate the series* observe extreme values* temporal clusterin * and fat7tail (leptokurtosis+ in the raph and descriptive statistics. ;xamination of the values of kurtosis* ske!ness and Jerque73era statistics reveals non7normal distribution and volatility clusterin in the series. "e also try to examine the behaviour of the return series usin 30; 0;>0;D. The raphs of Price 0eries* 30; 0;>0;D 0eries and 4escriptive 0tatistics* $onditional -olatility and Tra1ectory of -olatility #eturns are displayed in Gi ures / to :. Figure 0 Graph of the 1#E #ense2 a! "rice #eries )@

SE!SE& *EVE*

+SE s e ns e x 15000 10000 5000 0

18-1eb-%2

21-!ar-01

11-)a -%5

20-O.t-%8

1%-/$0-03

26-/pr-%6

21-O.t-04

25-)$l-%7

7-)a -00

5-)$ -02

2-Sep-%3

(E A#

Figure 3-Graph of 1#E #EN#E& #eries % *escripti+e #tatistics

1200 1000 800 600 400 200 0 -0.1 0.0 0.1 0.2 Series: DL+SE Sample 2 380% Observatio s 3808 !ea !e"ia !a#im$m !i im$m St". Dev. S&e' ess ($rtosis )ar*$e-+era ,robabilit0.000705 0.001008 0.230007 -0.136607 0.018361 0.273345 13.40655 17230.43 0.000000

Figure 4-Conditional -olatility

.0% .08 .07 .06 .05 .04 .03 .02 .01 .00 1000 2000 3000

Figure 5-(he (ra/ectory of -olatility of eturns

+SE sensex
0.3 0.2 0.1 0 -0.1 -0.2 Y EA R

3-)a -06

2ear

))

The ;xamination of the above raphs indicates non7normal distribution and volatility clusterin . The term volatility clusterin refers to the fact that lar e chan es come in bulks. The pattern of volatility can be seen in fi ure 9 and E for >0; and Gi ure A and : for 30;. The descriptive statistics in Gi ure . and Gi ure 8 tell the same story. The mean of the series >0; and 30; are very small* close to Bero i.e. @.@@@88/ and @.@@@A@/ respectively. In technical lan ua e it can be said that the series can be mean revertin . The unconditional standard deviations as measure of variation are quite small @.@):9/) for 30; and @.@)A8.9 for >0;. These findin s su return series of the both indices. 0trikin feature of the results is that >0; series is ne atively ske!ed (7@.)E..+ and that of 30; is positively ske!ed (5@..A99E/+. It indicates that 30; has lar er possibilities to enerate positive returns !hile >0; has hi her probability of ettin ne ative returns. 'ne can ar ue that the series is hi hly non7normal (asymmetric+ as confirmed by Jarque7 3eraE test for normality. -olatility clusterin found in the series su A#$% model 2any studies on A#$% modelin (3ollerslev et al.* )66E* 3era and %i in* )669+ ests that it is appropriate to use A#$% model est absence of normality in data of

for the data set used in the study. "e shall no! present some more ar uments for usin

provide 1ustification in usin A#$% model in the presence of volatility clusterin . 3era and %i is ()669+ ar ued that leptokurtosis in the unconditional distribution is a characteristic of conditional heteroscedasticity in the data. 0tock index returns are kno!n for positive autocorrelation at hi h frequencies (Mo and 2ackinlay* )66:K $luter et al.* )66)K Gama )68/+ !hich includes daily frequencies. The present study uses daily frequency data and thus it 1ustifies usin this kind of model. 'ne of the empirical re ularities discussed here about stock return distributions is the presence of autocorrelation in the ra! series and their squares. Autocorrelation in the ra! return series and its square is indicative of volatility clusterin . These features su makin use of A#$% model for this kind of data set. est in

The 37J teat statistic is T]ske!ness.\85(kurtosis79+.\.E^

).

"e test for autocorrelation in the ra! returns and their squares usin M1un 73ox (M73+ _7 statistics. Gor detectin autocorrelation look at _70tatistics in Table7) and its associated probability values. If the probability value is hypothesis (it su reater than @.@/* !e accept the null ests presence of autocorrelation+. ests absence of autocorrelation+. In a situation !here probability value

is less than @.@/* !e re1ect the null hypothesis (it su respectively su

The statistics iven in table ) and Table . of 0ample Autocorrelation730; and >0; est the presence of autocorrelation in all la s of the series.

(able 1-#a6ple Autocorrelation-1#E a! eturn #eries

La0s 1 2 3 4 5 6 7 8 % 10 11 12 13 14 15 /3 0.074 -0.014 0.031 0.024 0 -0.057 0.01 0.002 0.073 0.04 0.004 -0.002 0.008 0.015 0.002 4-Stat 20.71% 21.443 25.015 27.23% 27.23% 3%.714 40.068 40.0%1 60.426 66.671 66.736 66.755 67.03 67.855 67.87 ,rob 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

eturn #7uare #eries

La0s 1 2 3 4 5 6 7 8 % 10 11 12 13 14 15 /3 0.131 0.155 0.0%5 0.087 0.08% 0.0%6 0.063 0.075 0.247 0.075 0.162 0.06% 0.0%7 0.067 0.063 4-Stat 65.65 157.13 1%1.48 220.44 250.33 285.6% 300.8% 322.23 556 577.27 677.85 6%6.25 731.8% 748.%3 764.0% ,rob 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

(able $-#a6ple Autocorrelation-N#E a! eturn #eries

La0s 1 2 3 4 5 6 7 8 % 10 11 12 13 14 15 /3 0.10% -0.043 0.027 0.04 0.005 -0.022 -0.034 -0.012 0.065 0.038 -0.007 0.026 0.033 -0.003 0.022 4-Stat 46.3%4 53.473 56.287 62.588 62.6%5 64.527 68.%17 6%.462 85.70% %1.205 %1.382 %4.0%6 %8.452 %8.4%7 100.31 ,rob 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 La0s 1 2 3 4 5 6 7 8 % 10 11 12 13 14 15

eturn #7uare #eries

/3 0.32 0.164 0.233 0.136 0.174 0.165 0.158 0.111 0.124 0.0%8 0.182 0.15 0.0%3 0.226 0.11 4-Stat 3%7.23 500.%4 712.14 784.3% %01.83 1007.4 1104.6 1152.8 1212.1 124%.7 1378.3 1466.3 14%%.7 16%7.5 1744.4 ,rob 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

)9

"e computed _7statistics up to 98 la s but reported the _7statistics up to )/ la s for both ra! returns and their square to test for A#$% effect. All the la s are statistically si nificant* and the squares of the la values are lar er* su modelin is more appropriate (>elson* )66)+. The relevance of A#$% effect !as further examined by usin Ma ran e 2ultiplier test (A#$%7 M2 Test+. 3ox7Jenkins approach led us to specify the model for 30; 0ensex daily data series as iven belo!, *L1#Et8 9:99935;< 9:94.$19*L1#Et-1-9:905;53*L1#Et-3 < 9:94.300*L1#Et-;5 = (able> , Esti6ates of A ?1@ 3@ ;A Bodel
5ariable 3 /7819 /7869 /78%9 3oe66i.ie t 0.00068% 0.074210 -0.058%86 0.074655 St". Error 0.000325 0.01610% 0.016106 0.016105 t-Statisti. 2.120251 4.606605 -3.66224% 4.6355%0 ,rob. 0.0340 0.0000 0.0003 0.0000

estin that A#$% type

Then the residuals are tested for A#$%7M2 and the results are reported in the table E. (able . A CC-LB test Dutput
/73: ;est: 1-statisti. Obs<7-s*$are" %3.51772 %1.31731 ,robabilit,robabilit0.000000 0.000000

The G version of M2 test for A#$% indicates the presence of conditional heteroscedasticity for A#$% ()+. $onsequently* !e estimated model for A#$% ()+ and &A#$% ()* )+.

A CC ?1A and GA CC ?1@ 1A 6odel for 1#E #ense2

A CC ?1A 6odel (able 0 A CC Esti6ation Dutput
5aria .e E*$atio 3oe66i.ie t 3 /73:819 0.000241 0.282245 St". Error 2.62E-06 0.01%505 =statisti.s %1.%6203 14.47028 ,rob 0.000 0.000 />3 5.25518 S+3 5.24533

The coefficients are statistically si nificant* but the dia nostics test for 2odel Adequacy su est that standardiBed squared residuals ( t \ h
@./ t

* !here ht is standard deviation+ are )E

serially correlated as sho!n in table 8. %ere _70tat and its probability values are hi hly statistically si nificant indicatin serial correlation in standardiBed residuals It means that present A#$% ()+ model does not fit the data !ell. "e used hi h po!er A#$% (q+ models but the findin s reveals similar pattern (0tandardiBed squared residuals !ere serially correlated+. (able 3 *iagnostic test for #tandardiEed #7uared esiduals-A CC ?1A
A$ / 4 3 7 5 8 2 9 6 /0 // /4 /3 /7 /5 -01002 01056 01078 01034 01046 01039 01045 0104 01//3 01045 0106/ 010/5 0108/ 0103/ 010/4 "A$ -01002 01056 01072 01046 01047 01033 0104 010/7 01/02 0104/ 01022 01003 01075 010/9 -01008 ,-Stat 01/23/ /31502 4/1898 45153/ 491263 371/5 381508 391062 921074 961359 /4/143 /44106 /38176 /7014/ /70123 "ro.

0100 0100 0100 0100 0100 0100 0100 0100 0100 0100 0100 0100

"hen the use of hi h po!er A#$%(q+ model fail to correct serial correlation &A#$% (p*q+ model is considered to be more appropriate in this situation. "e employed &A#$% ()* )+ to model volatility and the relevant summary statistics of the model are iven in the table 8. (able 4 GA CC ?1@ 1A (est esults
5aria .e E*$atio 3oe66i.ie t 3 /73:819 ?/73:819 6.23E-06 0.122%44 0.863562 St". Error 8.27E-07 0.006676 0.007201 =statisti.s 7.53267 18.41527 11%.%21% ,rob 0.000 0.000 0.000 />3 5.45312 S+3 5.44162

)/

The dia nostic test for 2odel Adequacy su

ests that standardiBed squared residuals (

t \ h @./ t + as sho!n in table A are serially uncorrelated. It sho!s that there is no further
&A#$% effect and the model is appropriate for the present data set. (able 5 *iagnostic test for #tandardiEed #7uared esiduals
*ags / 4 3 7 5 8 2 9 6 /0 // /4 /3 /7 /5 A$ 010/ 0100/ 01008 -010/4 -01005 -01004 -010/5 -01043 -01004 010/7 -01004 -010/6 01032 -01008 -0104/ "A$ 010/ 0100/ 01008 -010/4 -01005 -01004 -010/5 -01044 -0100/ 010/5 -01003 -0104 01032 -01002 -01044 ,-Stat 017002 017057 01588 /1/732 /143// /14537 41/044 710373 710735 719705 719838 81457 //1773 //156/ /3133/ "ro.

01495 0157 0127 012/2 01577 0182/ 01826 01224 012/7 01347 01365 01375

The M1un 73ox _7statistics also corroborates absence of any autocorrelations in the standardiBed square residuals !hen &A#$% ()* )+ model is used. The conditional variance equation is then presented in the follo!in form. ht = @.@@@@@8.9 + @.)..6E t ) + @.:89/8.ht )
.

Gor time series analysis* it is desirable to have stationary series. 0tationarity of the series can be found by summation of Q 5 T and the value of this summation should be less than unity. The stationarity condition (Q 5 TY)+ is satisfied here. %ere the value of Q is 5@.)..6 and the value of T is 5@.:89/. and it is iven in the table 8. A lar e value of &A#$% la coefficients T) (5@.:89/.+ indicates that shocks to conditional variance takes a lon time to die out* so the volatility is LpersistentJ. Mo! value of error coefficient Q ) @.)..6 su volatility. %ere* Q)5 T)S@.6:8/@8 !hich is close to unity and therefore it can be said that a LshockJ at time t persists for many future periods. A hi h value of this kind implies a Llon )8 est that lar e market surprises induce relatively small revisions in future

memoryJ in the stock market. Any shock !ill lead to a permanent chan e in all future values of htK hence shocks to conditional variance are Lpersistent.J &A#$% (p* q+ model is inappropriate for capturin asymmetric effect and T&A#$% model can ainfully be employed to capture the asymmetric (levera e+ effect. "e also tried to use A#$% (q+ and &A#$% (p* q+ models usin >0; daily return series. 'ur findin s based on the analysis of >0; daily return series are quite similar to the findin s based on 30; daily return series. In order to avoid repetitions* the findin s are not represented here. The series is of A#7&A#$% ()* )+ type as in the case of 30;.

#u66ary
Indian ;conomy is currently passin throu h important historical phase of economic development. In the last periods* si nificant policy initiatives are undertaken in the field of industry* trade* exchan e rate* forei n investment and in financial sector also. These policy measures have influence on the functionin of stock market and behaviour of stock prices. -olatility in the stock market has important bearin individuals investors and the efficiency of stock market in the volatility in Indian 0tock 2arket. The results of the present study sho! that both the stock markets i.e. 30; 0ensex and >0;70CP $>D >ifty exhibit volatility clusterin . The descriptive statistics tables of both the marketsJ return series su est that the return series of 30; is positively ske!ed !hile that of >0; is ne atively ske!ed. "ithin the A#$% family* our results revealed that the &A#$% ()* )+ model satisfactorily explains volatility and is the most appropriate for the series under analysis. The model !ith lar e value of la coefficient sho!s that the volatility in the both markets is hi hly persistent and is predictable. The relatively small value of error coefficient of &A#$% ()* )+ implies that lar e market surprises induce relatively small revisions in future volatility. T&A#$% model can be employed to study the existence of the levera e effect . on earnin s of eneral for channelisin

resources for its productive uses. Present study attempts to et insi ht into behaviour of

)A

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