Entry, Concentration and the Process of Competition: Early Days of Deregulating Private Banking Industry in India

--K V Bhanu Murthy and Ashis Taru Deb

Extant studies treat the impact of entry on concentration, market structure and competition rather mechanically; with some even going further to naively identify concentration as an indicator of competition. This paper critically examines these contentions by studying the trends and determinants of concentration with a view to gaining an insight into the process of competition. The deregulation of domestic private banking industry in India, since the early 1990s, provides an opportunity for such a study. This paper is the first of its kind to identify a distinct pattern of change in the concentration ratio and explains its determinants in terms of a cubic form equation. The determinants of Herfindahl’s Concentration Ratio are number of firms, average asset size of the firms and their skewness. The study also points to a possible generalized pattern that market concentration follows upon deregulation of the industry.

© 2014 IUP. All Rights Reserved.

Option Pricing Models of Private Equity Valuation: A Comparative Analysis

--Ashish Kumar Garg and Kundan Kumar

The question how best to value privately-held equity for various purposes remains an open debate. In general, valuation models are asset-based, income-based or hybrid models, etc. In this study, we focus on Option Pricing Methodology (OPM), one of the widely used valuation models. We evaluate the relative performance of Black-Scholes Model vis-à-vis Finnerty Model. We consider the valuation accuracy of both the models under different liquidation periods. Among various option pricing methodologies used to calculate Discount for Lack of Marketability (DLOM), Chaffee European Put Option Model (based on the Black-Scholes option pricing model) was found to be a better technique.

© 2014 IUP. All Rights Reserved.

An Evaluation of Tracking Error on World Indices ETFs Traded in India

--Harsh Purohit, Nidhi Choudhary and Parul Tyagi

The Exchange Traded Funds (ETFs) are relatively new products in the Indian capital market, gaining popularity among investors in India. ETF has opened investment opportunities for retail as well as institutional investors. The investors have the option to expose their portfolio to overseas stock market and sector-specific market instruments through ETF and this opportunity comes with several benefits like lower cost, real-time investment and easy accessibility as compared to other instruments in the market. The ETF on the index of foreign country is one of the latest instruments in the Indian market. But such ETFs suffer from Tracking Error, whereby there is a difference between the mean return on ETFs and mean return on its underlying asset. The proposed study is an attempt to quantify this error using the methodology prescribed by the NSE and then evaluating its impact on the investments.

© 2014 IUP. All Rights Reserved.

Short-Term Integration Dynamics of Developing and Developed Stock Markets: Evidence from India, China, US and European Markets

--Rajni Kant Rajhans and M K Singh

The dynamics of integration is studied in two time frames: short-term and long-term. The focus of this paper is to evaluate the short-term integration dynamics of stock exchanges of India (Bombay Stock Exchange – BSE) and China (Shanghai Stock Exchange – SSE) with US (S&P500) and Europe (FTSE100). Granger Causality Test was used to identify the direction of causality, and impulse response was used to identify the effect of shocks from one market to the other markets. The outputs suggest that BSE Granger-causes FTSE100 and S&P500. But SSE does not Granger-cause S&P500 and FTSE100. This result contradicts the findings of the prior research (Janak Raj and Sarat, 2008), which suggest that Indian stock markets do not Granger-cause US, European and other developed markets. The impulse response of S& P500 to BSE suggests that any shocks from BSE to S&P500 survive for a period of two days. This study would help portfolio managers and investors to view diversification from a new perspective and take advantage of it.

© 2014 IUP. All Rights Reserved.

Stock Futures and Volatility Quotient: The Indian Scenario

--Sheetal Kapoor

The last decade of the 20th century in India is said to have witnessed the most innovative phase when derivatives trading incarnated on the stock bourses. Initially, index futures were introduced, followed by stock futures. The onset of derivatives trading, particularly stock futures, has been blamed for distorting the face of market stability, thereby making the market volatile. The present paper aims to find out empirically the impact of stock futures trading on the volatility quotient of the stock market. Though nowadays equity derivative products are available with respect to many equities, the study segregates a few scrips with justified rationale. The scrips, after being tested for symmetry/ asymmetry, are operated on GARCH family of models. The empirical results reveal that the overall stock futures’ trading has gone a long way in stabilizing the market and the notion of equity derivatives trading destructing the market stability is a myth.

© 2014 IUP. All Rights Reserved.

Measurement and Determinants of Competition in Private Banking Industry in India During 1992-2002

--K V Bhanu Murthy and Ashis Taru Deb

Using an appropriate theoretical framework and econometric methodology, the study seeks to measure and model competition in private banking industry in India in an attempt to analyze the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation is the motivation behind the study. It uses the concept of competition proposed by Stigler (1961) and measures it by Bodenhorn’s (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure- Conduct-Performance (S-C-P) paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price-cost margin. One basic contention of the study is that competition goes beyond ‘conduct’ and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three-equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition.

© 2014 IUP. All Rights Reserved.

Endogenous Benchmarking of Mutual Funds: Some Indian Evidence

--Ram Pratap Sinha

Benchmarking of Indian mutual funds is mostly based on ratio approach involving methodologies suggested by Sharpe and Treynor. The present paper employs Bootstrap Data Envelopment Analysis (DEA) for evaluating the performance of a few sectoral mutual fund schemes for the second half of 2010. The study uses input-oriented, output-oriented and graph hyperbolic measures of efficiency for the purpose of bootstrap DEA analysis. The computation is made in “R”.

© 2014 IUP. All Rights Reserved.

Testing the Efficiency of Price-Earnings Ratio in Constructing Portfolio

--Ruzbeh J Bodhanwala

Price-Earnings (PE) ratio is a very powerful indicator in accessing share performance against its competitors or industry players. This study focuses on constructing portfolios on the basis of PE ratio and measuring its performance against the benchmark BSE sensex for the last 10 years (2002-2012). BSE index is above 24000+ points and picking stocks at this level is a risky business. Most of the investors and fund managers believe in picking stocks which are relatively cheaper than the industry average and therefore PE ratio would play an important role. Using a combination of statistical tools, it is proved that portfolios formed on the basis of low PE outperform the BSE Benchmark market returns.

© 2014 IUP. All Rights Reserved.