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 largely depends on how well the econometric model captures the behaviour of underlying asset. We employed ARCH and GARCH models to study the behaviour of volatility. Our study shows that GARCH (1, 1) model satisfactorily explains volatility clustering and its high persistence.

Key Words : Volatility, Heteroscedasticity, ARCH, GARCH

JEL Classification Code: C22, C51, C52

Exploring the Volatility of Stock Markets: Indian Experience Introduction

Analysis of stock market for the evaluation of the risk has assumed greater significance in India after liberalization. Usefulness of efficient stock market in mobilizing resources is well-known. Volatility in the prices of stock adversely affects individual earnings and health of the economy. Volatility in the price of stock market can arise because of several reasons. It creates atmosphere of uncertainty and thus it hampers productive investment. Once again Sensex has started moving in upward direction and everyone is up bit in their mood about the performance of Indian economy. It is pertinent at this juncture to understand the nature of volatility in Indian Stock Market using new sets of data and new methods of examining behaviour of volatility.

In this paper, we have tried to examine the pattern of volatility using closing prices of S&P CNX Nifty and BSE Sensex stock price index from 3rd July, 1990 to 24th October, 2006. In the following section, we have discussed why the study of volatility in stock market is important? Then, we have

succinctly presented discussion on merits and demerits of different models employed for studying volatility. Methods and data description are also presented in this paper with discussion on findings of the study. In final section the brief summary of the paper is given.

Why Study Volatility?

Economic growth is essential for improving the quality of life. Standard classical and neo-classical theories emphasize the role of investment in enhancing economic growth. Monetary and financial sectors play a key role in mobilizing resources. Financial stability is crucial for promoting investment. In a situation of financial stability, financial institutions and markets are able to efficiently mobilize savings, provide liquidity and allocate investment. The growing role of the financial sector in the efficient allocation of resources at appropriate prices could significantly enhance the efficiency with which our economy functions. If financial markets work well, they will direct resources to their most productive uses. Risks will be more accurately priced and will be borne by those who have appetite for absorbing risks. Real economic activity with higher investments, in both quantity as well as quality, would result in growth with macroeconomic stability and fewer financial uncertainties. A stable financial system facilitates efficient transmission of monetary policy initiatives.

There are two constants in the business-change and risk-that are manifest in financial asset volatility. Prediction of financial asset volatility is now considerably improved due to the work of Engle(1982) which gave birth to ARCH models that are capable of predicting the hitherto unpredictable heteroscedastic residuals from the mean equation (Engle 1991). Consequently, a critical question emerges: Is empirical study of volatility important? If so, who will perceive it as important?

The study of financial assets volatility is important to academics, policy makers, and financial market participants for several reasons. First, prediction of financial market volatility is important to economic agents because it represents a measure of risk exposure in their investments. Second, a volatile stock market is a serious concern for policy makers because instability of the stock market creates uncertainty and thus adversely affects growth prospects. Recent evidence shows that when markets are perceived as highly volatile, it may act as a potential barrier to investing (Poshakwale and Murinde, 2001, Raju, M.T., Ghosh and Anirban 2004).

Third, the stock market volatility causes reduction in consumer spending Garner (1990).. Garner found that the stock market crash in 1987 brought about a reduction in the consumer spending in the U.S.. Fourth, pricing of derivative securities and pricing of call option is a function of volatility. Finally, stock return forecasting is in a sense volatility forecasting, and this has created new job opportunities for the professionals those who are experts in volatility forecasting. 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 framing rules and regulations related to stock market volatility.

The Indian Stock Market is represented by two most prominent stock indices, i.e. Bombay Stock Exchanges (BSE) Sensitive Index (Sensex) and NSEs S&P CNX Nifty. BSE is the older and the more often quoted index. However of late with the growing popularity of the NSE, due to its more transparent trading mechanism and lower trading cost, NSE is considered to be an important and broad-based market index.

Volatility in equity market has become a matter of mutual concern in recent years for investors, regulators and brokers. Stock return volatility hinders economic performance through consumer spending[1]. Stock Return Volatility may also affect business investment spending[2]. Further the extreme volatility could disrupt the smooth functioning of the financial system and lead to structural or regulatory changes.

However, increase in volatility per se is not a problem but increased volatility reflects underlying problems in fundamental forces affecting economic activities and expectations about them. In fact the more quickly and accurately prices reflect the available information; the more efficient would be pricing of securities and thereby allocation of resources. A market in which prices fully reflect available information is called efficient where share prices fluctuate randomly around their intrinsic values. The stock market in India has had its fair share of crisis engendered by excessive speculation resulting in excessive volatility. Undoubtedly, the confidence of investors in the early 1990s to some extent has been eroded by excessive volatility of the Indian Stock Markets. The wide spread concern of the exchange management, brokers and investors alike has realised the importance of being able to measure and predict stock market volatility.

From an investors view point, it would be immensely useful if the future stock return volatility could be predicted from the past data. Such forecasting capabilities are useful for pricing of sophisticated financial instruments such as futures and options. Here in the present study an attempt has been made to understand the nature of volatility in the Indian Stock Market from the past daily stock return data of BSE and NSE.

Modeling the Volatility

Many different types of models are being used for the modeling financial data, some more complicated than others. These quite different types of models are the topic of this section. Volatility clustering where tranquil periods of small returns are interspersed with the volatile periods of long returns is one of the oldest noted characteristic of financial data. It tells something about the predictability of volatility. If large changes in financial market tend to be followed by more large changes in either direction then volatility must be predictably high after large changes. Traders are considered to predict volatility in this way. This behaviour of volatility clustering is known as autoregressive conditional heteroscedasticity (ARCH) in the literature on financial econometrics.

Variance of stock market price is often used as risk measure in the analysis of stock market. Modeling and forecasting of the variance has received a lot of attention in the investment community for the last two decades Engle (1982), for the first time, proposed to model the time varying conditional variance with ARCH process that uses past disturbance to model the variances of the series and allows the variance of the error term to vary over time. Bollerslev (1986) generalized the ARCH process by allowing the conditional variance to be a function of prior periods squared errors and its past conditional variances. Thereafter, there have been refinements of approaches in modeling the conditional volatility that can capture the stylized facts of the data. So far GARCH models are found to be most appropriate discrete financial data.

Plenty of literature is available that very strongly advocates the use of the GARCH family of models to forecast volatility. Akgiray (1989), Pagan and Schwert (1990), Brailsford and Faff (1996) and Brooks (1998) used the US stock data and found that the GARCH models outperformed most competitors. Using data from European stock markets such as France, Germany and Italy, the Netherlands and the UK, Corhay and Rad (1994)[3] found that with the exception of Italy, the GARCH (1, 1) generally outperformed the other GARCH model. Anderson and Bollerslev (1998) substantiated with similar empirical work that the GARCH models did provide more accurate forecasts compared to other models.

Though, ARCH and GARCH models are quite useful in forecasting and modeling volatility but they lack in capturing leverage effect and information asymmetry. Nelson (1991) proposed an exponential GARCH (EGARCH) model based on a logarithmic expression of the conditional variability of variable under analysis. Later on the Threshold ARCH (TARCH) model was introduced by Zakoian (1994). The TARCH model developed by Glosten, Jagannathan and Runkle (GJR, 1993) is considered to be most suitable in estimating the impact of positive and negative shocks on volatility (Engle and Victor, 1993).

Interestingly all the models developed to study volatility focused on developed countries using financial and economic data from those countries. Literature on Financial econometrics classifies empirical regularities into two broad categories: (1) asymmetric or leverage effect and, (2) leptokurtosis or fat-tail distribution. For detailed discussion on these issues refer to the studies of Bera and Higgins, 1993, Pagan, 1996; and Bollerslev et al., 1994.

The rationale and underlying logic of asymmetric or leverage effect is that the distribution of stock return is highly asymmetric. Bad news is followed by larger increase in price volatility than good news (positive returns) of the same size. The study by Black (1976) notice this phenomenon and it is now known as the leveraged effect. It explains that as stock price falls, the debt-equity ratio of firms tend to rise and that will increase the volatility. Schwert (1989) also agreed with this explanation. Some scholars argue that the leverage effect (asymmetry) may stem from the feedback from volatility to stock price as changes in volatility trigger change in risk premiums (Campbell and Hentschel, 1992). Glsosten, Jaganathan and Runkle (1994) illustrate how to allow the effects of good and bad news to have different effects on volatility in their Threshold-GARCH (TARCH) model. We have not done any empirical analysis with TGARCH model to examine leverage effect in our data set.

Existing literature has not much focused on the analysis of emerging markets using the ARCH and GARCH models. Little work has been done in India to estimate and forecast stock markets volatility using advanced models. Here, some efforts are made to estimate conditional volatility in India to get new insights.

The ARCH model was introduced by Engle (1982) in his study Autoregressive Conditional Heteroscedasticity with estimates of the Variance of United Kingdom Inflation as the first formal model which seemed to capture the phenomena of changing variance in time series data. It is most widely used discrete time model for analysis of financial data. The formulation of his model is given below:

Where vt ~IID (0, 1)

Where lags.

is the variance at time t,

is the squared residual at time t, and q is the number of

The effect of a return shock i period ago (iq) on current volatility is governed by the parameter . In an ARCH model, old news arrived at the market more than q period ago has no effect at all on current volatility.

The ARCH model has many apparent advantages but has some weakness. a number of weaknesses. First the model assumes that positive and negative shocks have the same effects on volatility because it depends on the square of the previous shock. Second, ARCH model hardly provides any new insight for understanding the source of variations of a financial time series. It only provides the mechanical way of describing the behavior of the conditional variance. Finally, it over predicts the volatility because it responds slowly to large isolated shocks in time series data (Tsay, 2002).

Bollerslev (1986) extended the basic ARCH model by introducing the GARCH model which has proven to be quite useful in empirical work. He suggested that the conditional variance function be specified as follows: Yt= Xt + t is the mean equation. Where Yt is the stock return, X t is the exogenous variables or belonging to the set of information (Yt-1), is a fixed parameter vector and conditional variance is,

Where, 0>0, 1, 2,. q0 and 1, 2, 3,, p0 The GARCH (p, q) above defined as stationary when (1 + 2 +.+ q) + (1+ 1+.+ p) <1.

The GARCH model is an improvement over ARCH model but it also has some limitations. First, similar to the ARCH model, it equally responds to good and bad news. Second, based on the high frequency data, it is found that the tail behaviour of the GARCH models remains too short even with standardized student t-innovations (Tsay, 2002). Neither the ARCH nor the GARCH models take the asymmetry into account.

Nelson (1991) developed Exponential GARCH (EGARCH) model to incorporate asymmetric effects between positive and negative returns on assets. Symmetric GARCH model fails to capture leverage effect and therefore, GARCH model that can take care of asymmetry is needed. In response to this, Engle and Ng (1993) demonstrate that Glosten, Jagannathan, and Runkle (1993)

TGARCH model is the best parsimonious asymmetric GARCH model available. The specification for the conditional variance in TGARCH is given by,

Where

if

>0 , and 0 otherwise.

In this model, good news, and bad news, have differential effects on the conditional variance-good news has an impact of , while bad news has an impact of (+). If >0, we say that the leverage effect exists. If 0, the news impact is asymmetric.

Other extensions of ARCH model like integrated GARCH (IGARCH), ARCH in mean (ARCH-m) and multivariate GARCH were also used in some studies. All these models are used depending upon the nature of data and weakness found in other models but all are based on basic ARCH models.

The present study attempts to study volatility pattern of Indian Stock Markets and get some insight on volatility modeling using ARCH and GARCH kind of models.

Data Description, Analysis and Findings

In this section, we first describe the data set used in present study. The data set comprises of two market indices (BSE and NSE). In order to study pattern of time varying volatility of daily returns, GARCH model was employed.

We collected data on daily closing prices of S&P CNX Nifty and BSE Sensex stock price index from 3rd July, 1990 to 24th October, 2006. The sample size comprises of daily closing price, is of 3809 and 3873 observations for BSE and NSE indices respectively. The data is obtained from www.nseindia.com and CMIE Prowess online data base. Volatility has been estimated on return Rt which is defined as, Where Rt is logarithmic daily return at time t and Pt-1 and Pt are daily prices of an asset at two successive days, t-1 and t respectively.

In order to do time series analysis, transformation of original series is required depending upon the type of series when the data is in the level form. We have transformed the series of return by taking natural logarithm of the series. Some scholars (Bollerslev, 1986; Schewert, 1989; Engle and Patton, 2001; Harvinder Kaur, 2001; M.Karmakar, 2005) have pointed out two advantages of this kind of transformation of the series. First, it eliminates the possible dependence of changes in stock price index on the price level of the index. Second, the change in the log of the stock price index yields continuously compounded series.

The graph of Raw Price Series and the transformed series of S&P CNX NIFTY is shown below in Figures 1 to 4.

Figure 1-Graph of the Nifty Raw Price Series

Figure 2-Graph of S&P CNX NIFTY Series & Descriptive Statistics

Figure 3-Conditional Volatility

Figure 4-The Trajectory of Volatility of Returns

In order to evaluate the series, observe extreme values, temporal clustering, and fat-tail (leptokurtosis) in the graph and descriptive statistics. Examination of the values of kurtosis, skewness and Jerque-Bera statistics reveals non-normal distribution and volatility clustering in the series.

We also try to examine the behaviour of the return series using BSE SENSEX. The graphs of Price Series, BSE SENSEX Series and Descriptive Statistics, Conditional Volatility and Trajectory of Volatility Returns are displayed in Figures 5 to 8.

Figure 5 Graph of the BSE Sensex Raw Price Series

Figure 6-Graph of BSE SENSEX Series & Descriptive Statistics

Figure 7-Conditional Volatility

Figure 8-The Trajectory of Volatility of Returns

The Examination of the above graphs indicates non-normal distribution and volatility clustering. The term volatility clustering refers to the fact that large changes come in bulks. The pattern of volatility can be seen in figure 3 and 4 for NSE and Figure 7 and 8 for BSE. The descriptive statistics in Figure 2 and Figure 6 tell the same story. The mean of the series NSE and BSE are very small, close to zero i.e. 0.000665 and 0.000705 respectively. In technical language it can be said that the series can be mean reverting. The unconditional standard deviations as measure of variation are quite small 0.018351 for BSE and 0.017623 for NSE. These findings suggest absence of normality in data of return series of the both indices.

Striking feature of the results is that NSE series is negatively skewed (-0.1422) and that of BSE is positively skewed (+0.273345). It indicates that BSE has larger possibilities to generate positive returns while NSE has higher probability of getting negative returns. One can argue that the series is highly non-normal (asymmetric) as confirmed by Jarque-Bera[4] test for normality.

Volatility clustering found in the series suggests that it is appropriate to use ARCH model for the data set used in the study. We shall now present some more arguments for using ARCH model

Many studies on ARCH modeling (Bollerslev et al., 1994, Bera and Higgin, 1993) provide justification in using ARCH model in the presence of volatility clustering. Bera and Higgis (1993) argued that leptokurtosis in the unconditional distribution is a characteristic of conditional heteroscedasticity in the data. Stock index returns are known for positive autocorrelation at high frequencies (Lo and Mackinlay, 1998; Cluter et al., 1991; Fama 1965) which includes daily frequencies. The present study uses daily frequency data and thus it justifies using this kind of model. One of the empirical regularities discussed here about stock return distributions is the

presence of autocorrelation in the raw series and their squares. Autocorrelation in the raw return series and its square is indicative of volatility clustering. These features suggest in making use of ARCH model for this kind of data set.

We test for autocorrelation in the raw returns and their squares using Ljung-Box (L-B) Q-statistics. For detecting autocorrelation look at Q-Statistics in Table-1 and its associated probability values. If the probability value is greater than 0.05, we accept the null hypothesis (it suggests absence of autocorrelation). In a situation where probability value is less than 0.05, we reject the null hypothesis (it suggests presence of autocorrelation). The statistics given in table 1 and Table 2 of Sample Autocorrelation-BSE and NSE respectively suggest the presence of autocorrelation in all lags of the series.

Table 1-Sample Autocorrelation-BSE Raw Return Series Lags 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 AC 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 Q-Stat 20.719 21.443 25.015 27.239 27.239 39.714 40.068 40.091 60.426 66.671 66.736 66.755 67.03 67.855 67.87 Prob 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 Lags 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Return Square Series AC 0.131 0.155 0.095 0.087 0.089 0.096 0.063 0.075 0.247 0.075 0.162 0.069 0.097 0.067 0.063 Q-Stat 65.65 157.13 191.48 220.44 250.33 285.69 300.89 322.23 556 577.27 677.85 696.25 731.89 748.93 764.09 Prob 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

Table 2-Sample Autocorrelation-NSE Raw Return Series Lags 1 2 3 4 5 6 7 8 9 10 11 12 13 AC 0.109 -0.043 0.027 0.04 0.005 -0.022 -0.034 -0.012 0.065 0.038 -0.007 0.026 0.033 Q-Stat 46.394 53.473 56.287 62.588 62.695 64.527 68.917 69.462 85.709 91.205 91.382 94.096 98.452 Prob 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 Lags 1 2 3 4 5 6 7 8 9 10 11 12 13 Return Square Series AC 0.32 0.164 0.233 0.136 0.174 0.165 0.158 0.111 0.124 0.098 0.182 0.15 0.093 Q-Stat 397.23 500.94 712.14 784.39 901.83 1007.4 1104.6 1152.8 1212.1 1249.7 1378.3 1466.3 1499.7 Prob 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

14 15

-0.003 0.022

98.497 0.000 100.31 0.000

14 15

0.226 0.11

1697.5 0.000 1744.4 0.000

We computed Q-statistics up to 36 lags but reported the Q-statistics up to 15 lags for both raw returns and their square to test for ARCH effect. All the lags are statistically significant, and the squares of the lag values are larger, suggesting that ARCH type modeling is more appropriate (Nelson, 1991).

The relevance of ARCH effect was further examined by using Lagrange Multiplier test (ARCH- LM Test). Box-Jenkins approach led us to specify the model for BSE Sensex daily data series as given below: DLBSEt= 0.000689+ 0.074210DLBSEt-1-0.058986DLBSEt-6 + 0.074655DLBSEt-9+ Table: 3 Estimates of AR (1, 6, 9) Model Variable C AR(1) AR(6) AR(9) CoefficientStd. Error 0.000689 0.000325 0.074210 0.016109 -0.058986 0.016106 0.074655 0.016105 t-Statistic 2.120251 4.606605 -3.662249 4.635590 Prob. 0.0340 0.0000 0.0003 0.0000

Then the residuals are tested for ARCH-LM and the results are reported in the table 4. Table 4 ARCH-LM test Output ARCH Test: F-statistic Obs*R-squared 93.51772 Probability 0.000000 91.31731 Probability 0.000000

The F version of LM test for ARCH indicates the presence of conditional heteroscedasticity for ARCH (1). Consequently, we estimated model for ARCH (1) and GARCH (1, 1). ARCH (1) and GARCH (1, 1) model for BSE Sensex ARCH (1) model Table 5 ARCH Estimation Output Variance Equation zCoefficientStd. Error Prob statistics C 0.000241 2.62E-06 91.962030.000 ARCH(1)0.282245 0.01950514.470280.000 AIC SBC -5.25518-5.24533

The coefficients are statistically significant, but the diagnostics test for Model Adequacy suggest that standardized squared residuals ( , where ht is standard deviation) are serially correlated as shown in table 6. Here Q-Stat and its probability values are highly statistically significant indicating serial correlation in standardized residuals It means that present ARCH (1) model does not fit the data well. We used high power ARCH (q) models but the findings reveals similar pattern (Standardized squared residuals were serially correlated).

Table 6 Diagnostic test for Standardized Squared Residuals-ARCH (1)

AC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 -0.007 0.059 0.046 0.032 0.029 0.038 0.025 0.02 0.113 0.025 0.091 0.015 0.061 0.031 0.012

PAC -0.007 0.059 0.047 0.029 0.024 0.033 0.02 0.014 0.107 0.021 0.077 0.003 0.045 0.018 -0.006

Q-Stat 0.1731 13.507 21.686 25.531 28.793 34.15 36.506 38.097 87.042 89.358 121.23 122.09 136.49 140.21 140.73

Prob

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

When the use of high power ARCH(q) model fail to correct serial correlation GARCH (p,q) model is considered to be more appropriate in this situation. We employed GARCH (1, 1) to model volatility and the relevant summary statistics of the model are given in the table 6. Table 7 GARCH (1, 1) Test Results Variance Equation zCoefficientStd. Error Prob statistics C 6.23E-06 8.27E-07 7.53267 0.000 ARCH(1) 0.122944 0.00667618.415270.000 GARCH(1)0.863562 0.007201119.92190.000 AIC SBC -5.45312-5.44162

The diagnostic test for Model Adequacy suggests that standardized squared residuals ( ) as shown in table 7 are serially uncorrelated. It shows that there is no further GARCH effect and the

model is appropriate for the present data set.

Table 8 Diagnostic test for Standardized Squared Residuals

Lags 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

AC 0.01 0.001 0.006 -0.012 -0.005 -0.002 -0.015 -0.023 -0.002 0.014 -0.002 -0.019 0.037 -0.006 -0.021

PAC 0.01 0.001 0.006 -0.012 -0.005 -0.002 -0.015 -0.022 -0.001 0.015 -0.003 -0.02 0.037 -0.007 -0.022

Q-Stat 0.4007 0.4054 0.566 1.1437 1.2311 1.2534 2.1022 4.0343 4.0435 4.8405 4.8636 6.254 11.443 11.591 13.331

Prob

0.285 0.54 0.74 0.717 0.544 0.671 0.679 0.772 0.714 0.324 0.395 0.345

The Ljung-Box Q-statistics also corroborates absence of any autocorrelations in the standardized square residuals when GARCH (1, 1) model is used. The conditional variance equation is then presented in the following form.

For time series analysis, it is desirable to have stationary series. Stationarity of the series can be found by summation of + and the value of this summation should be less than unity. The stationarity condition ( + <1) is satisfied here. Here the value of is +0.1229 and the value of is +0.86352 and it is given in the table 6. A large value of GARCH lag coefficients 1 (+0.86352) indicates that shocks to conditional variance takes a long time to die out, so the volatility is persistent. Low value of error coefficient 1 0.1229 suggest that large market surprises induce relatively small revisions in future volatility.

Here, 1+ 1=0.986506 which is close to unity and therefore it can be said that a shock at time t persists for many future periods. A high value of this kind implies a long memory in the stock market. Any shock will lead to a permanent change in all future values of ht; hence shocks to conditional variance are persistent.

GARCH (p, q) model is inappropriate for capturing asymmetric effect and TGARCH model can gainfully be employed to capture the asymmetric (leverage) effect.

We also tried to use ARCH (q) and GARCH (p, q) models using NSE daily return series. Our

findings based on the analysis of NSE daily return series are quite similar to the findings based on BSE daily return series. In order to avoid repetitions, the findings are not represented here. The series is of AR-GARCH (1, 1) type as in the case of BSE.

Summary Indian Economy is currently passing through important historical phase of economic development. In the last periods, significant policy initiatives are undertaken in the field of industry, trade, exchange rate, foreign investment and in financial sector also. These policy measures have influence on the functioning of stock market and behaviour of stock prices. Volatility in the stock market has important bearing on earnings of individuals investors and the efficiency of stock market in general for channelising resources for its productive uses. Present study attempts to get insight into behaviour of the volatility in Indian Stock Market.

The results of the present study show that both the stock markets i.e. BSE Sensex and NSE-S&P CNX Nifty exhibit volatility clustering. The descriptive statistics tables of both the markets return series suggest that the return series of BSE is positively skewed while that of NSE is negatively skewed. Within the ARCH family, our results revealed that the GARCH (1, 1) model satisfactorily explains volatility and is the most appropriate for the series under analysis. The model with large value of lag coefficient shows that the volatility in the both markets is highly persistent and is predictable. The relatively small value of error coefficient of GARCH (1, 1) implies that large market surprises induce relatively small revisions in future volatility. TGARCH model can be employed to study the existence of the leverage effect . Bibliography 1. Akgiray, V (1939), Conditional Heteroscedasticity in Time Series of Stock Returns:Evidence and Forecast, Journal of Business, 62(1), 55-80. 2. Ballie, R T and DeGennaro, R P (1990). Stock Returns and Volatility, Journal of Financial and Quantitative Analysis, 25(2), 203-214. 3. Bera, A., and M. Higgins,(1993). ARCH Models: Properities, Estimation and Testing, Journal of Economic Surveys,. 305-362. 4. Box, G E P and Jenkins, G M (1976). Time Series Analysis: Forecasting and Control, revised edition, California: Holden-Day. 5. Bollerslev,T.(1986) Generalised Autoregressive Conditional Heteroscedasticity, Journal of Econometrics,. 307-327. 6. Corhay, A and Rad T (1994). Statistical Properties of Daily Return: Evidence from European Stock Markets, Journal of Business, Finance and Accounting, 21(2), 271-282. 7. Damodar Gujarati (2004), Basic Econometrics, PHI, fourth Edition. 8. Eliseabete Mendes Duarte and Jose Alberto Da Fonseca (2001), Volatility Analysis of Portugese Stock Market,1-17 9. Engle, R. (1982), Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of UK Inflation, Econometrica, 50(4), 987-1008. 10. Fama, E (1965). The Behaviour of Stock Market Prices, Journal of Business, 38(1), 34-105. 11. Garner A.C., 1988; Has Stock Market Crash Reduced Customer Spending? Economic Review, Federal Reserve Bank of Kanas City, April, 3-16. 12. Gertler, M. and Hubbard, R.G.,1989, Factors in Business Fluctuations, Financial Market Volatility, Federal Reserve Bank of Kanas City, 33-72. 13. Jamshed Y . Uppal, (1998) Stock Return Volatility in an emerging market: A case study of the Karachi Stock Exchange Managerial Finance, 24, pp 34-51. 14. Lo, A.W., and MacKinlat,(1988) Stock Market Prices do not Follow Random Walk: An Evidence from a Simple Specification Test. Review of Financial Studies, 41-66.

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, Srimad Rajchandra Institute of Management and Computer Application, Gopal Vidyanagar, Tarsadi, Ta. Bardoli, Dist. Surat. Ph.+91-2625-255389 Email: Prashant_m_joshi@yahoo.com

, Department of Research Methodology and Interdisciplinary studies in Social Sciences, Veer Narmad South Gujarat University, Surat Ph.+91-261-2256071 Email: kpcapricorn@yahoo.com

[1] Garner A.C., 1988, Has Stock Market Crash Reduced Customer Spending? Economic Review, Federal Reserve Bank of Kanas City, April, 3-16. [2] Gertler, M. and Hubbard, R.G.,1989, Factors in Business Fluctuations, Financial Market Volatility, Federal Reserve Bank of Kanas City, 33-72. [3]Corhay, A and Rad T(1994). Statistical Properties of Daily Return: Evidence from European Stock Markets, Journal of Business, Finance and Accounting, 21(2), 271-282. [4] The B-J teat statistic is T[skewness2/6+(kurtosis-3)2/24]