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The IUP Journal of Financial Risk Management
Stock Market Volatility Before and After Implementation of VIX in India
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Stock market volatility has always been an area of concern for market participants and policy regulators. Through this paper, an attempt has been made to model the volatility in the Indian equity market by employing the standard GARCH(1, 1) model. The paper also investigates whether the volatility on NSE has changed after the introduction of Volatility Index (India VIX) through the GARCH(1, 1) model with a dummy. Accordingly, the period of study for measuring the volatility has been split into two, i.e., the pre-IVIX introduction period (January 1, 2000 to October 31, 2007) and the post-IVIX introduction period (November 1, 2007 to August 31, 2016). The results of GARCH(1, 1) model with a dummy reveal that the volatility of the spot market has declined after the introduction of IVIX in India. In addition, the results of standard GARCH(1, 1) models provide evidence that recent news has a greater impact on the spot market changes in the post-IVIX introduction period.

 
 
 

Volatility represents the fluctuations in the returns of financial products. It is an important measure of the rate of risk of an asset. Volatility assumes great importance in foretelling the returns of a financial asset and is a vital input in pricing options and derivative products as it indicates risk in a product. Thus, understanding and predicting volatility can be of significance to market participants.

The arrival of new information in the market and the consequent dispersion in beliefs among market players will give rise to volatility. High volatility, compared to the equilibrium values of the stocks, can have significant impact on the returns of financial products. Substantial changes in the volatility of asset prices can have negative impact on risk averse investors. Its implications can also be noted on consumption patterns, corporate capital, business strategies and macroeconomic indicators. Thus, extreme volatility could affect the health of an economy by leading to major structural and regulatory changes.

 
 
 

Financial Risk Management Journal,Stock Market Volatility, Market participants and Policy regulators, Indian equity market by employing the standard GARCH(1, 1) model.