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A negative relationship between stock market returns and inflationary trends has been widely documented for developed economies in Europe and North America. This study provides similar evidence for India. This relationship is investigated in light of Fama's explanation that centres around linkages between inflation and real activity, and between stock returns and real activity. Specifically, the study tests whether the negative stock return-inflation relationship is explained by a negative relationship between inflation and real economic activity, and a positive relationship between real activity and stock returns. The results from the heteroscedasticity and autocorrelation corrected models provide only partial support for Fama's hypothesis. The relationship between real activity and inflation does not account for the negative relationship between real stock returns and the unexpected component of inflation. [ABSTRACT FROM AUTHOR]

Deals with a study which discussed the impact of volatility in the transaction costs on India's equity market. Factors explaining the low correlation between the Indian market and foreign markets; Barriers to foreign investment; Difficulties in transacting in India.

This paper examines the random walk hypothesis in the emerging Indian stock market using daily data on individual stocks. The statistical evidence in this paper rejects the random walk hypothesis. The results suggest that daily returns earned by individual stocks and by an equally weighted portfolio show significant non–linear dependence and persistent volatility effects. The non–linear dependence takes the form of ARCH–type conditional heteroskedasticity and does not appear to be caused by nonstationarity of underlying economic variables. Though conditional volatility is time varying, it does not explain expected returns. [ABSTRACT FROM AUTHOR]

A stock exchange's efficiency can be measured by its liquidity and price discovery mechanism. An exchange that provides price discovery will have high liquidity. By measuring the speed of stock price adjustment to its intrinsic value with the arrival of new information, we can understand the price discovery process and productive efficiency of a stock exchange. India has 23 stock exchanges, 20 of which have almost become dysfunctional due to negligible trading during the last five years. Measuring productive efficiency of the current active stock exchanges will help to understand the future direction of the Indian stock market. Using the corrected model and a new model proposed in this paper, I found that information adjustment in the Indian market is very slow. Contrary to the developed markets, in the Indian stock market, stock prices overreact before adjusting to their intrinsic values. I also found that market-wide information adjusts faster than firm-specific information. [ABSTRACT FROM AUTHOR]

Value-at-Risk (VAR) is widely used as a tool for measuring the market risk of asset portfolios. However, alternative VaR implementations are known to yield fairly different VaR forecasts. Hence, every use of VaR requires choosing among alternative forecasting models. This paper undertakes two case studies in model selection, for the S&P 500 index and India's NSE-50 index, at the 95% and 99% levels. We employ a two-stage model selection procedure. In the first stage we test a class of models for statistical accuracy. If multiple models survive rejection with the tests, we perform a second stage filtering of the surviving models using subjective loss functions. This two-stage model selection procedure does prove to be useful in choosing a VaR model, while only incompletely addressing the problem. These case studies give us some evidence about the strengths and limitations of present knowledge on estimation and testing for VaR. [ABSTRACT FROM AUTHOR]

This paper examines the stability of the day of the week effect in returns and volatility at the Indian capital market, covering the period January 1991-September 2000. The paper specifies a generalized autoregressive conditional heteroscedasticity (GARCH) model on returns and introduces separate dummies for days in alternate weeks in the specification of both the mean and the conditional variance to examine the robustness of the day of the week effect in return and in volatility within a fortnight. Results are compared to those based on ordinary least squares (OLS) procedure to examine how erroneous the inference on day-level seasonality could be when the aspect of volatility is ignored. The paper finds evidence in favour of significant positive returns on non-reporting Thursday and Friday, in sharp contrast to the finding of significant positive returns only on non-reporting Monday by OLS procedure. Separate subperiod analyses reveal that there have been changes in daily seasonality in both returns and volatility since the mid-1990s at the Indian capital market, manifested in the opposite signs and changes in the level of significance of some similar coefficients across periods. These findings on the day of the week effects along with its variation within a fortnight suggest that stock exchange regulations and the nature of interaction between the banking sector with the capital market could possibly throw valuable insights on the origin of the day of the week/fortnight effect in returns, while interexchange arbitrage opportunities due to differences in settlement period could lead to a seasonality in volatility. [ABSTRACT FROM AUTHOR]

The relevance of beta as a measure of risk depends on the stationarity of beta over rime. The paper discusses the stationarity of beta in the Indian capital market using a sample of thirty eight equity securities listed in the Stock Exchange Mumbai. The study uses weekly closing prices from May 11, 1990 to February 6, 1996. The average beta based on Sensex is .8634 and based on BSE100 index is .7398 and no security has negative beta. The market explains roughly 5 to 60 percent of the variance in the individual security returns. Product Moment Correlation and Rank Order Correlation show that the betas are not stationary over rime and hence beta cannot be used as a measure of future risk for individual securities and small portfolios. The paper, further, finds that the betas have the regression tendency of moving towards the mean beta of 1. [ABSTRACT FROM AUTHOR]

The Indian stock market is one of the earliest in Asia being in operation since 1875, but remained largely outside file global integration process until the late 1980s. This paper empirically investigates the long-run equilibrium relationship and short-run dynamic linkage between the Indian stock market and the stock markets in major developed countries after 1990 by examining the Granger causality relationship and the pairwise, multiple and fractional cointegrations between the Indian stock market and the stock markets from these three developed markets, Indian stock market is integrated with mature markets and sensitive to the dynamics in these markets in a long run. In a short run, both US & Japan Granger causes the Indian stock market but hot vice versa. Further it is found, Indian stock index & the mature stock indices form fractionally cointegrated relationship in the long run with a common fractional, nonstationary component and find that the Johansen method is the best reveal their cointegration relationship. [ABSTRACT FROM AUTHOR]

This paper uses a quality control approach to study the volatility of common stock in India at the market level and devises a trading behaviour at BSE. It addresses an important question, namely, ‘how have the returns in the Indian stock market behaved, following financial liberalisation’? Considering ‘volatility’ an important indicator of stock market efficiency and development, the average level of volatility is measured for the period 1980 to 2003. The data sample period, from Jan. 1, 1980 to Dec. 31, 2003, covers a wide range of political and economic events that may have influenced the economy and, hence, the stock market. Estimates of the standard deviation of monthly return in a year, daily return in a year and daily return in a month are made to have a complete idea of the level (size) and nature of volatility. Further, we have tried to study acceptable limits of volatility that may be embedded in the decision making of investors, depending on the type of investors. [ABSTRACT FROM AUTHOR]

The paper investigates the relevance of signaling hypothesis in India by examining market reaction and operating performance around distribution of bonus shares for a large sample of firms listed on the Bombay Stock Exchange (BSE). Our results indicate that cumulative abnormal returns of 12.73% exist for the 11-day period surrounding bonus announcements. Consistent with the signaling hypothesis, the abnormal return is positively related to the bonus ratio and negatively related to the size of the firm. Bonus issuers exhibit superior operating performance subsequent to the issue when compared to control firms with similar pre-event performance. The superior performance of bonus issuers is driven by the better profit margin rather than by asset utilization. We link the impact of corporate control mechanism on signaling by documenting a relationship between ownership-structure and post bonus issue operating performance. [ABSTRACT FROM AUTHOR]

Abstract: A growing body of research points to the fact that capital markets react to environmental news and thus create incentives for pollution control in both developed and emerging market economies. In this paper, we conduct an event study to examine the impact of environmental rating of large pulp and paper, auto, and chlor alkali firms on their stock prices. We find that the market generally penalizes environmentally unfriendly behaviour in that announcement of weak environmental performance by firms leads to negative abnormal returns of up to 30%. A positive correlation is found between abnormal returns to a firm''s stock and the level of its environmental performance. These findings should be viewed as further evidence of the important role that capital markets could play in environmental management, particularly in developing countries where environmental monitoring and enforcement are weak. [Copyright &y& Elsevier]

Most privatization programs begin with a period of partial privatization in which only non-controlling shares of firms are sold on the stock market. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. Using data on Indian state-owned enterprises we find that partial privatization has a positive impact on profitability, productivity, and investment. [ABSTRACT FROM AUTHOR]

We estimate a flow of funds model for the household sector in India, within the Almost Ideal Demand System (AIDS) framework, and examine the demand for money and the substitution effects between money and other financial assets. The restricted long-run model, obtained using cointegration techniques, provides stable equilibrium relationship between I(1) variables and broadly satisfies the axioms of rational choice in consumer demand theory. We find that financial sector reform exerts a significant impact on the interest rate structure and household portfolio preferences; specifically, there is strong substitutability among risk-free assets and a possible speculative effect in the stock market, while the exchange rate strongly influences the demand for money. These findings all have important policy implications. [ABSTRACT FROM AUTHOR]

Discusses the impact of the governance of politics in India on its economic development. Implications of establishing shareholder supremacy; Assessment of the payment crises in the Calcutta Stock Exchange; Financial performance of corporate sector in the country.

This paper suggests a systematic approach to studying predictability and nonlinear dependence in the context of the Indian stock market, one of the most important emerging stock markets in the world. The proposed approach considers nonlinear dependence in returns and envisages appropriate specification of both the conditional first- and second-order moments, so that final conclusions are free from any probable statistical consequences of misspecification. To this end, a number of rigorous tests are applied on the returns, based on four major daily indices of the Indian stock market. It is found that the Indian stock market is predictable, and this observed lack of efficiency is due to serial correlation, nonlinear dependence, day-of-the week effects, parameter instability, conditional heteroskedasticity (GARCH), daily-level seasonality in volatility, the short-term interest rate (in some subperiods of some indices), and some dynamics in the higher-order moments. [ABSTRACT FROM AUTHOR]

This study examines the effect of expiration of options and futures on price, volatility, and volume of the underlying shares. The values of these variables 1 day prior to expiration, on the day of expiration, and 1 day subsequent to expiration are compared with those 1 and 2 weeks before and after the corresponding day with the use of the Wilcoxon matched-pairs signed-ranks test. The underlying share prices tend to get marginally depressed a day prior to expiration and to strengthen significantly a day after the expiration. The rate of increase of returns on the day after the expiration is abnormally high. An abnormally high volume is also observed on the expiration day; it starts building up a day prior to expiration and continues into the following day for shares with relatively high derivative volumes. These effects can be largely ascribed to arbitrage activities and the restriction on short sales in the Indian cash market. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1045–1065, 2005 [ABSTRACT FROM AUTHOR]

Evidence of inefficiencies existing in the Indian Stock Market has once again generated interest in technical analytical methods, which attempt to achieve superior returns based on past price movements. This paper tests and describes the applicability of trading rules in the Indian stock market under the present scenario with a ban on short-selling. It also analyses the effect of transaction costs on the prospective returns for an individual investor and the utility of a percentage band to remove erroneous Whiplash signals. The paper further explores and hypothesises that individual investors should be able to outsmart the market post-transaction-costs using longer moving averages which represent long-term market cycle trends, since these will involve low transaction costs but such gains are likely to be achieved over long cycle times since longer moving averages capture long cycle trends. [ABSTRACT FROM AUTHOR]

The present paper is an endeavor to investigate seasonal anomalies, if any, existing in stock returns in developed and developing countries. The former is represented by the US and the later by the Indian stock market. The daily closing prices of two indices . S&P CNX Nifty and S&P 500 have been used in order to comment on seasonality in the two markets under investigation. The reference period ranges from January 1998 to August 2005, which is further broken into two sets- January 1998 to December 2001 and January 2002 to August 2005. The study examines five types of anomalies, namely, turn of the month effect, semi-monthly effect, monthly effect, Monday effect and Friday effect. The findings of this study indicate that none of the above anomalies exist in the US market and thus this market can be considered as informationally efficient. On the other hand, the Indian stock market reveals turn of the month effect as well as semi-monthly effect but the day effect is not found. [ABSTRACT FROM AUTHOR]

Volatility forecasting is an important area of research in financial markets and lot of effort has been expended in improving volatility models since better forecasts translates into better pricing of options and better risk management. In this direction, this paper attempts to evaluate the ability of ten different statistical and econometric volatility forecasting models in the context of Indian stock and forex markets. These competing models are evaluated on the basis of two categories of evaluation measures — symmetric and asymmetric error statistics. Based on an out-of-sample forecasts and using a majority of evaluation measures we find that GARCH (4, 1) and EWMA methods will lead to better volatility forecasts in the Indian stock market and GARCH (5, 1) will achieve the same in the forex market. The same models perform better on the basis of asymmetric error statistics also. [ABSTRACT FROM AUTHOR]

Using the (1,1) variant of the Generalised Auto Regressive Coefficient of Heteroscedasticity (GARCH 1,1) the study shows that daily spot market volatility in India has marginally declined since the introduction of futures trading in India, The study also shows a simultaneously significant improvement in the information coefficient 'α' and reduction in 'β', the persistence coefficient that we forward as case in the growing efficiency of the Indian stock market. The study seeks to break new ground by examining the expiration- day effect of futures trading on spot market volatility and contends that contrary to experience elsewhere, there is a significant, albeit small, decline in daily volatility on expiration day. [ABSTRACT FROM AUTHOR]

This study investigates the effect of shifting of shares from one group to another on share prices and market liquidity on the Bombay Stock Exchange. The study uses an event study to analyse share price changes and liquidity around announcement and actual date of switching. The overall results suggest weak evidence of positive reaction of the market to the up-switch of shares from Group B1 to Group A. However, there is a negative reaction in case of up-switch from Group B2 to Group B1. In case of down-switch from Group A to Group B1 and from Group B1 to Group B2, the study found that the market does not respond to the announcement of the down switch but incorporates such information at the time of actual switch. The study also reveals a sharp fall in liquidity after the date of announcement for both the up-switched and the down-switched firms but this decline is relatively subdued after the date of actual switch. [ABSTRACT FROM AUTHOR]

In integated stock markets identical stocks will trade at equal prices in domestic and foregin markets. Understanding the degree of integration of a country's capital markets could assist policy maker's in formulating guidelines in emerging markets that are vulnerable to rapid capital inflow and flight of capital. It is difficult to measure stock market integration however Korajzck (1996) evolved a measure based on the International Arbitrage Pricing Theory. We examine how far the Indian stock market has integrated with the global market by observing the mis-pricing of assets in asset pricing model of portfolio theory. The Indian stock markets appear to be more integrated since late 1990s, perhaps due to lower barriers for foreign porfolio invertment funds and easier access for Indian firms to international markets. Finding of this study shows that as the level of integration increases, there is an argument for bringing down the barriers further. [ABSTRACT FROM AUTHOR]

The information theoretic concept of entropy is a useful tool in studying price manipulation in stock markest, Sample entropy values computed for the price data of a scrip, for various trading days in the period during which the scrip is reported to be subject to price manipulation, prove to be potential evidence for manipulation of the scrip's price. An attempt is made in this paper to select appropriate values for the parameters used for computation of sample entropy of a short time series of stack prices. [ABSTRACT FROM AUTHOR]

Purpose - This paper seeks to investigate whether the "financial highlights" section of annual reports of a sample of Indian companies satisfy the information requirements of investors. Design/methodology/approach - The research method involves the preparation of a check-list from those items that have been suggested as significant to be disclosed in annual reports by both the "sophisticated" and "non-sophisticated" investors as suggested in the study of Joshi and Abdulla. After the preparation of this check-list, "financial highlights" section of a sample of companies listed on any of the Indian Stock Exchanges has been examined to investigate whether this section contains that information, which has been considered as significant by the investors, in the study by Joshi and Abdulla. Findings - Most of the companies do not disclose information items that are perceived by users of financial information in India as being significant under the "financial highlights" section. Research limitations/implications - The limitation of the current study rests on the fact that it uses Joshi and Abdulla for evaluating the "financial highlights" section and hence only considers the need of investors in annual reports and in this specific section. Second, the use of the survey result obtained by Joshi and Abdulla might not hold completely true at the present time due to difference in time period. Originality/value - This is a pioneering study that questions whether the "financial highlights" section in annual reports provides those information items that are considered as "highlights" by investors. [ABSTRACT FROM AUTHOR]

This paper carries out a dynamic analysis of stock pricing in emerging economies, using a cointegration model on panel data, using ‘nested’ procedures with subsets of company groupings and time periods — taking Indian stock markets as the concrete case. It is observed that all classifications of company groupings do not result in similar observations. This helps in developing an approach to panel data estimation for financial markets without using structural equations. At the same time it develops a dynamic asset pricing model for emerging economies using India as a concrete case with net worth, profit, dividend, debt–equity ratio, interest cost and their growths as control variables.Journal of Asset Management (2007) 7, 335–346. doi:10.1057/palgrave.jam.2250041 [ABSTRACT FROM AUTHOR]

The stock market efficiency is an issue which can be examined only through empirical research works. During the last two decades especially after the opening up of the Indian economy, a number of research works have been carried out on the subject by experts attempting to explain and measure the different types of observed share price behaviour and the form of efficiency of Indian stock market. However, nothing conclusive is yet known about the likely behaviour of the share price and the form of efficiency. The present study is an attempt in this direction. The study is based on weekend share price data of BSE 30 (SENSEX) scrips covering a time period of two years i.e. from 1st, April 2000 to 31st March 2002. Rank correlation analysis has been extensively used in the study to examine the rank of performance of the above 30 stocks at different time intervals. [ABSTRACT FROM AUTHOR]

Stock splits are a relatively new phenomenon in the Indian context. This paper examines the market effect of stock splits on stock price, return, volatility, and trading volume around the split ex-dates for a sample of stock splits undertaken in the Indian stock market over the period 1999–2005. The traditional view of stock splits as cosmetic transactions that simply divide the same pie into more slices is inconsistent with the significant wealth effect associated with the announcement of a stock split. However, the empirical evidence confirms a negative effect on price and return of stock splits. The overall cumulative abnormal returns after the split are negative. These results suggest that stock splits have induced the market to revise its optimistic valuation about future firm performance, rejecting signaling hypothesis to which splits convey positive information to markets. Hence, stock splits have reduced the wealth of the shareholders. The results also show that presence of a positive effect on volatility and trading volume following the split events, thus suggesting that split events enhance liquidity. [ABSTRACT FROM AUTHOR]

This study examines the cost efficiency performance of 111 commercial banks in Bangladesh, India, Pakistan and Sri Lanka over 1997–2004. The primary focus is to assess whether bank size, state ownership and stock exchange listing have significant effects on South Asian banks' efficiency performance. To this end, a translog-form composite-error cost efficiency model, which allows for exogenous environmental influences, is estimated. The results indicate that the overall efficiency of South Asian banks declined over 1997–2004. Larger banks and banks with widespread ownership through stock exchange listings were found to be relatively more cost efficient. In contrast, state-owned banks were less efficient. [ABSTRACT FROM AUTHOR]

Theoretically, the stock markets are considered as rational and efficient institutions. However, instances of mass hysteria occur when stocks are massively overvalued by the experts and investors leading to disastrous stock market crashes. Predicting the behaviour of stock markets is perhaps one of the most difficult task. Present paper examines the existence of size anomaly in Indian stock market and suggests a trading strategy that could help an investor earn superior returns. A sample of 240 BSE listed companies over a period of six years (September 1996 to September 2002) has been taken. The empirical results undisputedly indicate that the small size firms outperform the larger firms not only on the basis of raw returns, but also on the basis of risk adjusted performance measures. The study indicates existence of size anomaly as the smallest decile has earned four times the mean return of the highest. It also indicates a descending stair-step pattern in the return distribution of different Size portfolios. [ABSTRACT FROM AUTHOR]

In an attempt to examine the market efficiency and volatility of stock market, forex market and bullion market in India during the last one year (October 2003 to September 2004). This paper suggests that stock, forex and silver markets are efficient compared with gold market; but at the same time gold is the lowest volatile market. Absence of a large number of participants to influence movement in the prices call be the reasons for lower degree of efficiency ill the gold market. Lower volatility of gold market maybe judge by the fact that gold has the characteristic of currency ill the global market and the Reserve Bank of India take regulation and supervision when it is necessary. On the other hand forex market, which is observed to possess lower degree of market efficiency next after gold, is the highest volatile market. Higher volatility in the forex market does not imply stability in the financial market as a whole because funds flow from one market to another. This might play an adverse effect in promoting industrialization and growth in our country in the long run. [ABSTRACT FROM AUTHOR]

Purpose — An understanding on the linkages between financial development and economic growth in general and the stock market with economic activity in particular is imperative in emerging economies. The objective of this paper is to find out the causal linkages between stock market and economic activity in India. Design/methodology/approach — The paper applies recently developed Granger non-causality tests by Toda-Yamamota, Dolado and Lutkephol (popularly known as the TYDL model) for an empirical exercise. Findings — The notable finding of the paper is that both the stock price (BSE Sensex) and economic activity (IIP) are integrated of order one, i.e. I(1). The Johansen-Juselius co-integration tests suggest the existence of one co-integrating vector. This rules out spurious relations and suggests the presence of at least one direction of causality. The TYDL model suggests that there is bi-directional causality between stock price and economic activity during the post-liberalization period, implying that a well-developed stock market could enhance economic activity and vice-versa. Research limitations/implications — In the broader framework of financial markets, the presence and role of the stock market is minuscule in the context of India. Despite this, it could play a considerable role in the process of the economic development of the country. However, to analyze the cause and effect relationship between stock market and economic activity, it is essential to analyze the issue in greater detail and depth. The main limitation of the paper is the use of IIP as a proxy for economic activity, which neglects the agricultural sector, being the primary sector in India and also the service sector. This is of course due to the non-availability of GDP data on a monthly basis. Further, a detailed study on the issue could be highly appreciable from the perspective of policy implications. Originality/value — The findings of the paper have some valuable implications. It could give some insight for policy makers about the possible linkages between stock market and the economy. Coming to empirical parts, this is perhaps the first paper in the context of India to apply the TYDL model to examine the relationship between stock price and economic activity. [ABSTRACT FROM AUTHOR]