Indian stock market has seen many microstructure changes during last one decade or so that has helped its exponential growth. The equity market has crashed few times but settlement has passed off without any hitch. Volatility including intra-day volatility has been a major issue for the market. The paper tries to search for a suitable volatility measure for Indian stock market using tick level data and estimates six different kind volatility measures and compares them to understand which one performs best. The realized volatility estimates using the sum of squared returns from high frequency data performs better than the currently used IGARCH model by stock exchanges. The result is in agreement with the findings from developed markets.

Indian stock market has seen many microstructure changes during last one decade or so. This has helped the market to grow and attract substantial foreign investment. Last decade has seen a few market debacles when a handful of people tried to manipulate the market in their favor but very few payment failures have been observed. The market has crashed few times, specifically on May 17, 2004, but settlement has passed off without any hitch. This has been possible due to sound and alert risk management practices (systemic and non-systemic) followed by the leading exchanges in the country.

The current risk management at leading exchanges are based on two combined principles—(a) the regulatory risk capital required to be deposited by brokers with the exchanges in terms of the SEBI circular on risk management (popularly known as VaR based margins) and (b) an in-house principle that would provide for triggers when a member crosses threshold levels of exposures in total or in any particular stock or stocks. The second principle is managed manually by the staff of the exchanges and is purely a telephone-based method of advising members to prepay their obligations in full or in part before the settlement date. If the member fails to bring in early pay-in, the exchange may suitably decrease the member’s exposure limits. This is in addition to the usual gross exposure levels management as per the rules of the exchanges. In recent years (with the growth of trading volumes) the second option has become more useful than the regulatory capital charges on the existing margin requirement as managing intraday volatility related risk has become paramount importance for exchanges.