Modelling Volatility in the Indian Stock Market

Authors

  • Vinita Adhikari

Abstract

Volatility refers to the dispersal of stock-returns from its mean. The importance of studying volatility is that can be used as a surrogate to risk. Market Volatility is an important variable in discussing notional and practical applications given its fundamental role in stock-pricing and risk preference of the investor. Volatility has a very wide sphere of influence over the market and it has major implications on investment, financial instrument valuation, risk-management and decision making. The stock prices vary every day, because of supply and demand by the investors and market participants. Stock-volatility is an indication of a highly liquid market. The research paper explores the volatility behaviour in the stock market based on the daily closing prices with the use of GARCH and eGARCH models. The paper’s objective is to analyse the returns from the NSE and BSE index and apply the GARCH model for volatility estimation. Basis the model output, the paper also utilizes the eGARCH model to identify if leverage effect is present in the stock market in the period considered for analysis. The results from the model outputs display a degree of volatility persistence across the ten years for both the indices. The GARCH model has further been applied to forecast twenty further observations. Another key theme explored is the presence of leverage effect which is the inclination for volatility to increase significantly more, following a significant price-fall than following a price-rise of the same degree. The eGARCH model applied negates the presence of leverage effect in the time-series data.

 

Published

2020-11-01

Issue

Section

Articles