Impact of Futures and Options Trading on Index Stocks' Systematic Risk, Correlation Structure, and Volatility

-- Rinalini Pathak Kakati and M Kakati

This paper examines whether the advent of future and option trading has led to an increase in index-stocks' daily return covariation, systematic risk and volatility in the Indian stock market. A number of tests have been conducted on the S&P CNX Nifty Index, 25 index stocks and a control sample of 20 non-index stocks. The impact has been examined over the three sub-periods—pre, transition, and post derivative periods. The results seem to indicate that, in general, the S&P CNX Nifty and its component stocks have experienced a major structural shift in their systematic relationship with the market following the introduction of derivative products. Overall, the systematic risk has declined and the nature of volatility seems to have changed post derivative. The evidence finds that non-index stocks also do exhibit a similar pattern of decreased systematic risks and the changing nature of volatility structure during the same period. Thus, these impacts on the S&P CNX Nifty index and index stocks may not be due to derivative trading but due to secular changes in the general market forces which might have affected both index and non-index stocks simultaneously. The study provides evidence that the derivative trading increases the index stocks' covariability. The opposite price behavior in the case of non-index stocks strongly suggests that the increased correlation among the S&P CNX Nifty stocks is associated with derivative trading activities and is not a result of a market-wide secular trend towards the higher correlation among the individual firm's stock returns.

© 2007 IUP . All Rights Reserved.

Performance of the Common Stocks Under Alternative Investment Strategies

-- Kapil Choudhary

While the efficient market hypothesis denies the possibility of earning abnormal returns, the fundamental analysts assert that investment strategies based on the accounting numbers may be indicators of future investment performance. Earlier studies indicate that alternatively investment strategies were able to generate excess abnormal return. The present study examines the relationship between investment performance of equity securities and alternative investment strategies based on their market capitalization, P/E ratio and earning per share. During the period from January 1997 to December 2005, the low market capitalization, P/E ratio, and earning per share portfolios on average earned higher absolute rate of return than the high market capitalization, P/E ratio, and earning per share portfolios respectively. In terms of Sharpe's reward to variability ratio, Treynor's reward to volatility ratio and Jensen's differential return performance measures low market capitalization, P/E ratio and earning per share investment strategies beat the high market capitalization, P/E ratio and earning per share investment strategies respectively. Among the three investment strategies the low market capitalization investment strategy was found superior to both low P/E ratio and low earning per share investment strategies in terms of absolute and risk adjusted rate of return.

© 2007 IUP . All Rights Reserved.

Factors Affecting Market Price of Sensex Shares

--Niladri Das and J K Pattanayak

This paper examines various research studies undertaken in the Indian and international context highlighting the affect of various fundamental factors on the behavior of the stock market. The empirical analysis of these studies exposes a lot of contradictions among them and there prevails a wide gap between the Indian and international research studies. This paper identifies the critical variables, which have significant effect on stock price movements and thereby influencing the entire market movement. The 30 scrips constituting the Sensex are used as proxy to capture the entire stock market movement. Appropriate statistical techniques have been used to establish a meaningful relationship among the various explanatory variables identified through the empirical analysis considering the available research studies. The various explanatory variables, which are acting as major determinants of stock price movements, are condensed into a few critical factors by the factor analysis and the relevance of these factors in influencing the stock market movements is explained in detail. The results reveal that few factors are acting as major determinants of stock price movements and thereby have a significant bearing on the entire market. With the Sensex touching the 13,000 mark, there is a lot of skepticism among the investors about the behavior of the stock market and the safety of their investment in the highly volatile Indian stock market. These factors can be used as a major analytical tool by the investors, corporates, and the brokers to make rational and intelligent investment decisions.

© 2007 IUP . All Rights Reserved.

Valuation Errors of Cross-listed Stocks in BSE and NSE

-- Nikhil Rastogi

Efficiency of a market could be measured in terms of the contribution of value variance and noise to the total return variance. This study adopts the model used by Damodaran (1993) to compute the value variance and noise for the stocks in the "A", "B1" and "B2" groups of the BSE and compares with similar cross-listed stocks at the NSE. The study is done using daily closing prices for the period from January 2002 to December 2004. The results show an increase in the contribution of noise to the total return variance as one moves from "A" group to "B1" to "B2" group for both the exchanges. Also the component of noise is more than value variance in the total return variances for stocks listed at the NSE when compared to similar stocks at the BSE.

© 2007 IUP . All Rights Reserved.

Dynamic Relationship between Stock Market, Market Capitalization and Net FII Investments in India

--N P Tripathy

Globalization and liberalization have brought dramatic changes in the financial sector of Indian economy. India has emerged as an important destination for global investment. Keeping this in view, the present study examines the dynamic relationship between stock market, market capitalization and net FII investment in India during the period from June 2002 to June 2005 by using Granger Causality Test and Vector Auto Regression Model. The results indicate that there is a unidirectional causal relationship between market capitalization and stock market, net FII investment with stock market. Again the VAR analysis shows that stock return and market capitalization have an impact over net FII investment in the expected direction over a short horizon.

© 2007 IUP . All Rights Reserved.