Application of the Concept of Dissonance to Explain the Phenomenon of Return-Volatility Relationship

--Debasis Bagchi

In this paper, we attempt to provide a behavioral explanation to the observed asymmetric return-volatility relationship. In some cases, the affect heuristic, mental accounting and extrapolation bias may not be adequate to explain return-volatility dynamics. We build up three hypotheses to establish whether return-volatility relationship is influenced by cognitive dissonance. We observe that both positive and negative relationships exist for return-volatility dynamics. We show that cognitive dissonance is responsible for return-volatility relationship and which can explain their observed negative and positive relationships. Our third hypothesis relates to significance of volatility feedback theory. We find that it is rejected, which confirms that volatility feedback theory is not always tenable for explaining asymmetric return-volatility relationship.

© 2014 IUP. All Rights Reserved.

Herding Behavior in an Emerging Stock Market: Empirical Evidence from India

--Ashish Garg and Kiran Jindal

This paper is an attempt to examine the presence of herd behavior in the stock market of India, which is one of the emerging economies of the world. The study uses the measures suggested by Christie and Huang (1995) and Chang et al. (2000) on National Stock Exchange data. Empirical results based on daily and monthly data indicate that during periods of extreme price movements, equity return dispersions tend to increase rather than decrease, thus providing evidence against the presence of herding in the Indian stock market for the years 2000-2012. Owing to reforms in Indian stock market and the increased presence of institutional players, investors’ behavior seems to be more rational, facilitating the application of rational pricing models in the Indian stock markets.

© 2014 IUP. All Rights Reserved.

Fiscal Response to Foreign Aid Inflows in Nigeria

--Omo Aregbeyen and Ismail Olaleke Fasanya

This paper analyzes the fiscal response of the government to aid inflows in Nigeria during the period 1961 to 2009. This is against the backdrop of the fact that no study has analyzed the peculiar fiscal response/behavior of the government in Nigeria vis-à-vis aid flow over time. Yet, the fiscal response of the government had significantly determined and shaped the growth path of the economy. The empirical analysis is anchored on the Heller type fiscal response modeling analytical framework and combines several procedures in modern econometric analysis/estimation techniques. The findings show that aid inflows had significant impact on the fiscal reactions of government in Nigeria: government expenditure, particularly capital (development) expenditure, increased in response to aid flows, tax efforts were relaxed, while domestic borrowing declined. Aid flows also provide free resources to increase recurrent (routine) spending, thus confirming the aid fungibility hypotheses. Since aid inflows cannot be permanently relied upon, it is advised that the government place a premium on improving its tax efforts as well as cut down recurrent expenditures.

© 2014 IUP. All Rights Reserved.

Intraday Trading Activity and Volatility: Evidence from Energy and Metal Futures

--Vivek Rajvanshi

We use tick-by-tick data for one energy futures (crude oil) and four metal futures (gold, silver, copper, and zinc) traded at Multi-Commodity Exchange India Limited (MCX) for the period of four years from January 1, 2009 to December 31, 2012. We test and find support for the Mixture-of-Distribution Hypothesis (MDH), which suggests a positive simultaneous relationship between trading volume and price volatility, and the Sequential Information Arrival Hypothesis (SIAH), which argues that information arrives sequentially in the market and there would be a lead-lag relationship between volatility and volume. Further, in order to test the dispersed belief and asymmetrical information hypothesis, we test the impact of the net effect of trading numbers and order imbalance on volatility. We find that trading numbers explain the volume-volatility relationship better than the order imbalance and mainly drive the return volatility in the Indian commodity futures market. Our results find strong support for the above hypotheses and suggest that the four theories—MDH, SIAH, dispersed belief, and asymmetrical information hypothesis—complement each other.

© 2014 IUP. All Rights Reserved.

Relationship Between Crisis and Stock Volatility: Evidence from Indian Banking Sector

--Shveta Singh and Anita Makkar

The present study empirically examines the relationship between the crisis and stock returns volatility in the Indian banking sector. Bankex stock index is used as a proxy of stock prices of Indian commercial banks. The time series data of closing stock prices for nine years was collected on daily basis from January 1, 2004 to December 31, 2012. GARCH model is used to capture the impact of crisis on stock volatility of banks. The results reveal a high persistence of volatility and significant negative association between stock returns and their volatility during both subperiods of crisis. The study concludes that the crisis has a significant impact on the stock volatility of the Indian banking sector. The stock returns volatility has significantly changed during the pre- and post-crisis time periods.

© 2014 IUP. All Rights Reserved.