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Model for Forecasting Volatility in Indian Stock Market: The Volatility Index
-- Jadhav Aditya Mohan and Chakrapani Venkata Chaturvedula
At present, India's economy looks upbeat with an increase in investment in the stock market. At the same time, it is also seen that the market fluctuations are very high. Such high levels of fluctuations or volatility make it difficult to predict the future expected values of the market and make investment decisions. Similarly, volatility is an important component for estimating the option price using the Black Scholes model. In such a situation, having an estimate of future volatility is very useful. Similar to the price indices that are used as indicators of the overall market value and returns, volatility indices are used as indicators of expected market volatility over a future period. Such indices exist in the US and the European countries. The CBOE Volatility Index or VIX is the first volatility index of its kind providing volatility forecasts on a continuous basis for the Chicago Board of Exchange. The present study looks into the aspect of construction of such an index in the Indian context. The study aims to construct an Indian Market Volatility Index (IMVI) for the Indian stock market using the Nifty option series which are based on the S&P CNX Nifty Index. The study also aims to validate the predictive properties and effectiveness of IMVI. The results of this study are expected to offer guidance for the future researchers in the area of market microstructure. Though this study focuses on constituting the index on a daily basis, the index can be further developed for continuous prediction.
© 2008 IUP . All Rights Reserved.
Estimating the Accuracy of Value-at-Risk in Measuring Risk in Equity Investment in India
-- Vanita Tripathi and Shalini Gupta
Over the past few years, Value-at-Risk (VaR) has become a standard measure of market risk embraced by banks, trading firms, mutual funds and others, including even the non-financial firms. But any risk measure is useful and reliable only insofar as it can be verified for its accuracy. This paper evaluates the accuracy of VaR in estimating the risk in equity investment in India. For this purpose, the study uses the daily data for 30 securities comprising BSE-Sensex and two major stock indicesBSE-Sensex and NSE Nifty for the period January 2006 to February 2007 and portfolio-normal method (parametric approach to VaR calculation) for calculation of VaR. The hypothesis regarding the accuracy of VaR estimates was tested using the chi-square test. The results reveal that VaR estimate does not accurately measure the risk in equity investment in India as VaR overestimates the loss in 24 out of 30 securities. It is only in the case of four securities that the observed number of violations is exactly equal to the expected number. These results may be attributed to non-normal distribution of equity returns in Indian securities market as against the normally distributed returns assumed under portfolio-normal method. All the securities showed excess kurtosis estimate, exhibiting the leptokurtic returns' distribution and also, out of 30 securities, 20 are showing negatively skewed returns and 10 are showing positively skewed returns. Moreover, the assumption of past representing the future is also not validated in the present case in the context of stock volatility observed during the period. The study also observes that portfolio-normal method of VaR computation is a better risk measure for estimating the portfolio risk as compared to risk on individual securities.
© 2008 IUP . All Rights Reserved.
An Analysis of Working Capital Structure and Financing Pattern of Mauritian Small Manufacturing Firms
-- Kesseven Padachi, M S Narasimhan, R Durbarry and C Howorth
The competitive nature of the business environment requires firms to adjust their strategies and adopt good financial policies to survive and sustain growth. Managing working capital is problematic for the small business firms as they hardly adopt best practices unlike their larger counterparts. This paper, therefore, examines the structural differences in working capital and the financing pattern of 58 small manufacturing firms, operating in five industry groups for the period 1998-2003. An analysis of working capital components and funding pattern shows significant structural changes. While the stocks level and trade debtors have not experienced any major variations, yet they account for 80% of the short-term resources tied up in working capital. Thus, the working capital position of the sample firms reveals disproportionate increase in current asset investment in relation to sales resulting in a sharp decline in the working capital turnover. The mean value is three times, indicating a lower operational efficiency. The study also shows an increasing trend in the short-term component of working capital financing. While the short-term funds, in particular trade credit and other payables, have financed the major part of the working capital, the percentage of long-term funds used to finance the working capital has declined consistently during the same period. This over-concentration on short-term funds is a reality of the SMEs as they often faced difficulties in raising finance to support their business activities.
© 2008 IUP . All Rights Reserved.
Profit Efficiency of Indian Commercial Banks:A Non-Parametric Approach
-- Ram Pratap Sinha
For commercial banks operating in India, improvement of asset quality has become important in the reform years because of the following reasons: (1) The deregulation of the banking sector entry and relaxation of branch licensing policy resulted in substantial decline in the banking sector spread, compelling the commercial banks to drastically reduce inefficiency; (2) The introduction of prudential asset classification, income recognition, and capital adequacy norms in effect increased penalties for commercial banks with low asset quality. The paper seeks to compare the Indian commercial banks (for the reform period) in respect of their ability to generate operating profit by using the data envelopment approach under both constant and variable returns to scale. The years of analysis are 1998-99, 2000-01, and 2002-03. The results show that the observed commercial banks have diverged in terms of technical and scale efficiency in 2000-01 as compared to 1998-99. However, the trend has been somewhat reversed in 2002-03. Further, most of the commercial banks exhibited decreasing returns to scale for the years of study. The observed private sector banks have higher mean technical efficiency scores as compared to their public sector counterparts. A comparison of the mean technical and scale efficiencies of the public sector commercial banks with regard to private sector commercial banks shows that for 1998-99 and 2002-03, the observed public sector commercial banks have higher mean scale efficiency scores than the observed private sector commercial banks.
© 2008 IUP . All Rights Reserved.
Assessing Social Performanceof Microfinance Institutions in India
-- Mitali Sen
Microfinance holds a big promise to generate income and employment and alleviate poverty in the developing countries. The Microfinance Institutions (MFIs) are financial institutions with a primary objective of making credit available to that segment of the population, which has been ignored by the commercial banking system for not having collateral requirements. The efficient functioning of these MFIs on a sustainable basis is important but for MFIs it is equally important that people at or below the poverty line are reached, quality services are provided, and that microfinance improves clients' lives. Financial sustainability does not ensure the automatic fulfillment of social objectives expected of a typical MFI. In other words, both financial performance and social performance matter. This paper discusses the emerging importance of social performance in microfinance and reviews some of the assessment tools recently developed. The study makes an attempt to assess the social performance of an MFI situated in the state of Jharkhand, using the social rating methodology developed by M-CRIL, the world's leading microfinance rating agency. Finally, the study recommends some guidelines for the MFIs in India to enable them to implement social reporting in their organizations and institutionalize social performance management.
© 2008 IUP . All Rights Reserved.
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