Subject A REPORT ON

topic
Submitted to

Prof.

Submitted By: Group No. Date of Submission: 23/09/2013

Name Debayan Biswas Ganesh Arote Omkar Bibikar Tejas Lakhe

Roll Number 2012PGP 2012PGP113 2012PGP 2012PGP 2012PGP

Objectives

Using Markov chain model to analyze intraday dynamics of volume and price data for Nifty futures during 50 days from 1/8/2013 to 20/9/2013 To test whether the U-Shaped pattern is followed by Nifty futures prices by using statistical tests Testing which model among private information model, specialist market power model, and inventory model has most explanatory power where U-shaped behavior is concerned

To understand how volatility is affected at opening time, closing time and during lunch hours

Data and methodology

The Data
50 days data from 1/8/2013 to 20/9/2013 Obtained from NSE website www.nseindia.com analysts.html Minute by minute time stamped data was converted to 5 minute data due thin trading during parts of day Grouping of volatilities done in three groups: High (H) , Normal (N), Low (L) where volatility is given by = | ln ( )| is /Nd is mean absolute rate of price change MAD or mean absolute deviation of is the and and http://www.tradewithme.me/data-archives-for-technical-

Partitioning is done as shown below in order to get equally distributed volatility states H: N: L:

Volatility and volume changes are calculated as = and where where is the volatility change over two successive days, and volume change over two successive days Volume and return variability are partitioned as follows H: N: and

L: H: N: L:

for volatility

and for volume

Analysis of the intraday hourly price behaviour

Under U-shaped trading pattern market is more active and volatilities are higher in opening and closing hours We used long run probability model by constructing second order Markov chain for each specified hour during the sampling period The long run distribution of states was obtained as

Limiting probabilities would reflect which transition between two states will be more frequent in the long run To test this we form a hypothesis which implies that long run probabilities for all transactions between two states are same

would follow asymptotic chi square distribution under null hypothesis

Thus if null hypothesis cant be rejected then long run probabilities of various state to state transactions will be identical Limiting probability vector denotes long run distribution at hour h It is used to test whether long run distribution is different across different hours U- shaped pattern would mean that opening and closing hours at other hours will be different from

Analysing the relationship between volatility and volume

Theory of information models reflect that high trading volume should be accompanied by higher volatility

We combined information about volume and volatility changes to form a composite state of level of We then tested the null hypothesis that time proportions in all states are not significantly different using chi square test so as to verify the statement

Empirical Results
Let HH=1, HN=2, HL=3, NH=4, NN=5, NL=6, LH=7, LN=8,LL=9, where HH denotes a high volatility state followed by another high volatility state, and so on Using second-order Markov chain, we constructed the transition probability matrices (9 9) for each hour which are shown in tables 1.1 to 1.6 long-run limiting probability of each state (HH,HN, HL, NH, NN, NL, LH, LN, LL) in the various time intervals is obtained using In the opening hours the successive transitions happened more frequently which is consistent with U- shaped pattern of high volatilities During lunch time there is low volatility which can be attributed to low activity All but two null hypotheses were rejected which shows transition probabilities of higher volatilities to higher volatilities in the opening and closing hours are significantly higher than those of other transitions

Conclusions
The project used Markov chain methodology to examine the transition patterns of the intraday Nifty futures trading volume and price data. The data was divided in three equal frequency groups according to mean absolute deviation of volatility. We studied if there is transition pattern of successive price volatilities in different periods within the trading day and tested if the transition patterns in different hours are the same. Results show that for futures price volatilities, there is a U-shaped transition pattern as the most probable transitions in the opening and closing hours are that between higher volatilities. We also nd that before the lunch break, from 12:15 to 12:30 h, the transition patterns had lower volatilities. We tested the hypothesis that the days of higher volatility changes will also be the days of higher volume adjustments, and vice versa using daily closing price and trading volume data.

We concluded that during the sample period, the long-run time proportion of higher volatilities with higher volume is the largest and the long-run time proportion of lower volatilities with lower volume is the second largest Also these are significantly larger than that of any other volatilityvolume combinations Our results are supportive of the information model

Transaction Matrices and Limiting probability vectors

Transition Matrix

HH HN HL NH NN NL LH LN LL

HH HN HL NH NN NL LH LN LL 0.471 0.235 0.294 0 0 0 0 0 0 0 0 0 0.487 0.231 0.282 0 0 0 0 0 0 0 0 0 0.366 0.268 0.366 0.281 0.344 0.375 0 0 0 0 0 0 0 0 0 0.222 0.481 0.296 0 0 0 0 0 0 0 0 0 0.320 0.160 0.520 0.438 0.375 0.188 0 0 0 0 0 0 0 0 0 0.292 0.417 0.292 0 0 0 0 0 0 0 0 0 0.333 0.262 0.405 Limiting State Vector (9) NH NN NL

HH

HN

HL

LH

LN

LL

0.1479 0.1125 0.1033 0.1029 0.1132 0.0882 0.1128 0.0786 0.1405

Table 1.1 : Time slot 9:15 AM to 10:15 AM

HH HN HL HH 0.344 0.281 0.375 HN 0 0 0 HL 0 0 0 NH 0.371 0.314 0.314 NN 0 0 0 NL 0 0 0 LH 0.250 0.250 0.500 LN 0 0 0 LL 0 0 0

Transition Matrix NH NN NL 0 0 0 0.375 0.250 0.375 0 0 0 0 0 0 0.286 0.429 0.286 0 0 0 0 0 0 0.349 0.233 0.419 0 0 0 Limiting State Vector (10) NH NN NL

LH 0 0 0.293 0 0 0.250 0 0 0.302

LN 0 0 0.390 0 0 0.350 0 0 0.349

LL 0 0 0.317 0 0 0.400 0 0 0.349

HH

HN

HL

LH

LN

LL

0.1004 0.0881 0.1237 0.1067 0.0934 0.1162 0.105 0.1348 0.1316

Table 1.2 : Time slot 10:15 AM to 11:15 AM

HH

Transition Matrix HH HN HL NH NN NL 0.24 0.48 0.28 0 0

LH 0 0

LN 0

LL 0

HN 0 0 0 0.2927 0.3171 0.3902 0 0 0 HL 0 0 0 0 0 0 0.2609 0.3478 0.3913 NH 0.2927 0.5122 0.1951 0 0 0 0 0 0 NN 0 0 0 0.375 0.2813 0.3438 0 0 0 NL 0 0 0 0 0 0 0.1628 0.3488 0.4884 LH 0.25 0.375 0.375 0 0 0 0 0 0 LN 0 0 0 0.3571 0.3095 0.3333 0 0 0 LL 0 0 0 0 0 0 0.1864 0.3559 0.4576 HH HN HL Limiting State Vector (11) NH NN NL LH LN LL 0.168

0.0712 0.1244 0.0708 0.1243 0.1108 0.1299 0.0709 0.1297

Table 1.3 : Time slot 11:15 AM to 00:15 PM

HH HN HL HH 0.5 0 0.5 HN 0 0 0 HL 0 0 0 NH 0 0 1 NN 0 0 0 NL 0 0 0 LH 0 0.6667 0.3333 LN 0 0 0 LL 0 0 0

Transition Matrix NH NN NL LH LN LL 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0.6667 0 0.3333 0 0 0 0 0 0 0.2857 0.5714 0.1429 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0.1429 0.5714 0.2857 0 0 0 0 0 0 0.25 0.25 0.5 Limiting State Vector (12) NH NN NL

HH HN HL 5E07 0.1419 0.2342 0.1577

LH

LN

LL 0.152

0.051 0.0182 0.2065 0.0386

Table 4 : Time slot 0:15 PM to 0:30 PM

Transition Matrix

HH HN HH 0.4615 0.25 HN 0 0 HL 0 0 NH 0.4634 0.2195 NN 0 0 NL 0 0 LH 0.3846 0.359 LN 0 0 LL 0 0

HL 0.2885 0 0 0.3171 0 0 0.2564 0 0

NH

NN

NL

LH

LN

LL

0 0 0 0 0 0 0.4286 0.2857 0.2857 0 0 0 0 0 0 0.2941 0.3235 0.3824 0 0 0 0 0 0 0.2581 0.4516 0.2903 0 0 0 0 0 0 0.3514 0.3784 0.2703 0 0 0 0 0 0 0.3056 0.3889 0.3056 0 0 0 0 0 0 0.4 0.2 0.4 Limiting State Vector (13) NH NN NL

HH

HN

HL

LH

LN

LL 0.110

0.1657 0.1028 0.1081 0.1027 0.1186 0.0919 0.1082 0.0918

Table 1.5 : Time slot 01:30 PM to 02:30 PM

HH HH 0.4167 HN 0 HL 0 NH 0.2963 NN 0 NL 0 LH 0.3415 LN 0 LL 0

HN 0.2917 0 0 0.4074 0 0 0.3415 0 0

HL 0.2917 0 0 0.2963 0 0 0.3171 0 0

Transition Matrix NH NN NL 0 0 0 0.3514 0.2432 0.4054 0 0 0 0 0 0 0.3333 0.3333 0.3333 0 0 0 0 0 0 0.3333 0.3333 0.3333 0 0 0 Limiting State Vector (14) NH NN NL

LH

LN

LL

0 0 0 0 0 0 0.4474 0.3158 0.2368 0 0 0 0 0 0 0.4167 0.3056 0.2778 0 0 0 0 0 0 0.3235 0.2059 0.4706

HH

HN

HL

LH

LN

LL 0.108

0.1294 0.1249 0.1101 0.1045

0.091 0.1113 0.1304 0.0909

Table 1.6 : Time slot 2:30 PM to 3:30 PM