IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672

Volatility of Sectoral Indices in Indian Stock Market: A Study of NSE (2004-2016)

*Gangineni Dhanaiah
**Dr. R. Sivaram Prasad
*PhD Research Scholar, Acharya Nagarjuna University, Guntur, Andhra Pradesh- 522510
**HOD, Dept.of Commerce and Buss.Admn, Acharya Nagarjuna University, Guntur
Abstract
This paper attempts to investigate the performance and volatility of a broad market Index, namely
NIFTY50 and 6 other sectoral indices of NSE namely NIFTYBANK, NIFTYMETAL, NIFTYAUTO,
NIFTYPHARMA, NIFTYIT, NIFTYFMCG. Our study covers recent time period from April1, 2004 to 31st
March, 2016.Daily Closing Index values were taken for all the Indices from Bloomberg Database.
These Indices are Total Return Index (TRI) values. Various statistical tools like descriptive statistics,
Box-plots, Histograms,Q-Q Plots, Normality tests are utilized to analyze data and evaluate findings
to arrive at conclusions regarding NIFTY50 and selected sectoral indices at NSE.
KEY WORDS: NSE, Nifty50, Sectoral Indices, Volatility
JEL Classification: G 15, G19, G20
Introduction
Indian Stock market witnessed huge reforms since 1994 after the establishment of institutions
like SEBI and NSE. NSE provides fully automated screen based trading system with national
reach. Indian Stock market has become a model for securities industry worldwide in terms of
systems and practices. The market has transformed significantly in the last 25 years both in
terms of quantity and quality. SEBI and NSE have transformed Indian Stock Market in terms of
products, technology, settlement, participants, surveilliance, risk management and enforcement
comparable with global standards. In this context understanding the dynamics of sectoral indices
is useful for traders, investors, portfolio managers, regulators and corporates.
Table: 1 Details of sectoral indices selected for the study

Index

Date
of
implementation

Base
value

Nifty50
Nifty FMCG
Nifty IT
Nifty Bank
Nifty Pharma
Nifty Metal
Nifty Auto
All Values as on

3rd Nov. 1995

1st Jan 1996
1st Jan 1996
1st Jan 2000
1st Jan 2004
1st Jan 2004
1st Jan 2004
March 31, 2016

1000
1000
100
1000
1000
1000
1000

No of
companies
included
in the
index
50
15
10
12
10
15
15

Proportion
of
respective
sector
MktCap
80.4%
91.9%
93.3%
79.9%
87.9%
91.1%

Proportion
with CNX
Nifty index
8.6%
12.15%
15.6%
6.1%
2.6%
8.6%

Source: NSE Website

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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
2. Literature Review
Many studies examine the volatility and correlation of various stock markets ( see for example
Vohra,2016;Pandey,2005;Panda&Acharya,2011;Nguyen.2011;Marisetty,2003;Katzke.2013). Here
we review some of the studies in the extant literature on volatility and co-integration.
Aggarwal, et.al (2016) examines the events leading to large shifts in emerging markets volatility.
The authors determine when large changes in the volatility of emerging stock market returns
happen. The paper studies the reasons of large shifts in volatility. It primarily examines the local
and global events leading to the change. An ICSS (Iterated Cumulative sum of squares) algorithm
is used to study the changes in volatility patterns. It concludes that most of the events are found
to be local and include Mexican crisis, periods of hyperinflation in Latin America etc.
A significant event noted in their study is October 1987 crash.
Maggiora&Skerman (2009) studies the co-integration between the American stock market and the
other European markets over 2, 4, 8 years. The interrelation between various markets is very
vital in terms of institutional investors in managing risk. It contributes to portfolio diversification
strategy.
Sharma (2016) tries to explore the relationship between NIFTY50 and various sectoral indices.
They are important indicators of performance of a stock exchange. It concludes that there is no
long term association between sectoral indices. Brigida (2015) studied regime switching models in
energy markets. The researcher suggested a probability model to study the various reasons that
cause a distinct shift like recession, central bank currency intervention etc. Regime switching
also explains deviation in time series such as fat tails, skewness. Charles and Darne (2014)
studied the large shifts in volatility and their causes using a new semi-parametric test and
conditional heteroskedasticity models. This study also shows that some shocks are not identified
as extraordinary movements by the investors due to high volatility episodes. In particular it
studies the shocks in volatility of DJIA index. Dwyer (2015) provides various ways of cointegrating time series assuming important asymptotic distributions. It mainly focuses on one
unit root of the variable with no constant terms.
Katzke (2013) examines the dynamics of return co-movement in context to largest economic
sectors of South Africa. It also examines the inter-sector diversification and Dynamic conditional
correlation (DCC) and Asymmetric DCC. Multi-variate GARCH techniques to study the timevarying conditional correlations. The study concludes that historic co-movement techniques to
examine the asset were not accurate. This study also concludes that global and domestic market
uncertainty magnifies co-movements between indices.
3. Objectives
1. To study the returns and volatility clustering in selected indices of NSE
2. To examine whether there is any difference in mean returns across the selected sectoral
indices of NSE
3. To investigate the correlation matrix of daily returns of NSE sectoral indices during 20042016.
4. Data
We aim to study the volatility in returns and pair-wise correlations between Nifty and selected six
sectoral indices of NSE during 2004-2016. The data set consists of the daily closing prices of six
large sector total return indices of NSE. These sectoral indices are weighted by their free-float
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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
market cap and contain the majority of the equities within their respective economic groups. They
reflect the aggregate price behavior of the firms within the sectors they track.
Sector indices data was obtained from Bloomberg Database and spans the period April1, 2004 to
March 31, 2016. The data availability from 2004 decided the choice of sectors included in the
study. The methodology adopted by NSE shifted to free float from 2004. In total 2983 daily
observations are included in this analysis.
5) Data Analysis
4.1) Daily Closing price plots of

NSE Indices

The graph below shows the performance of broad market index namely NIFTY 50 and six sectoral
indices at NSE during 2004-2016. Stock Market Index is a barometer of Economy and sectoral
indices represent the performance & growth of various sectors including Auto, Pharma, Metal,
FMCG, Bank, IT.
30,000

25,000

20,000

15,000

10,000

5,000

0
04

06

08

10

12

14

16

Price Plots of NSE Indices ( 2004-2016)

NIFTY50
NSEFMCG
NSEPHARMA

NIFTYAUTO
NSEIT

NSEBANK
NSEMETAL

Fig 1: Combined price plot

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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
NIFTY50

NIFTYAUTO

12,000
10,000

NSEBANK

10,000

25,000

8,000

20,000

6,000

15,000

4,000

10,000

2,000

5,000

8,000
6,000
4,000
2,000
0

0
04

06

08

10

12

14

16

0
04

06

08

NSEFMCG

10

12

14

16

04

06

08

NSEIT

12

14

16

12

14

16

NSEMETAL

30,000

14,000

6,000

25,000

12,000

5,000

10,000

20,000

10

4,000

8,000
15,000

3,000
6,000

10,000

2,000

4,000

5,000

2,000

0
04

06

08

10

12

14

16

12

14

16

1,000
0
04

06

08

10

12

14

16

04

06

08

10

NSEPHARMA
16,000

12,000

8,000

4,000

0
04

06

08

10

Fig 2: Individual Index closing graphs

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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
4.2)

Examining the Return Plots of NSE Sectoral Indices

RAUTO

RBANK

15

RFMCG

20

10

10

10
5

0
0

0
-5

-5
-10

-10

-10
-15

-20
04

06

08

10

12

14

16

-15
04

06

08

RIT
15

10

12

14

16

06

08

10

12

14

16

12

14

16

RNIFTY

RMETAL

30

04

20
15

10

20
10

5
10

0
0

0
-5

-5
-10

-10

-10

-15

-20
04

06

08

10

12

14

16

14

16

-15
04

06

08

10

12

14

16

04

06

08

10

RPHARMA
15
10
5

0
-5

-10
04

06

08

10

12

Return Series of NSE Indices (2004-2016)

Daily Return series of NSE Indices (2004-2016) exhibit volatility clustering and time varying
volatility in returns (give references) from visual observation of their line plots.

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4.3)

Histograms of Daily Returns of NIFTY50

RNIFTY
.35
.30

Density

.25
.20
.15
.10
.05
.00
-20

-16

-12

-8

-4

Histogram

12

16

20

Normal

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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
Table1: Descriptive Statistics of Daily Returns of NIFTY & NSE Indices (2004-2016)
Sample: 4/01/2004 3/31/2016
RAUTO

RBANK

RFMCG

RIT

RMETAL

RNIFTY

RPHARMA

Mean

0.069

0.063

0.074

0.063

0.034

0.055

0.064

Median

0.113

0.079

0.114

0.079

0.069

0.097

0.109

Maximum

14.005

17.240

8.304

13.459

27.459

16.334

11.159

Minimum

-10.315

-15.138

-12.382

-14.408

-15.421

-13.054

-8.634

Std. Dev.

1.516

2.034

1.352

1.754

2.347

1.539

1.266

Skewness

-0.243

-0.133

-0.434

-0.043

0.189

-0.269

-0.556

Kurtosis

8.453

8.901

8.655

10.301

13.257

13.284

9.588

3724.841

4336.188

4068.583

0.000

0.000

0.000

0.000

0.000

0.000

0.000

206.024

187.383

219.388

187.590

101.916

163.572

191.291

Jarque-Bera
Probability
Sum

Sum Sq. Dev. 6853.548 12338.483 5454.391

Observations

2983

2983

2983

6626.783 13092.754 13180.540 5548.157

9174.535 16431.513 7060.561

2983

2983

2983

4779.060
2983

Daily mean returns of broad market index (Nifty50) and other sectoral indices are close to zero.
All the indices except Metals showing negative skewness and Kurtosis greater than 3. JarqueBera test shows significance implying that the distribution of Indices is non-normal.

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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
Table2: Correlation Matrix of Daily Returns of NSE Sectoral Indices (2004 -2016)

RAUTO

RBANK

RFMCG

RIT

RMETAL

RNIFTY

RAUTO

1.000

RBANK

0.723

1.000

RFMCG

0.609

0.556

1.000

RIT

0.487

0.472

0.397

1.000

RMETAL

0.709

0.694

0.553

0.474

1.000

RNIFTY

0.824

0.870

0.702

0.635

0.819

1.000

RPHARMA

0.604

0.546

0.577

0.435

0.548

0.679

RPHARMA

1.000

Correlation matrix shows Banking sector is highly correlated with NIFTY50 (0.87) followed by
Auto (0.824), Metal (0.819). I found least correlation with IT sector. The results are in conformity
with the NSE Index factsheet documents1.
1. (https://www.nseindia.com/products/content/equities/indices/sectoral_indices.htm)
RNIFTY

RBANK

.4

RMETAL

.28

.25

.24
.20

.2

Density

.20

Density

Density

.3

.16
.12

.15

.10

.08

.1

.05
.04

.0

.00
-16

-12

-8

-4

12

16

20

.00
-16

-12

-8

-4

RAUTO

12

16

20

-20

.1

.3

.2

.0
0

12

16

10

15

20

25

30

.2

.1

.1

.0

.3

Density

Density

.2

-4

-5

.4

.4

.3

-8

-10

RFMCG

.5

-12

-15

RPHARMA

.4

Density

.0
-10

-8

-6

-4

-2

10

12

-16

-12

-8

-4

12

RIT
.4

Density

.3

.2

.1

.0
-15

-10

-5

10

15

Histogram

Kernel

Fig 3: Histogram and Normal Curve fitted for Nifty & Sectoral Indices (2004-2016)
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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
Histogram and normal curve fit shows the distribution is non-normal.

RAUTO

RBANK

RFMCG

6
4

2
0
-2

Quantiles of Normal

Quantiles of Normal

Quantiles of Normal

-4

-4

2
0
-2
-4

-6

-8
-15

-10

-5

10

15

-6
-20

Quantiles of RAUTO

-10

10

20

-15

Quantiles of RBANK

RIT

-10

10

10

Quantiles of RFMCG

RMETAL

-5

RNIFTY
6

-4

Quantiles of Normal

Quantiles of Normal

Quantiles of Normal

-5

2
0
-2
-4

-8

-10
-15

-10

-5

10

15

Quantiles of RIT

-6
-20

-10

10

20

30

Quantiles of RMETAL

-20

-10

10

20

Quantiles of RNIFTY

RPHARMA
6

Quantiles of Normal

4
2
0
-2
-4
-6
-10

-5

10

15

Quantiles of RPHARMA

Fig 4: Q-Q Plots of NIFTY and NSE Sectoral Indices (2004 2016)

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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672

RAUTO
15

RBANK
20

RFMCG
10

10

15
10

10

RIT

5
0

0
-5

-5

-5
-10

-10

-10
-15

-20

RMETAL
30

-10

-15

RNIFTY
20

-15

RPHARMA
15

15
20

10
10

10

-5
-10

-5
-10

-20

-15

-10

Box Plots for NIFTY and Sectoral Indices of NSE

Fig 5: Box plots to check outliers
Findings & Conclusions:
1. Daily mean returns of broad market index(Nifty 50) and the selected 6 sectoral indices namely
Nifty BANK, Nifty AUTO, Nifty FMCG, Nifty IT, Nifty METAL, Nifty PHARMA are close to zero.
2. All the Indices exhibit negative skewness except metal index which shows positive skewness.
Maximum return in this period (2004-2016) is witnessed by Metal index (27%) followed by Bank
(17%), Nifty (16%), Auto (14%).
3. Standard deviation is highest in case of metal (2.3%) followed by bank (2%), IT (1.7%).
4. Kurtosis is highest in case of metal and Nifty (13) followed by IT (10.3).
5. All the return distributions of Nifty and Sectoral Indices exhibit non-normality as evidenced by
Jarque-Bera statistic which is significant (p<0.05).
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IJEMR November 2016 - Vol 6 Issue 11 - Online - ISSN 22492585 Print - ISSN 2249-8672
6. Correlation matrix for the period (2004-2016) shows highest correlation between Nifty 50 and
Bank (0.87) followed by Auto and Metal. The results show least correlation with IT index at 0.63.
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