Professional Documents
Culture Documents
Submitted by
Rahul Arora
BBA (Gen) Semester-VI
Enrol. No.: 0651221708
1
DECLARATION
I hereby declare that the major project report, entitled “Volatility in Stock Market”, is based on
my original study and has not been submitted earlier for award of any degree or diploma to any
institute or university.
The work of other author(s), wherever used, has been acknowledged at appropriate place(s).
Countersigned
Supervisor Director
2
ACKNOWLEDGMENT
I am deeply indebted to Prof. Yamini Soi who acted as a mentor and guide, providing
knowledge and giving me their valuable time out of their busy schedule, at every step throughout
the research. It is only because of him this project came into being.
I also thank the Director of Delhi College of Advanced Studies, for providing an opportunity of
doing this project under his leadership.
I also take the opportunity to express my sincere gratitude to each and every person, who directly
or indirectly helped me throughout the project and without anyone of them the research, would
not have been possible.
Student Name
Enrl.No.
EXECUTIVE SUMMARY
Investors care about volatility for five reasons. 1) The wider the swings in an
investment's price the harder emotionally it is to not worry. 2) When certain cash
flows from selling a security are needed at a specific future date, higher volatility
means a greater chance of a shortfall. 3) Higher volatility of returns while saving
for retirement results in a wider distribution of possible final portfolio values. 4)
Higher volatility of return when retired gives withdrawals a larger permanent
impact on the portfolio's value. 5) Price volatility presents opportunities to buy
assets cheaply and sell when overpriced.
In today's markets, it is also possible to trade volatility directly, through the use of
derivative securities such as options and variance swaps.
Although the Black Scholes equation assumes predictable constant volatility, none
of these are observed in real markets, and amongst the models are Bruno Dupire's
Local Volatility, Poisson Process where volatility jumps to new levels with a
predictable frequency, and the increasingly popular Heston model of Stochastic
Volatility.
OBJECTIVES
The movement of stock market has always been a puzzle. In past few years stock
market has become quite volatile. It has become quite difficult to predict the erratic
movement shown which is in not at all in tandem with the information which is fed
to stock market. Thus chaos prevails in the markets with investor optimism at
unexpected levels.
The objective of this paper is try to analyze these questions in the context of Indian
stock markets. Its an attempt to unearth the rationale for these weird movements
SCOPE
The Indian Stock Market is well known for its volatility i.e. it is unpredictable and
may work according to demand and supply conditions , Foreign Institutional
Investors Involvment , Mergers , Take overs and acquisitions of the companies
etc may give a a diverse directions to the Indian Stock Market. In this we did a
proper analysis of the several Stocks and try to see the trends that may able to
prove that market give chances to make money at every levels . The stock markets
may be different for traders and investors but both have same motive that is to
maximize the investment. One have to make a better portfolio and keep a record of
it to judge That the chosen company may be able to give better return. It may
involve Quantitative analysis of the Stocks which involve making tables and
graphs to ascertain viability of the company. Stock Market involves the certain
exchanges which help in dealing in stocks such as BSE , NSE.
METHODOLOGY
First of all we examine the fundamentalist view put forward by economists who
argue that volatility can be explained by Efficient Market Hypothesis. A
fundamentalist view says that the stock market react with information flowing in
the stock market. It is the micro and macro economic factors that drives the
market. Trying to examine this fact all the key macro and micro economic factor
growth is being observed with respect to growth in stock market.
On the other hand, the view that volatility is caused by psychological factors is also
tested. A Psychology view states that stock market is more of emotional driven. It
is the perception of the investors that greatly affects the stock market. So We try to
study how the change in habits and perceptions affected the price movements.
What precipitating factors started this remarkable surge, making it crazy? We try to
prove how these perceptual changes have changed volatility through empirical
evidence.
After that an empirical study of BSE Sensex and a set of representative stocks are
carried out to find the changes in their volatility in the last two years. The stock
market regulation in introduction of rolling settlement and dematerialization as a
measure of reducing volatility is put to test. The study tries to correlate the
economic growth concept with the growth of stock market of India.
Inter–day Volatility
The variation in share price return between the two trading days is called inter–day
volatility.Inter–day volatility is computed by close to close and open to open value
of any index level on a daily basis. Standard deviation is used to calculate inter–
day volatility. The inter–day volatility is calculated byclose to close and open to
open volatility method.
Close to close volatility
For computing close to close volatility, the closing values of the Nifty and Sensex
are taken. Close to close volatility (standard estimation volatility) is measured with
the following formula
Open to open volatility
Open to open volatility is considered necessary for many market participants
because opening prices of shares and the index value reflect any positive or
negative information that arrives after the close of the market and before the start
of the next day’s trading . Inter–day volatility takes into account only close to close
and open to open index value and it is measured by standard deviation of returns.
Intra–day Volatility
The variation in share price return within the trading day is called intra–day
volatility. It indicates how the indices and shares behave in a particular day. Intra–
day volatility is calculated with the help of Parkinson Model and Garman and
Klass model.
INTRODUCTION.
'Nifty' the glamorous dancing beauty of traditional Indian stock market. In the
recent past this glamorous stock market indicator dances aggressively. This paper
is aimed at throwing lights on various factors that made our nifty baby to dance
fast with lots of forward steps. Does the movement of Nifty or Nifty really mean
anything to the investors, fund managers, investment advisors, and last but not the
least to the regulators? Do these numbers have any significance? Do they have any
scientific basis? How does a layman understand these numbers? What exactly that
goes into these numbers? In recent years, indexes have come to the forefront owing
to direct applications in finance in the form of index funds and index derivatives.
Index derivatives allow people to cheaply alter their risk exposure to an index
(hedging) and to implement forecasts about index movements (speculation).
Hedging using index derivatives has become a central part of risk management in
the modern economy. Securities market indexes have been constructed to give a
quick answer to the question: What is the-market- doing? What-the-Index-Means?
An index is a number, which measures the change in a set of values over a period
of time. A stock index represents the change in value of a set of stocks, which
constitute the index .More specifically, a stock index number is the current relative
value of a weighted average of the prices of a pre-defined group of equities. It is a
relative value because it is expressed relative to the weighted average of prices at
some arbitrarily chosen starting date or base period. The starting value or base of
the index is usually set to a number such as 100 or 1000.Characteristics-of-a-good-
IndexA good stock market index is one, which captures the behavior of the overall
equity market. It should represent the market; it should be well diversified and yet
highly liquid. Movements of the index should represent the returns obtained by
"typical" portfolios in the country.
India's oldest and first stock exchange: Mumbai (Bombay) Stock
Exchange. Established in 1875. More than 6,000 stocks listed.
The Stock Exchange, Mumbai, popularly known as" BSE" was established in
1875 as "The Native Share and Stock Brokers Association". It is the oldest one
in Asia, even older than the Tokyo Stock Exchange, which was established in
1878. It is the first Stock Exchange in the Country to have obtained permanent
recognition in 1956 from the Govt. of India under the Securities Contracts
(Regulation) Act, 1956.
A Governing Board having 20 directors is the apex body, which decides the
policies and regulates the affairs of the Exchange. The Governing Board consists
of 9 elected directors, who are from the broking comm. Unity (one third of them
retire ever year by rotation), three SEBI nominees, six public representatives and
an Executive Director & Chief Executive Officer and a Chief Operating Officer.
BSE Indices
NSE was incorporated in 1992 and was given recognition as a stock exchange in
April 1993. It started operations in June 1994, with trading on the Wholesale
Debt Market Segment. Subsequently it launched the Capital Market Segment in
November 1994 as a trading platform for equities and the Futures and Options
Segment in June 2000 for various derivative instruments.
NSE Indices
NSE also set up as index services firm known as India Index Services & Products
Limited (IISL) and has launched several stock indices, including:[13]
CONCEPTUAL FRAMEWORK
When we think about stock market, we think about its volatile nature.
Unpredictability is the essential part of the market. Volatility in stock market is the
relative rate at which the price of a security moves up and down. There are many
definations of volatility but in simple words volatility is "the rate and magnitude of
changes in price", it is about how fast prices move. Volatility is low when the
market is quite but moving in range of trade.
Today's market deals directly with volatility through options and variance swaps.
Accounting the annualized standard deviation of daily change in price leads to
evaluation of volatility. In simple terms, if the price of a stock moves up and down
rapidly over short time periods, it has high volatility. If the price almost never
changes, it has low volatility.
Many Investors feel that when volatility is high, it's time to buy but when it is low
you should not step into market. On the contrary, a number of studies have also
shown that when volatility rises, there is a greater chance that the stock market is
experiencing losses. Basically, when the stock market is climbing, volatility tends
to decline. On the other hand when the stock market falls, volatility tends to rise.
So if you go by above said theory you should be more conscious of the volatility in
the market as you make buy and sell decisions.
Volatility is calculated by a simple mathematical term called beta that shows how
volatile the security is compared to the market. Beta measures U.S-listed stocks
and funds. A beta greater than 1 means the stock or fund you're looking at is more
volatile than the broader market. Beta measures this volatility risk for securities
trading in the market, where information about securities is integrated into prices.
The Volatility Index (VIX) is the most popular measure of stock market volatility.
A high reading on the VIX marks periods of higher stock market volatility. Low
readings on the VIX mark periods of lower volatility. This index is important as it
works easily with other market indicators. This indicator helps to ascertain when
there is too much optimism or fear in the market. By analyzing its message, traders
get better understanding of investor's sentiments, and thus likely flip-flops in the
market.
However, volatility can be good in that if you buy on the lows, you can make
money. Short term market players like day traders hope to make money through
volatility. The most successful investor in the history, Warren Buffet says volatility
is not a measure of risk. Volatility provides investment opportunities. So you can
make good purchases and make money even when market is dropping.
NIFTY
SENSEX
Year Max Index Level Min Index Level Daily Avg
Return
1998-99 4280.96 2764.16 -.02482 %
1999-00 5933.56 3245.27 .14112 %
2000-01 5541.54 3540.65 -.13788 %
2001-02 3742.02 2600.12 -.01129 %
2002-03 3512.55 2834.41 -.05568 %
2003-04 6194.11 2924.03 .23833 %
2004-05 6915.09 4505.16 .04923 %
2005-06 11307.04 6134.86 .21580 %
2006-07 14652.09 8929.44 .05002 %
2007-08 20873.33 12455.37 .9192 %
The daily average return of the Nifty and the Sensex in the year 1998–99 was
0.00294 per cent and -0.02482 per cent respectively. The Nifty had positive return
whereas the Sensex had negative return. The pressure of economic sanctions
following detonation of nuclear service, woes of East Asian financial markets,
volatility of Indian currency and the redemption pressures faced by the Unit Trust
of India (UTI) in respect of its US–64 Scheme made the Nifty decline from
1212.75 in April, 1998 to 808.7 in October, 1998 and the Senses from 4280.96 to
2764.16. In the year 1999–2000, the Nifty and the Sensex return increased from
0.00294 percent to 0.15606 per cent and -0.02482 per cent to 0.14112 percent
respectively. The union budget of 1999, strength of the Government and also its
commitment towards second generation reforms improved macro economic
parameters and better corporate results raised the return. In this year the growth
rate of GDP and industrial sector was 6.4 per cent and 6.6 per cent respectively and
within industrial sector, the growth rate of manufacturing sector was 7.3 per cent.
The trend got reversed during 2000–2001.The Indian economy decelerated and the
Nifty and the Sensex yielded negative return of –0.09435 per cent and -0.13788 per
cent respectively. There was a large sell off in new economy stocks in global
markets. This brought down the Nifty from the height of 1636.95 in April, 2000 to
the lower level of 1108.20 in October, 2000 and the Sensex from 5426.82 in April,
2000 to 3689.43 in October, 2000, The growth rate of GDP and the industrial
sector declined from 6.4 per cent to 6 per cent and from 6.6 per cent to 4.9 per cent
respectively. Within the industrial sector, the growth rate of manufacturing sector
declined to 5.2 per cent and the infrastructure sector also registered a lower growth
as compared to that of the previous year.
The earth quake in Gujarat, rising oil prices, devaluation of rupee vis-a- vis dollar,
rising interest rates and inflation, the proposal to increase the tax on distribution of
dividend by companies and by MFs from 10 per cent to 20 per cent did not speak
well of the corporate sector. Scams have over and again proved the vulnerability of
the regulatory network and system of the finance and capital markets in this year.
Ketan Parek scam in the stock market resulted in a big default in Calcutta Stock
Exchange, the BSE and the NSE. Several stockbrokers grossly misused the badla
finance given to them by investors. FIIs investment was very low in that year. The
above cited reasons were the major reasons for the negative returns.
The year 2001–02 recorded positive return of 0.00317 per cent but Sensex had
negative return of - 0.01129 per cent. The introduction of rolling settlement and
derivatives encouraged FIIs and domestic investment even though markets were
affected by riots in Gujarat, cyclone in Orisa, suspension of repurchase facility
under UTI’s US 64 scheme and the attack of World trade Center, Indian
Parliament and Jammu and Kashmir Assembly. The year 2002–03 recorded
negative return of –0.05239 per cent and -0.05568 per cent in the Nifty and Sensex
respectively. Morgan and Stanley Capital International Index value for India
declined to 3.9 per cent. Failure of the monsoon, bomb blast in Ghatkopar area of
Mumbai, the war between Indo–Pak border and tussle between US and Iraq had
negative impact on the stock market. There was a subdued trend in both public and
rights issue. The divestment programme of the public sector units was deferred
and PSU stock price declined by 50 per cent. In June and October 2002, the FIIs
turned as net sellers, and their investments were –Rs.8660 mn and –Rs.8757 mn
respectively. In this year a total of Rs.4070 crore was mobilised as against Rs.7543
crore in 2001–02. Banks and financial institutions were the main mobilisers during
the year. All these factors led to the negative return in the Nifty and Sensex.
The daily average return in the Nifty and the Sensex was the highest in the year
2003–04. Strong economic fundamentals exhibited in the fall in interest rates,
strong GDP growth rate, increase in foreign exchange reserves and exports of
Indian companies doubled the Nifty and the Sensex in the first three quarters.
Further, the large expenditure by the Government on infrastructure sector and the
reform process enhanced the morale and motivation levels of Corporate India
which in turn boosted the stock market returns. The SEBI’s ban on the
Participatory Notes issued by unregulated entities made the markets more
disciplined and investor friendly. In addition, the introduction of T+2 settlement
cycle and the derivatives in CNX.IT index, the margin system and the improved
surveillance in the exchanges were also the reasons for the increased return.
There was a decline in the return in the year 2004–2005. As the index value of the
Nifty sharply came down from 1892.45 and 5925.58 respectively on 23rd April
2004, to 1388.75 and 4505.16 respectively in May, 2004, a lower circuit breaker
was applied on the NSE for the first time. This brought a total halt to all trading
and the fund flow to stock market from the retail investors and the Foreign
Institutional Investors dwindled. They were net sellers in May, 2004. But, slow
down in Chinese economy, tax exemption on long term capital gain, and tax
reduction on short term gain, the appreciation of rupee against the US dollar, low
returns of bank FD rate and insurance policies and negative returns of debt market
mutual funds prevented the negative return. The over all performance of the stock
markets in the world was well. By 2005, India’s growth story was well established.
Money started pouring in from everywhere. A new industrial resurgence; a pick up
in investment; modest inflation in spite of spiraling global crude prices; rapid
growth in exports and imports with a widening of the current account deficit;
laying of some institutional foundations for faster development of physical
infrastructure; progress in fiscal consolidation; and the launching of the National
Rural Employment Guarantee (NREG) Scheme for inclusive growth and social
security increased the return in the year 2005-2006. And the biotech sector is
growing at 37.42 percent and inched closer to US$ 1.5 billion in revenues during
fiscal year (April 1 to March 31) 2005-06. The GDP growth rate was 9.4%.In
respect of the household sector, the saving in the form of financial and physical
assets has gone up from Rs. 4,208.41 billion and Rs. 4,459.15 billion in 2005-06.
All these factors boost the Indian stock market scaled high. Two things have
happened in this period to push the market to uncharted territory.
One is a robust inflow of foreign money, as more and more FIIs have rushed to
pump money into the Indian market. What is new about these inflows is the
decisive move made by Japanese funds to look at India as an alternative to China,
the bulk of the $ 1.9 billion that has flowed into Indian markets in July alone has
come from Japanese FIIs, taking the total FII investments in 2005 to around $7
billion. The number of new FIIs registered during the year has also gone up
significantly.
Again there was a decline in the market return in the year 2006-2007. Global crude
oil prices were surging yet again and had touched $78 a barrel due to the tensions
in West Asia and the hurricanes from the Atlantic into the US east coast of the year
further surged in crude prices and oil production and refinery output were
disrupted in the affected area. Global liquidity had almost been drained off
following the rate increases in the US, Europe and in Japan. The RBI had also done
its bit in doing the same in India and a further movement in that direction cannot
but had an adverse impact on the stock market. FII flows in 2006, at about $8.5
billion (around Rs 38,000 crore), were lower by 20 per cent than in 2005. But this
was due to the markets tanking in May and June. Pharma, ferrous metals, FMCG,
oil and gas, and auto components did perform wellin that year. The year 2007 saw
Indian stock markets scaling new peaks. During 2007-08 the secondary market
rose on a point-to-point basis with the Sensex and Nifty rising by 47.1 and 54.8 per
cent respectively. Amongst NSE indices, both Nifty and Nifty Junior delivered
record annual equity returns of 54.8 per cent and 75.7 per cent respectively during
the calendar year. The Indian financial sector is on a roll. It has emerged as the
third best performing market in the world with a dollar return of 71.23 per cent.
The popular Bombay Stock Exchange (BSE) benchmark index, sensex, also posted
its highest ever absolute gain of 6500 points in over two decades. Simultaneously,
the National Stock Exchange (NSE) has climbed to the top spot in stock futures
contracts and number-two slot in the index futures segment in the world. Spices
export from India has reached record levels and exceeded the target set for 2007-08.
VOLATILITY
Stock market volatility indicates the degree of price variation between the share
prices during a particular period. A certain degree of market volatility is
unavoidable, even desirable, as the stock price fluctuation indicates changing
values across economic activities and it facilitates better resource allocation. But
frequent and wide stock market variations cause uncertainty about the value of an
asset and affect the confidence of the investor. The risk averse and the risk neutral
investors may withdraw from a market at sharp price movements. Extreme
volatility disrupts the smooth functioning of the stock market. The literature on
stock market volatility is voluminous, but, some general conclusions on common
stock risk have emerged from this research. The overall stock market volatility has
fluctuated over the time with no discernible trend and some authors have argued
that volatility is higher during the bear markets. In this study, inter–day and intra–
day volatility are calculated for each year and for different phases. Inter–day
volatility of the Nifty and Sensex are given in table
Year wise Inter day Volatility for Sensex and Nifty (1998-2008)
The close to close volatility and the open to open volatility in the Nifty and the
Sensex moved in tandem. In the Nifty and in the Sensex, the close to close
volatility ranged from 0.991 per cent to 2.025 per cent and 1.010 per cent to 2.151
per cent respectively. The open to open volatility in the Nifty and the Sensex
ranged from 0.992 per cent to 2.041 per cent and 1.047 per cent to 2.846 per cent
respectively. The close to close and the open to open volatility in the Sensex was
very high in the year 2000-2001.The loss was very high in Sensex compared to
Nifty The entire financial year (2000-2001) of the stock market was in the grip of
bears. From 1998 – 2003 the Sensex values were consistently higher than the
values of the Nifty, in both the volatility. From 2004-2008 the close to close
volatility was very high in Nifty. In the Nifty the open to open volatility was high
in the year 1999 - 2000. In the Sensex the open to open volatility was high in the
year 2000- 2001. The Nifty recorded negative return and a low volatility in the
year 2002–2003. The close to close volatility in the Nifty was at their peak in
2007–2008. The Nifty ranged from 3633.60 to 6287.33. US job data and interest
rate cut by US Fed, higher inflation and political uncertainty over US-Indo nuclear
agreement brought a tinge of wariness in the markets. Crude oil price affected the
market adversely. On 3rd September 2007 the value of Sensex was 15422.05 but
on 28th September it was 17291.10. In the first half of October 2007 Sensex
climbed from 18K to 19K in just four days. As a result circuit breakers were
applied on October 16.
FACTS
This section describes stylized facts of U.S. stock price data and explains why it
proved di¢cult to reproduce them using standard rational expectations models. The
facts presented in this section have been extensively documented in the literature.
We reproduce them here as a point of reference for our quantitative exercise in the
latter part of the paper and using a single and updated data set.7 It is useful to start
looking at the data through the lens of a simple dynamic stochastic endowment
economy.
Fact1:The PD ratio is very volatile.
It follows from equation (2) that matching the observed volatility of the PD ratio
under rational expectation requires alternative preference speci.ca- tions. Indeed,
maintaining the assumptions of i:i:d: dividend growth and of a representative
agent, the behavior of the marginal rate of substitution is the only degree of
freedom left to the theorist. This explains the development of a large and
interesting literature exploring non-time-separability in consumption or
consumption habits.
Fact 2: The PD ratio is persistent.
The previous observations suggest that matching the volatility and persistence of
the PD ratio under rational expectations would require preferences that give rise to
a volatile and persistent marginal rate of substitution. This is the avenue pursued in
Campbell and Cochrane (1999) who engineer preferences that can match the
behavior of the PD ratio we observe in Figure 1. Their speciation also helps in
replicating the asset pricing facts mentioned later in this section, as well as other
facts not mentioned here.14 Their solution requires, however, imposing a very high
degree of relative risk aversion and relies on a rather complicated structure for the
habit function .
In our model we maintain the assumption of standard time-separable consumption
preferences with moderate degrees of risk aversion. Instead, we relax the rational
expectations assumption by replacing the mathematical expectation in equation (2)
by the most standard learning algorithm used in the literature. Persistence and
volatility of the price dividend ratio will then be the result of adjustments in beliefs
that are induced by the learning process. Before getting into the details of our
model, we want to mention three additional asset pricing facts about stock returns.
These facts have received considerable attention in the literature and are
qualitatively related to the behavior of the PD ratio, as we discuss below.
Statistical Tools
The daily and intra-day stock price data have been first processed by using
Microsoft Excel. Subsequently, econometric analysis package EViews has been
used to test the return and volatility data for various statistical properties and to
estimate ARCH/GARCH class of models.
Diagnostic Tests
As part of the diagnostics, we begin with a visual inspection of the plot of daily
returns on Sensex as shown in Figure 1. It can be seen that returns continuously
fluctuate around a mean value that is close to zero. The movements are in the
positive as well as negative territory and larger fluctuations tend to cluster together
separated by periods of relative calm. This is consistent with Fama’s (1965)
observation that stock returns exhibit volatility clustering where large returns tend
to be followed by large returns and small returns by small returns leading to
contiguous periods of volatility and stability. Descriptive statistics on Sensex and
Nifty returns are summarized in Table 1. For both Sensex and Nifty, the skewness
statistic for daily returns is found to be different from zero indicating that the
return distribution is not symmetric. Furthermore, the relatively large excess
kurtosis suggests that the underlying data is leptokurtic or heavily tailed and
sharply peaked about the mean when compared with the normal distribution. The
Jarque-Bera statistic calculated to test the null hypothesis of normality rejects the
normality assumption. The results confirm the well-known fact that daily stock
returns are not normally distributed but are leptokurtic and skewed.
Behaviour of Volatility Estimates
The analyses in the preceding section reveal that the volatility of daily return on
Sensex might follow an ARCH or a GARCH process. Hence, we believe that daily
return does not follow a homoscedastic pattern. Before moving on to modeling the
conditional volatility as a GARCH process, we take up a simple exercise to study
the inter-temporal pattern of volatility in daily return series during the period of
1993-2003. Our exercise begins with the most commonly used measure of
volatility in statistical literature. We compute the variance of the daily returns over
a 30-day horizon. Thus, for any date ‘t,’ the variance of daily returns is given by:
where, day r30 is the average return for the 30-dayperiod under consideration. In
the next step, we exclude the first observation and include the 31st observation.
Thus, in this case, we consider t = 2, 3… 31. It is like constructing moving average
of a series. This way we construct the variance for the remaining period and check
whether the variance has changed over time or not. The schematic diagram for the
30-day variance of Sensex daily return series is shown in Figure 2. The pattern is
similar for Nifty also. This graphical presentation reveals that, of late the stock
market has become more volatile than what it was at the beginning of the period
under study. Moreover, some degree of clustering is also evident in the plot. We
find that during 1993- 94, 1996-97, and 1998 onwards, large variations are
generally appearing together whereas periods of small variations appear separately.
We can also use other estimators that use easily available information on the stock
prices, viz., daily opening, closing, high, and low prices. The simplest of
these is the classical estimator 2 σ ) = (Ct - Ct-1)2; where, Ct is the closing price on
day t and Ct-1 on the previous business day. A different class of volatility
estimators, known as the ‘extreme-value volatility estimators’ is proposed by
Parkinson (1980), Garman and Klass (1980), and Rogers and Satchell (1991). In
addition to the daily closing price, these estimators take into account the daily
opening, high, and low prices for arriving at the measure of volatility. Due to their
superior information content, these estimators are more efficient as compared to
the classical estimator.
Volatility shown in Indian Markets due to the various Scandals and other
circumstances. Graph is given below-
Indian Market
There have been reports, mostly in the popular press, citing that the intra-day
volatility in particular and volatility in general went up in 2003 and more so in the
first three months of 2004. An attempt has been made to calculate inter and intra-
day volatility for both Sensex and Nifty with reference to these periods also. A
close examination of the Tables 4, 5 and 6 with regard to open to close volatility
and high low volatility reveals that the perceptions are not altogether correct. In
fact, although the parameters registered their peak in 2000, they fell down further
in 2001 and 2002. However, the volatility as per these two parameters in 2003 is
only slightly higher compared to 2002, but when compared to 2001 and 2000 this
is much lower and about 50 percent of what it was in 2000. In the first 3 months of
2004 volatility calculation reveals that high low volatility slightly went up in
January 2004 to 2.10 percent but it is much lower than what was recorded in 2000
and 2001. Open close volatility however, continuous to be low and although the
parameters further receded in February and March 2004. The results are more or
less the same for both the Indian indices. Tables 8 and 9, Charts 3 and 4 provide
information on inter and intra-day volatility for both Sensex and Nifty in terms of
Indian rupees (not adjusted for $ terms). The tables and charts evidently exhibit a
close relationship between inter and intraday relationship. Close to close and open
to open volatility moved in tandem with little divergence in a few periods. This
little divergence was evident from 1997 to 2002. The volatility levels are almost
identical. As per finance theory, in an efficient market both are supposed to be
almost the same because the time length is identical and if there are no
informational asymmetry then these two parameters
converge and have identical volatility. Only in case of Nifty, the divergence was
little higher and it was highest in 1997. From 1998 the indicators traveled nearly
together. Intra-day volatility parameters : open-close and high-low also
experienced close togetherness excepting for 1991. The integration between these
two parameters is higher in case of Sensex, compared to Nifty. The divergence,
Nifty, prevailed for the entire period from 1995 to 2003 and they never crossed.
This is something very intriguing and deserves micro investigation for the purpose
of effective dissemination of information.