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INDUSTRY
PROFILE
History has shown that the price of shares and other assets is an
important part of the dynamics of economic activity, and can influence or be
an indicator of social mood. Rising share prices, for instance, tend to be
associated with increased business investment and vice versa. Share prices
also affect the wealth of households and their consumption. Therefore,
central bank tends to keep an eye on the control and behavior of the stock
market and, in general, on the smooth operation of financial system
functions. Financial stability is the raison d'tre of central banks.
Exchanges also act as the clearinghouse for each transaction,
meaning that they collect and deliver the shares, and guarantee payment to
the seller of a security. This eliminates the risk to an individual buyer or
seller that the counterparty could default on the transaction.
The smooth functioning of all these activities facilitates economic
growth in that lower costs and enterprise risks promote the production of
goods and services as well as employment. In this way the financial system
contributes to increased prosperity.
CHAPTER-2
COMPANY
4
PROFILE
It is establish in 1980
CHAPTER-3
6
THEORETICAL
ASPECTS
What is volatility?
The dictionary meaning of the word volatility means the rapid changes
or unpredictable.
Volatility most frequently refers to the standard deviation of the
change in value of a financial instrument with a specific time horizon. It is
often used to quantify the risk of the instrument over that time period.
Volatility is a measure of uncertainty of the return realized on an asset.
Volatile market carries wide fluctuations on either side. It offers
(fluctuations) false signal for investment. In order to estimate, understand
and forecast these fluctuations, volatility indicator is developed by some
researchers to serve above purpose.
In other words, volatility refers to the amount of uncertainty or
risk about the size of changes in a security's value. A higher volatility means
that a security's value can be spread out over a larger range of values. This
means that the price of the security can change dramatically over a short
time period in either direction. Whereas a lower volatility would mean that a
security's value does not fluctuate dramatically, but changes in value at a
steady pace over the period of time.
Volatility is a measurement of change in price over a given period. It is
usually expressed as a percentage and computed as the annualized
standard deviation of the percentage change in daily price. The more volatile
a stock or market, the more money an investor can gain (or lose) in a short
time.
Types of volatility:
1. Standard deviation:
Standard deviation of a probability distribution, random variable,
or population or multi-set of values is a measure of the spread of its
values. It is usually denoted with the letter (lower case sigma). It
is defined as the square root of the variance. In other words, the
standard deviation is the root mean square (RMS) deviation of
values from their arithmetic mean.
Standard Deviation=
( x x)
2. Chaikins volatility:
It is based on the difference between the high and low prices posted
by the scrip. The higher the difference between the high and the low
prices, the higher would be the volatility. In the oscillator, a ten period
average of the difference between the high and the low prices is first
calculated. Then a ten period ROC is calculated of the average values.
3. Wilders volatility:
It is based on concept of true range. The true range is defined as the
greater value obtained from the three equations:
Current high current low
Previous periods close- current low
Previous periods close- current high.
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4. Beta volatility:
This method is to calculate each stocks average daily or weekly price
change over that past year or two. A far more sophisticated approach is to
correlate a stocks daily or weekly percent price changes of a broad based
market index. This type of relative volatility is called a beta.
A beta tells not just how volatile a stock volatile it has been relative to
the market. It describes the relationship between the stocks return and
index return.
6. Implied volatility:
Volatility implied from an option price. In terms of finance, the implied
volatility of contract i.e. option is the volatility implied by the market price of
the option based on an option pricing model.
7. Volatility smile:
Variation of implied volatility with strike price.
8. Volume volatility:
It refers to the number of shares or contracts traded in a security or
an entire market during a given period. Volume is normally considered on a
daily basis, with a daily average being computed for longer periods.
Example
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Large increases in volume can be seen on days [1],[3] and [5] - when closing
price
falls
sharply,
signaling
that
distribution
is
taking
place.
There is unusually low volume on days [2] and [4], both are inside days
signaling uncertainty.
CHAPTER 4
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RESEARCH
METHODOLOGY
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2.2 Objective:
Primary objective:
Study of volatility of BSE SENSEX
Secondary objectives:
-To measure risk through volatility.
-To know the average relationship between standard deviation and
closing price through regression analysis.
-To check the volatility of intra day.
-To study the impact of bse sensex volatility change on different sectors
stocks/scripts through correlation.
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CHAPTER - 5
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Data analysis:
Methods employed for the study are as follow:
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Inference:
In1.2 maximum volatility is 1019.18 on 30/11/2006 and minimum is
15.3709 on 27/1/1989.
Wider fluctuations can be seen in weekly volatility compare to monthly this
shows that consistent trend can be obtain in monthly volatility compare to
weekly. Whether it is monthly or weekly data, period of year 2006 can be
considered to be the most volatile year.
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Inference:
1.3 is the graph of cipla weekly data, maximum volatility is 541.18413 on
28/5/2004 and minimum is 0.07059 on 6/7/1990 whereas mean value is
23.1029. The values which are very far away from mean shows the price
fluctuations are higher.
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Infosys monthly
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1.8 is the graph of SBI weekly data, where maximum volatility is 85.9865 on
1/12/2006 and minimum is 0.4899 on 1/9/1995 whereas mean value is
14.7913.
1.9 SBI monthly
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1.9 is the graph of the of SBI monthly, where maximum value is 225.75 on
4/7/2007 and minimum is 5.3884 on 27/2/1999 whereas mean value is
34.9086.
Inference:
From the entire above, maximum volatility can be seen in month wise data
analysis whereas minimum value can be seen in week wise data analysis.
The cipla is considered to be attaining the highest volatility i.e.541.1841 in
the year 2004 which is highly deviated from the mean value i.e.23.1029 as
compared to any other stocks.
BSE SENSEX index faced highest volatility in the year 2006.
Low value of standard deviation indicates that possibility of a bottom being
reached and high value of it indicate that a top being formed.
Wider fluctuations can be seen in weekly volatility compare to monthly this
shows that consistent trend can be obtain in monthly volatility compare to
weekly.
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SBI monthly
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Cipla weekly:
The below is the graph of standard deviation at t2/t1 of cipla weekly data
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Infosys weekly:
The below is the graph of standard deviation at t2/t1 of Infosys weekly.
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Infosys Monthly:
The below is the graph of the standard deviation on t2/t1 of Infosys monthly
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Reliance weekly:
The below is the graph of the standard deviation on t2/t1 of Reliance
weekly.
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Inference:
Through original data we concluded that the maximum value are
obtained in month wise data analysis but here maximum volatility is seen in
week wise data analysis (in absolute data analysis). Here more fluctuation
can be seen in month wise data analysis than week wise data analysis.
Further trend can not be determined through absolute value.
If absolute value of t2/t1 and its standard deviation are taken than
they show very low value that volatility can not be measured.
In BSE weekly very few fluctuations are seen and the values which are
very far from the mean are considered to be out liners.
Limitations of the standard deviation method
It gives more weight age to extreme items and less to those which are near to
the mean.
2. Chaikins volatility: It is the measurement of intra day trading.
2.1 BSE monthly:
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High value of chaikins volatility indicates that there are wide fluctuations
during intra day.
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3. Volume volatility:
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Inference:
Maximum value 2188356 on 26/5/2006
Minimum value 58 on 29/1/93 & 5/2/93
In above chart in the initial period fluctuations are very minute and upto
certain extent values remain constant for particular period of time i.e. 190
is constant for 3 weeks.
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Inference:
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Inference
Maximum value: 60248999.52 on 29/11/1996
Minimum value: 869276.64 on 31/1/90
Low volatility indicates that fluctuations has dried up and high volatility
value which are very far away from mean value that values are considered to
be the outliners.
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Inference:
Maximum value: 1360552.698 on 28/5/1999,
Minimum value: 58885.69 on 7/10/1994.
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Inference:
Maximum value: 47046084.42 on 31/7/1996
Minimum value: 231870.048 on 23/12/94
Inference:
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Low volatility indicates that fluctuations has dried up and high volatility
value which are very far away from mean value that values are considered to
be the outliners.
4. CORRELATION ANALYSIS:
It deals with the association between two or more variation. It
attempts to determine the degree of relationship between variables.
CIPLA
BSE
-0.08437
INFOSYS
0.901543
SBI
0.81966
RELIANCE
BSE
0.445132075
Inference:
There is positive relationship between BSE SENSEX and INFOSYS
where as there is negative relationship between BSE SENSEX and CIPLA.
Positive relation indicates that there is high degree direct relationship
between BSE SENSEX and INFOSYS. And negative relation indicates there
is low degree indirect relationship between BSE SENSEX and CIPLA.
5. Regression Analysis:
It gives average relationship between two or more variables. Therefore
it is useful in estimating and predicting the average value of one variable for
a given value of another variable.
R2= bxy*byx
5.1 BSE Weekly:
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The above is the graph of regression (R2) between the closing price of the
BSE SENSEX weekly and standard deviation on close price.
On date 8/10/90 R2 is 0.93368, on 11/26/93 R2 is 0.965475, on
1/9/04 R2 is 0.963724. This shows strong relationship between closing
price and its standard deviation.
On the other hand on 5/25/90 R 2 is 0.002199, on 12/1/00 R2 is
0.000151 this shows far away relationship between closing price and its
standard deviation.
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The above is the graph of the R 2 between closing price and its standard
deviation.
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The above is the graph of R2 between absolute value i. e. t2-t1 and its
standard deviation.
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The above is the graph of the R2 between t2/t1 and its standard deviation.
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The above is the graph of R2 between close price and its standard deviation.
The above is the graph of R 2 between t2/t1 and its standard deviation. The
maximum values are between 0.1 and 0.2.
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The above is the graph of the R2 between t2-t1 and its standard deviation.
Maximum values falls between 0.1 and 0.2.
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The above is the graph of R2 between close price and its standard deviation.
Maximum value falls between 0.2 and 0.6.
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The above is the graph of the R2 between t2-t1 and its standard deviation.
Here maximum values are less than 0.2.
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The above is the graph of R2 between t2/t1 and its standard deviation.
Maximum values falls below 0.3.
5.5 Infosys Monthly:
The above is the graph of the R2 between close price and its standard
deviation.
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The above is the graph of the R2 between t2-t1 and its standard deviation.
The above is the graph of R2 between t2/t1 and its standard deviation.
5.6 Reliance weekly:
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The above is the graph of the R 2 between close price and its standard
deviation.
The above is the graph of the R2 between t2-t1 and its standard deviation.
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The above is the graph of the R2 between t2/t1 and its standard deviation.
5.7 Reliance monthly:
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The above is the graph of the R 2 between close price and its standard
deviation.
The above is the graph of R2 between t2-t1 and its standard deviation.
The above is the graph of the R2 between t2/t1 and its standard deviation.
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The above is the graph of the R 2 between close price and its standard
deviation.
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The above is the graph of the R2 between t2-t1 and its standard deviation.
The above is the graph of the R2 between t2/t1 and its standard deviation.
5.9 SBI monthly:
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The above is the graph of the R 2 between close price and its standard
deviation.
The above is the graph of R2 between t2-t1 and its standard deviation.
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The above is the graph of the R2 between t2/t1 and its standard deviation.
Inference:
Maximum value ranges between 0.2-0.6
This shows that investor is having good idea about the trend prevailing in
the market by seeing the standard deviation of closing price.
Good regression or close regression reflect that less fluctuation is there &
more reliable picture came into existence and vice-versa.
From above graph it seems that original values and t2-t1 regression shows
concrete relationship, but in case of t2/t1 regression shows value below 0.7.
So from this we can say that original values and t2-t1 regression represent
stock well with the closing price and standard deviation.
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CHAPTER 6
FINDINGS &
CONCLUSION
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CONCLUSIONS:
BSE SENSEX index faced highest volatility in the year 2006.
Reliance monthly does not shows wide fluctuations as weekly, after
the period of 2005 in monthly data, volatility does not reaches below
maximum bottom. There is increase in volatility at a diminishing rate.
The cipla is considered to be attaining the highest volatility
i.e.541.1841 in the year 2004 which is highly deviated from the mean
value i.e.23.1029 as compared to any other stocks.
Cipla is the most volatile stock compare to other three stocks and SBI
is less volatile stock.
1. Chaikins Volatility peak occurs as the market retreats from a new high
and enters a trading range.
2. The market ranges in a narrow band - note the low volatility.
The breakout from the range is not accompanied by a significant rise in
volatility.
3. Volatility starts to rise as price rises above the recent high.
4. A sharp rise in volatility occurs prior to a new market peak.
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5. The sharp decline in volatility signals that the market has lost impetus
and a reversal is likely.
Market tops would formed by an increase in volatility and market
bottoms would be formed by a decrease in volatility. An increase in volatility
may well mark a turn in the direction of a bearish trend and over longer
term, a decrease in volatility would indicate the possibility of a significant
bull market top being approached.
High value of standard deviation shows high volatility but trend can
not stay at a high value for a longer period of time and so it has to come
down, low volatility value shows that the fluctuation has dried up.
Volatility approaches bottom immediately after top being approached.
So when volatility is low than it can be said that trend fluctuations has
dried out.
Low values of standard deviation would indicate the possibility of a
bottom being reached i.e. low volatility and high value of standard deviation
would indicate the possibility of a top being formed i.e. high volatility.
High value indicates high volatility and vice versa. The values which
are above and far away from the mean value are considered to be outliners.
High volatility means high risk and low volatility means low risk.
Modified data shows very minor fluctuations so it cant be used in
measuring volatility or risk.
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value can potentially be spread out over a larger range of values. Meaning
that the price of the security can change dramatically over a short time
period in either direction. Whereas a lower volatility would mean that a
security's value does not fluctuate dramatically, but changes in value at a
steady pace over a period of time.
CHAPTER 7
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RECOMMENDATIONS
Recommendation:
High volatility levels can sometimes be used to time trend reversals such as
market tops and bottoms. Low volatility levels can sometimes be used to
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BIBLIOGRAPHY
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BIBLIOGRAPHY:
Reference Books:
Norman G. Fosback (1998), Stock Market Logic, Tata Mc. Graw Hill
John C. Hull (fifth edition), Option, futures and Derivatives, Delhi: Pearson
education (Singapore) Pte. Ltd.
S. P. Gupta (2004) , Statistical Methods, New Delhi : Sultan Chand & Sons
Education Publications
Websites:
http://en.wikipedia.org/wiki/volatility
http://en.wikipedia.org/wiki/standard deviation
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http://www.esignalcentra.com/support/futuresource/workstation/help/ch
arts/studies/wilders_volatility.htm
http://en.wikipedia.org/wiki/beta_coefficient
http://en.wikipedia.org/wiki/implied_volatility
http://www.trade10.com/volatility.htm
http://stockcharts.com/school/doku.php?id=chart_school:glossary_v
http://www.incrediblecharts.com/technical/volume.htmhttp://www.incredi
blecharts.com/technical/chaikin_volatility.htm
www.matstat.com
www.statisticxl.com
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