Indian Stock Market

Author – Arjun Palande

1. Linkage Between Stock Market and Manufacturing Sector in India: A Time Series Analysis.

Manufacturing sector dynamics in India

Nusrat (2009) delved into the intricate connection and causal dynamics between India’s stock market and manufacturing sector. Focusing on the period from July 1997 to March 2006, he meticulously utilized monthly data from BSE Sensex and the Index of Industrial Production (IIP). Employing the Engel-Granger cointegration test for long-term relationships and the Granger causality test for short-term dynamics, his analyses unveiled a lasting bond between the stock market and manufacturing sector. Intriguingly, in the short term, the causality was found to flow from BSE Sensex to IIP.

 

2. Market Reaction to Stock Dividends: Evidence from India

Decoding Market Signals

Chhavi et al (2014) took a closer look at how the market responded to decisions regarding stock dividends in India. They wanted to understand not just the financial impact but also the broader implications on stock returns, trading activity, and risk. What they discovered added a human touch to the numbers – significant abnormal returns around the announcement date, hinting that stock dividends were seen as signals of promising times ahead. The study also noted a dip in liquidity and a decrease in the ups and downs of returns, painting a more nuanced picture of the market’s reactions to these strategic decisions.

 

3. Has the Global Financial Crisis Made India’s Stock Market More Independent?

Diversification Potential

Thazhungal (2014) embarked on a journey to unravel the intricate relationship between the Indian stock market and major global markets from 2005 to 2013. Beyond just numbers, the goal was to discern if the financial upheaval of 2008 presented a golden opportunity for global investors to diversify through Indian equities. The results of the Granger causality test painted a dynamic picture, showcasing a short-term influence from developed markets to India both before and after the crisis. However, delving deeper with Johansen’s cointegration methodology revealed that post-recession, the Indian stock market’s long-term movements danced to its own tune, detached from common factors with other markets. These insights hinted at promising avenues for global investors seeking diversification through equity ventures in India.

 

4.     Dynamics of the Relationship between Mutual Funds Investment Flow and Stock Market Returns in India.

Unveiling financial dynamics

Mishra (2011) took up the challenge to unravel the financial dance within the Indian landscape. In a span covering January 2000 to May 2010, Mishra applied the Toda and Yamamoto approach to Granger causality tests, unveiling a captivating revelation – a one-way street where stock market returns exert a gravitational pull on mutual funds’ investment flow in India. This suggests that the surge in stock market activities becomes a magnetic force, drawing mutual funds into the capital market. Mishra’s research extends beyond numbers, echoing a call to action. It nudges government and monetary authorities to consider essential steps, steering towards a less volatile and more efficient capital market environment in India. In essence, Mishra’s work brings a human touch to the intricate interplay of financial forces shaping India’s investment landscape.

 

5.     Impact of Introducing Different Financial Derivative Instruments in India on Its Stock Market Volatility.

How Derivative Trading Shaped India’s Stock Market (1996-2012)

Suparna et al (2014) embarked on a journey to unravel the impact of introducing derivative trading, including stock index futures, stock index options, currency futures, and interest rate futures, on India’s underlying stock market volatility. Using daily closing prices of S&P CNX Nifty and employing a Generalized Autoregressive Conditional Heteroscedastic (GARCH) (1, 1) framework to capture the heteroscedasticity in stock market returns, their investigation spanned from April 1, 1996, to March 31, 2012. The findings painted a nuanced picture of time-varying volatility persistence, revealing the evolving nature of stock market dynamics over the estimation period. Interestingly, the introduction of equity derivatives, such as stock index futures and stock index options, and interest rate futures in the currency derivative segment proved successful in taming stock market volatility in India. However, the advent of currency futures had an unexpected twist, showing a destabilizing impact on the country’s stock market volatility. What lies behind these revelations? The study points to the general expectation that derivative instruments are introduced to control risk, leading to reduced volatility in the underlying spot market – a phenomenon observed in the cases of equity derivatives and interest rate futures. However, the ineffectiveness of currency futures in stabilizing stock prices is attributed to factors like speculator dominance in the foreign exchange market and India’s current integration with the global economy. As we dive into the world of financial intricacies, Suparna and her team shed light on how these derivative instruments have left their imprint on India’s ever-evolving stock market landscape.

6.     Volatility Contagion Between India and Selected Stock Markets.

Decoding volatility dynamics between India and Global Market.

Karam Pal et al (2017) delved into the intricate web connecting the financial markets of both developing and developed economies. Their quest centered on exploring the interdependence between the Indian implied volatility index (IVIX) and six international indices – VIX, VCAC, VDAX-NEW, VSMI, VXJ, and VSTOXX. To decode this complex relationship, they employed the bivariate VAR(p) system and BEKK-GARCH model, aiming to unravel the dynamics of volatility transmission and spillover. What emerged from their analysis was a significant link between IVIX and VIX. When VIX experienced a shock, IVIX responded robustly, and this effect lingered for approximately six days before subsiding, and vice versa. The Granger causality test further affirmed a bidirectional causality between these two volatility indices. Zooming in on individual relationships, bidirectional cross-shock spillover effects were observed between India and America, India and Germany, India and Switzerland, and India and the Eurozone markets. Additionally, there were bidirectional volatility linkages between IVIX and other key indices – VIX, VCAC, and VSTOXX. Beyond the numbers, the study’s significance lies in shedding light on the behaviors of the second moment in financial decision-making. By understanding these dynamics, the research contributes valuable insights for crafting improved portfolio diversification strategies, emphasizing the human dimension in navigating the complexities of global financial interconnections.

 

7.     Effects of derivatives usage and financial statement items on capital market risk measures of Bank stocks: evidence from India.

Banking Dynamics Unveiled: Navigating Capital Market Risks in India (2017)

Gaurango et al (2017) took a deep dive into the world of banking, unraveling the impact of off-balance sheet derivatives usage combined with various financial statement elements on the capital market risk measures of both private and public sector banks in India. The backdrop of financial market liberalization policies in the 1990s, which fueled a surge in investment in Indian banks’ stocks, adds significance to understanding the intricacies of capital market risk. Their research, using panel data analysis, brings forth noteworthy insights. The findings highlight key factors influencing the total return risk of bank stocks, including bank size, core capital-to-risk adjusted asset ratio, and interest spread. Market risk, on the other hand, is significantly linked to both the amount of derivatives usage and the return on asset ratio. The firm-specific risk component of bank stocks is notably affected by the volume of total assets, interest spread, and core capital-to-asset ratio. Interest rate risk exposure is tied to the core capital-to-asset ratio and interest spread. Interestingly, the study reveals that ownership structure – whether a bank is private or public – doesn’t wield a significant influence on capital market risk measures. Beyond the numbers, this research brings a human touch to the understanding of how financial decisions and market dynamics interplay, offering valuable insights for both domestic and foreign investors navigating the complexities of bank stocks in India.

 

8.     Stock Market Volatility Before and After Implementation of VIX in India.

The Impact of India VIX on Equity Volatility

Maithili and Reddy (2018) sought to understand and model the volatility within the Indian equity market. The paper, a beacon in the sea of market concerns and regulatory considerations, employed the GARCH(1, 1) model to shed light on this intricate dance of numbers. Adding a twist to their analysis, the paper delved into the impact of the introduction of the Volatility Index (India VIX) on the National Stock Exchange (NSE). The study divided its focus into two chapters of time – the pre-IVIX introduction period (January 1, 2000, to October 31, 2007) and the post-IVIX introduction period (November 1, 2007, to August 31, 2016). What emerged from their findings was a story of change. The GARCH(1, 1) model, with its clever inclusion of a dummy, uncovered a decline in the volatility of the spot market after the introduction of IVIX in India. Moreover, standard GARCH(1, 1) models hinted at the evolving dynamics where recent news held a more pronounced sway over spot market changes in the post-IVIX introduction period. Beyond the statistical revelations, Maithili and Reddy’s work adds a human touch to the understanding of market shifts, providing valuable insights for market participants and policy regulators alike.

 

9.     Jumps beyond the realms of cricket: India’s performance in One Day Internationals and stock market movements.

Cricket Swings and Market Jumps

Konstantinos et al (2020) embarked on a unique exploration, delving into the unexpected realm where cricket meets finance. Their study sought to unravel the intriguing relationship between the performance of the Indian cricket team in one-day international matches and the dynamics of the Indian stock market. Picture this – the highs and lows of cricket impacting the ebbs and flows of stock market metrics. Covering the period from October 30, 2006, to March 31, 2017, their analysis went beyond the usual metrics. They utilized a nonparametric causality-in-quantiles test, a tool that allowed them to uncover fascinating patterns in the data. What emerged was evidence of predictability, where the outcomes of cricket matches, whether wins or losses, seemed to have a discernible impact on stock market volatility and jumps. Interestingly, losses carried a stronger predictability signal compared to wins, especially in the lower quantiles of the conditional distributions. However, the influence on stock returns was more subtle, primarily observed towards the upper end of the conditional distribution. In this unexpected marriage of cricket and finance, Konstantinos and team humanized the numbers, offering a quirky yet insightful perspective on how the excitement of the cricket field may ripple into the world of stocks, creating an unusual but intriguing avenue for exploration.

10.  India’s Stock Market Bubble 2021: Signs and Causes.

Insights into India’s Dynamics Amid Pandemic

Tanushree and Avichal (2021) shed light on the intricate dance between these two realms. They invite us into the dynamic world of the stock market, where the exchange of stocks facilitates the flow of funds from investors to firms. At the heart of this financial ecosystem is the fundamental purpose of aiding firms in raising essential funds. They emphasized into the intriguing phenomenon of the 2021 stock market bubble, a cyclical surge in asset prices that has caught the attention of financial authorities, including the Reserve Bank of India (RBI). Tanushree and Avichal dissect the factors contributing to the market’s inflation, offering a vivid discussion on India’s unique circumstances. From the decentralization of firms from China to the accelerated rate of vaccination, the paper unveils the pull-push forces shaping the stock market landscape. Moreover, it explores the nuanced interplay between India’s monetary and fiscal policies during the pandemic, intertwined with the welfare assistance provided to the public. In weaving together these elements, the researchers humanize the intricate dynamics of the stock market, providing insights into the fascinating interplay of global events and financial trends.

 

Insights into India’s Financial Landscape: A Brief Overview of Key Research Studies

These diverse research studies provide insightful perspectives on India’s financial landscape. Nusrat (2009) reveals a lasting bond between the stock market and the manufacturing sector. Chhavi et al. (2014) decodes market signals around stock dividends, showcasing significant abnormal returns. Thazhungal (2014) explores India’s post-recession independence from global markets. Mishra (2011) highlights a one-way street where stock market returns influence mutual funds’ flows. Suparna et al. (2014) investigates the impact of derivative trading, taming volatility with equity derivatives but destabilizing with currency futures. Karam Pal et al. (2017) uncovers bidirectional causality between India’s implied volatility index and global indices. Gaurango et al. (2017) delves into banking dynamics, revealing factors affecting bank stocks’ total return risk and market risk. Maithili and Reddy (2018) find a decline in spot market volatility post India VIX introduction. Konstantinos et al. (2020) explores cricket’s impact on stock markets, noting predictability, especially with losses. Tanushree and Avichal (2021) analyze the 2021 stock market bubble, attributing it to diverse factors. Together, these studies not only provide financial insights but also humanize India’s stock market dynamics.

 

References :

Ahmad, N. (2009). Linkage Between Stock Market and Manufacturing Sector in India: A Time Series Analysis. ICFAI Journal of Applied Finance, 15(1), 43–55.

 

Banerjee, G., Das, A., Jana, K., & Shetty, S. (2017). Effects of derivatives usage and financial statement items on capital market risk measures of Bank stocks: evidence from India. Journal of Economics & Finance, 41(3), 487–504. https://doi.org/10.1007/s12197-016-9366-6

 

Gkillas, K., Gupta, R., Lau, C. K. M., & Suleman, M. T. (2020). Jumps beyond the realms of cricket: India’s performance in One Day Internationals and stock market movements. Journal of Applied Statistics, 47(6), 1109–1127. https://doi.org/10.1080/02664763.2019.1663157

 

Gupta, T., & Sharma, A. (2021). India’s Stock Market Bubble 2021: Signs and Causes. IUP Journal of Financial Risk Management, 18(2), 7–17.

 

Mehta, C., Jain, P. K., & Yadav, S. S. (2014). Market Reaction to Stock Dividends: Evidence from India. Vikalpa: The Journal for Decision Makers, 39(4), 55–74. https://doi.org/10.1177/0256090920140405

 

Mishra, P. K. (2011). Dynamics of the Relationship between Mutual Funds Investment Flow and Stock Market Returns in India. Vision (09722629), 15(1), 31–40. https://doi.org/10.1177/097226291101500104

 

Naik, M. S., & Reddy, Y. V. (2018). Stock Market Volatility Before and After Implementation of VIX in India. IUP Journal of Financial Risk Management, 15(1), 23–36.

 

Nandy, P. S., & Chattopadhyay, A. K. (2014). Impact of Introducing Different Financial Derivative Instruments in India on Its Stock Market Volatility. Paradigm (09718907), 18(2), 135–153. https://doi.org/10.1177/0971890714558704

 

Narwal, K. P., Sheera, V. P., & Mittal, R. (2017). Volatility Contagion Between India and Selected Stock Markets. IUP Journal of Financial Risk Management, 14(2), 7–39.

 

Saji, T. G. (2014). Has the Global Financial Crisis Made India’s Stock Market More Independent? IUP Journal of Applied Finance, 20(4), 83–93.