Volatility In Stock Market-brm

Volatility in Indian Stock Markets OBJECTIVE The movement of stock market has always been a puzzle. In past few years stock market has become quite volatile. It has become quite difficult to predict the erratic movement shown which is in not at all in tandem with the information which is fed to stock market. Thus chaos prevails in the markets with investor optimism at unexpected levels. Has the stock market volatility increased? Has the Indian market developed into a speculative bubble due to the emergence of "New Economy" stocks? Why is this volatility so pronounced? The objective of this paper is try to analyze these questions in the context of Indian stock markets. Its an attempt to unearth the rationale for these weird movements.

METHODOLOGY First of all we examine the fundamentalist view put forward by economists who argue that volatility can be explained by Efficient Market Hypothesis. A fundamentalist view says that the stock market react with information flowing in the stock market. It is the micro and macro economic factors that drives the market. Trying to examine this fact all the key macro and micro economic factor growth is being observed with respect to growth in stock market. On the other hand, the view that volatility is caused by psychological factors is also tested. A Psychology view states that stock market is more of emotional driven. It is the perception of the investors that greatly affects the stock market. So We try to study how the change in habits and perceptions affected the price movements. What precipitating factors started this remarkable surge, making it crazy? We try to prove how these perceptual changes have changed volatility through empirical evidence. After that an empirical study of BSE Sensex and a set of representative stocks are carried out to find the changes in their volatility in the last two years. The stock market regulation in introduction of rolling settlement and

Volatility in Indian Stock Markets dematerialization as a measure of reducing volatility is put to test. The study tries to correlate the economic growth concept with the growth of stock market of India.

INTERPRETATION FUNDAMENATALIST VIEW It was found that during the period of 1998 to 2000, there was no such spectacular growth which could have led to such a whooping growth in stock market. Example the GDP growth for the year 1999-2000 was only 5.9% coupled with the moderate growth in industrial sector. Even the corporate profit grew by only 32% but the stock market grew amazingly high by 117%.Any erratic rise has to be followed by an steep fall. So is this case of Indian economy.

PSYCHOLOGICAL PHENOMENON In recent times media and IT has shown a tremendous growth .The news feed provided by Reuters and Bloomberg keep the investor updated every minute. Such increased reporting of stock movements generally increase the demand for stocks. This has resulted in markets adjusting to such information faster than before which in turn increase market volatility. The ICE(Information, Communication and Entertainment) industry was also overhyped in the period of 1998 to 2000.A study of volatility of IT stock suggest how IT has to play a major part in the volatility of stock market. The stock market also a feedback affect wherein the stock price increase forms a vicious circle whereby the initial increase (decrease) propels further price increase (decrease).A test was carried out to check the difference in

Volatility in Indian Stock Markets volatility of stocks while they are rising as opposed to their fall. It is also seen that these feedback loops have different intensities during a Bull Run and a Bear run. It was seen that the price volatility was more when the stock was falling as compared to when it was rising which shows that the feedback was more during a bear run Even the cultural change like new stock option plan to executives and employees, brought a new set of investors in market leading to huge demand of shares. A recent survey by ET, SEBI & NCAER has shown that 7.66 million households (total investor base of 12.1mn) invested in the equity markets for the first time between March 1999 and March 200010. This increase in the number of investors has increased the demand for stocks. This excessive demand coupled with the "ICE" affect has taken optimism to great heights leading to over valuation. This has increased the speculative activities, which is seen by the delivery to trading volume ratio, which is as low as 15% Ergo high volatility.

Rolling settlement was introduced to reduce the speculative activities in volatile stocks from 10th January 2000. A study was carried out to analyze the change in volatilities before and after the introduction of rolling settlement. We found that the stocks had that volatilities during the six-month period have gone up . This might be due to the free-fall in the share prices that occurred after the introduction of rolling settlement.

CONCLUSION After doing the empirical analysis of data the research paper states that there were many factors that affected stock market volatility. Though no fundamental factors emerge for the existence of such high volatility we find

Volatility in Indian Stock Markets that other perceptual factors have led to this mad rush for stocks leading to volatility. Thus the research paper helped a lot in determining the reason behind heavy fluctuations in stock market between 1998 to 2000.