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The IUP Journal of Financial Risk Management
Price Volatility: An Evaluation of the Indian Stock Market During Global Financial Crisis
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This paper studies the problems associated with the prediction of future share prices in the Indian context. The period chosen for this study is highly critical due to the presence of financial crisis and meltdown as a result of subprime market. This study tries to find out whether the Indian market, during the time of financial crisis and the meltdown across the world adjusts to the new information or not. It is found that the trend projection almost lost its grip over the Indian share market during the study period. A distribution in which the ratio of the fourth moment to the square of the second moment is greater than 3—which is the value for a normal distribution—appears to be more heavily concentrated about the mean, or more peaked, than a normal distribution. Therefore, the share prices of the Indian market during the period of current financial crisis yields a typical leptokurtic normal distribution. It means that there exists fatter tails and greater risk of extreme outcomes. It also reveals the high volatility of the present share market. The study concludes that no market in the world is insulated from externalities as it is advocated in the decoupling theories of today.

 
 
 

The behavior of stock prices has been an important topic of discussion in the academic circles for a long time. In this context, financial researchers have developed various theories and models which have been tested empirically for different equity markets. Among them is the Random Walk (RW) theory, one of the earliest theories proposed for stock price behavior, which states that future stock prices cannot be predicted on the basis of past price movements.

Many research studies have been carried out by international economists and professors. Some of them are: Kendel (1965), Dryden (1970), Solink (1973), Malaikah (1990), Aybar (1992), Khiliji (1993, 1994), Uppal (1993), Ahmed (1995), and Hussain (1997). There are also recent studies in this area.

The present study seeks to find out the problems in the prediction of future share prices in the Indian context. The period chosen for this study is highly critical, in the sense that financial crisis and economic meltdown due to subprime market are very much present. This study analyzes the problems associated with RW theory.

The distribution is positively skewed and the values of the kurtosis are between 1 and 3. Therefore, the distribution curve takes the shape of mesokurtic. Figures 1 and 2 depict the trends of share prices and indices. The trend is visible when the closing price of all the selected shares and indices is plotted in a figure. The movement of indices and share prices are downwards. It reflects the general trend of the market during the period of financial crisis and economic meltdown across the world in 2008. With this kind of trend, one is not able to predict the future trend of shares and indices. Also, how quickly the Indian market can absorb information or cue from the world market cannot be ascertained with these figures. Tables in Annexures 3 and 4 consist of the values of various statistical test results of the selected shares of the NSE.

 
 
 

Financial Risk Management Journal, Financial Crisis, Random Walk Theory, RW Theory, Economic Meltdown, Indian Stock Market, National Stock Exchange of India, NSE, Nifty, Junior Nifty, CNX 500, CNX Nifty, Cumulative Distribution Function , CDF, Financial Management, Financial Services.