Page 1. 1 Study of Common Stochastic Trend and Co-Integration in the Emerging Markets A Case Stud... more Page 1. 1 Study of Common Stochastic Trend and Co-Integration in the Emerging Markets A Case Study of India, Singapore and Taiwan Golaka C Nath & Sunil Verma Abstract The relationship between the stock markets of the developed countries has been ...
The relationship between the stock markets of the developed countries has been examined extensive... more The relationship between the stock markets of the developed countries has been examined extensively in the literature. This study examines the interdependence of the three major stock markets in South Asia. Using daily stock market data from January 1994 to November 2002, we examine the stock market indices of India (NSE NIFTY), Singapore (STI) and Taiwan (Taiex). The index level series are non-stationary and so we employ bi-variate and multivariate cointegration analysis to model the linkages among these stock markets. We found no cointegration between the stock market indices for the entire period and hence no long run equilibrium. We found mild causality for some years in the study though most of the time these markets have not been interlinked. The study has used. It should be borne in mind that the tests carried out only tests for presence or absence of linear relationships.
Forward exchange rate bias explanation generally falls into two categoriesassumption of rational ... more Forward exchange rate bias explanation generally falls into two categoriesassumption of rational expectation resulting in a risk premium and expectation errors which is systematic. The paper tests the bias in the Indian forward exchange markets using one-month and three month forward contracts. The study finds that the three month contracts have larger prediction errors than the one-month contracts. The paper also finds that the prediction errors have information content which leads to assume the presence of risk premium. The study also finds that risk one-month contracts have lesser variability vis-à-vis the three month contracts.
This paper analyses the India sovereign yield to find out the principal factors affecting the ter... more This paper analyses the India sovereign yield to find out the principal factors affecting the term structure of interest rate changes. We apply Principal Component Analysis (PCA) on our data consisting of zero coupon interest rates derived from government bond trading using Nelson-Siegel functional form. This decomposition of the yield curve highlights important relationship between identified factors and metrics of the term structure shape. The empirical findings support statistical similarities between the Indian yield curve and term structure studies of major countries.
Collateralized Borrowing and Lending Obligations, more popularly known as CBLO, has been taking t... more Collateralized Borrowing and Lending Obligations, more popularly known as CBLO, has been taking the center stage in financial markets in recent months. CBLO has been a innovative product that provides tremendous flexibility to the user which a Repo does not provide. During the initial period of its launching, the volume in CBLO market was negligible as it was a new product. Any new product takes time to integrate with comparable products in the market. However as the time progressed, market participants realized the utility of the product and the restrictions imposed in call market for non-bank participants helped this market to grow. The CBLO, an infant in the financial world, stands on its own in this market, and the statistics display a calibrated integration of CBLO market with other markets due to its advantages like CRR exemption, SLR status for the securities remaining unencumbered in the gilt accounts of the bank maintained with the CCIL under the Constituents' Subsidiary General Ledger (CSGL) facility, lower risk weight etc.
The study has attempted to empirically examine the efficiency of Govt. securities auction in Indi... more The study has attempted to empirically examine the efficiency of Govt. securities auction in Indian market. It is observed that prices of the securities under auction generally move downward between the date of announcement of auction and the date of auction. The yield, duration, issue size, outstanding stocks of the security under auction have significant impact of the price changes of auctioned securities. Introduction of an open limit order book system for Government securities market has been found to be statistically significant. Before the introduction of limit order book system, the average price change was 1.89% while after introduction of limit order book system, the same came down drastically to 0.87%.
Bond Theory is an integral part of financial market. Understanding the same is essential for stud... more Bond Theory is an integral part of financial market. Understanding the same is essential for students entering the market for career options. There are various types of bonds and pricing logic is different for different type of bonds. The differential approach presented in this write up tries to make students understand bond pricing dynamics more intuitively. The concept of duration and convexity has been explained with graphical presentations. The write-up is an application based approach to bring clarity to the Bond theory topic. Indian bond market conventions (30/360E, Semi-annual payment of coupon, FV=100, quotation on Clean price, etc.) have been used for explanation.
The short term market is an important source for banks and institutions to secure funds to align ... more The short term market is an important source for banks and institutions to secure funds to align their short term asset liability mismatches. Central Banks use the market to signal policy stance changes. In India, Reserve Bank of India uses monetary policy not only to signal the policy stances but also uses the same to map growth dynamics of the economy. The short term rates generally synchronize with policy rates in a manner that helps smooth transmission of monetary policy. In India, the short term market heavily revolves around daily LAF of RBI as well as overnight inter-bank Call Money, Repo and CBLO markets. Effort to develop a term money market has not been very successful. The article looked at creating an indexed rate taking into account all three segments into consideration rather than picking up only one rate. The liquidity was estimated as ratio of LAF and Net Demand and Time Liability (NDTL). The relationship between indexed rate and liquidity was tested and found to be rational. The article also found rational relationship between the spread of Inter-bank Call and Repo and ratio of LAF and NDTL along with money market transaction volume.
Macroeconomics and Finance in Emerging Market Economies, 2015
Repo is used in India as an instrument for monetary policy by institutionalizing daily Liquidity ... more Repo is used in India as an instrument for monetary policy by institutionalizing daily Liquidity Adjustment Facility (LAF) which allows banks and Primary Dealers to manage their liquidity needs. Liquidity stress in the market has an impact on the short term interest rate. Entities not having adequate securities balances borrow funds from inter-bank uncollateralized call market and the call rates are prone to liquidity shocks in the system. The spread between Call and Repo rates is likely to widen when there is liquidity stress in the market. The study tried to find the determinant of the spread. It found that LAF window activity as well as total money market activity has an impact on the spread. In order to understand if the spread behaves in a different manner when the system has excess liquidity vis-à-vis shortage of liquidity, a Regime Switching model using Goldfeld and Quandt's Dmethod for switching regression was used. The tests found that the monetary policy is stable in both the regimes and the effectiveness of monetary policy in both the regimes are not statistically different.
Traditionally Indian banking system provided the much-needed financial support to industry and co... more Traditionally Indian banking system provided the much-needed financial support to industry and commerce. Till the onset of financial sector reforms in early 1990s the Indian industry depended heavily on banks and development financial institutions for their working capital and long-term projects respectively. Capital was scarce and hence, needed rationing to areas and sectors where the government wanted and prioritized. The existence of Controller of Capital Issues was the guiding force behind investment where public support was needed. At the time of its liberation from the British in 1947 India had only the traditional commercial banks and these banks were small and owned by private companies who had other interests in business and promoted banks to channelize resources to their activities. It was no different from earlier fragmented banking system of the USA. These banks supplied shorter maturity credit for working capital needs of the industry and commerce as major infrastructur...
ABSTRACT Value-at-Risk (VaR) has been widely promoted by the Bank for International Settlement (B... more ABSTRACT Value-at-Risk (VaR) has been widely promoted by the Bank for International Settlement (BIS) as well as central banks of all countries as a way of monitoring and managing market risk and as a basis for setting regulatory minimum capital standards. The revised Basle Accord, implemented in January 1998, makes it mandatory for banks to use VaR as a basis for determining the amount of regulatory capital adequate for covering market risk. Foreign exchange forms a major part of banks' holding and hence are subject to risk. We have adopted three categories of VaR methods, viz., Variance-Covariance (Normal) methods including Risk-Metric, Historical Simulation (HS) and Tail-Index Based approach. We have used the daily exchange rate data from March 1, 1993 to October 8, 2003 for our analysis. Empirical results show that most of the models are failing in 1 500 rolling window while the full sample data is over estimating the VaR.
The study attempts to capture the long term relationship between Crude Oil and Gold prices. Empir... more The study attempts to capture the long term relationship between Crude Oil and Gold prices. Empirical analysis shows that Gold and Crude oil prices are positively correlated but no long term plausible relation was established between them using Granger Causality test and Regression using lags. Study finds no strong evidence for causality running in either direction between gold prices and crude oil prices.
Liquidity is one of the most important factors after credit risk that affects the bond yields. Th... more Liquidity is one of the most important factors after credit risk that affects the bond yields. The paper uses various measures of liquidity to understand their determinants in Indian sovereign bond market. The Liquidity measured by parameters like Turnover Ratio and Amihud Illiquidity Indicator show that these parameters not only have instantaneous relationship with bond yield but contemporaneous relationship with themselves. Impact Cost is not found to have any explanatory power. Financial crisis had marginal impact on the Indian sovereign bond market. It functioned well during the crisis period without much deterioration in general market liquidity condition as RBI injected large amount of liquidity to the system within a limited time period to ensure stability in the financial markets in India. However, the notion of flight to safety was evident as traders started investing largely in Government bonds shunning credit products as the credit quality in general started to dip. This was duly supported by large issuances of Government bonds. The study also finds that the electronic order matching system for government bonds has been successful in improving liquidity and reducing volatility in the market.
The proactive measures undertaken by Reserve Bank of India (RBI) helped to develop the government... more The proactive measures undertaken by Reserve Bank of India (RBI) helped to develop the government securities market and added depth and liquidity. The proprietary deals constitute the largest part of the dealing in Government securities market. Commercial Banks offer constituent services to smaller entities like cooperative banks, corporates, etc. to facilitate their trading activities in Government securities. The constituent deals have almost stagnated as many smaller entities are given permission by RBI to directly deal in the market instead of going through a Bank. RBI has been taking measures to improve direct market access instead of going through intermediaries. The study finds that NDSOM system has helped to reduce price variations in Government securities to a large extent as bond traders can view the market online and take appropriate positions. There is a need to encourage smaller entities co-operative banks, pension funds with Gilt Accounts and currently participating through brokers or Primary Members like commercial banks to avail of the NDSOM to directly manage their positions and also to reduce their transaction costs. There is also a need for Foreign Institutional Investors to be given access to the NDSOM to be able to take advantage of the direct trading in this market.
This paper makes a serious attempt to explore whether there exists a need to study the use of non... more This paper makes a serious attempt to explore whether there exists a need to study the use of non -linear models to test the existence of long memory,in an emerging market like India. It starts by discussing how,various authors are challenging the efficient market hypothesis. This has ,led to the ,use of non-linear dynamic ,systems ,for modeling
Macroeconomics and Finance in Emerging Market Economies, 2008
The Clearing Corporation of India (CCIL) was set up with the prime objective to improve efficienc... more The Clearing Corporation of India (CCIL) was set up with the prime objective to improve efficiency in the transaction settlement process, insulate the financial system from shocks emanating from operations related issues, and to undertake other related activities that would help to broaden and deepen the Money, Gilts and Forex markets in India. The role of CCIL is unique as it provides guaranteed settlement of three different products under one umbrella. It has been instrumental in setting up and running NDS-OM, NDS-Call and NDS-Auction system for the central bank that had helped the Indian market to evolve and grow immensely. It had also immensely bolstered CCIL's image in terms of ability to provide transparent, efficient, robust and cost effective end to end solutions to market participants in various markets. The success of its money market product `CBLO' has helped the market participants as well as the central bank to find a solution to unusual dependence on uncollateralized call market. CCIL has introduced many innovative products/tools like ZCYC, Bond and Tbills indices, Sovereign Yield Curve, Benchmark reference rates like CCIL-MIBOR/MIBID and CCBOR/CCBID.
Page 1. 1 Study of Common Stochastic Trend and Co-Integration in the Emerging Markets A Case Stud... more Page 1. 1 Study of Common Stochastic Trend and Co-Integration in the Emerging Markets A Case Study of India, Singapore and Taiwan Golaka C Nath & Sunil Verma Abstract The relationship between the stock markets of the developed countries has been ...
The relationship between the stock markets of the developed countries has been examined extensive... more The relationship between the stock markets of the developed countries has been examined extensively in the literature. This study examines the interdependence of the three major stock markets in South Asia. Using daily stock market data from January 1994 to November 2002, we examine the stock market indices of India (NSE NIFTY), Singapore (STI) and Taiwan (Taiex). The index level series are non-stationary and so we employ bi-variate and multivariate cointegration analysis to model the linkages among these stock markets. We found no cointegration between the stock market indices for the entire period and hence no long run equilibrium. We found mild causality for some years in the study though most of the time these markets have not been interlinked. The study has used. It should be borne in mind that the tests carried out only tests for presence or absence of linear relationships.
Forward exchange rate bias explanation generally falls into two categoriesassumption of rational ... more Forward exchange rate bias explanation generally falls into two categoriesassumption of rational expectation resulting in a risk premium and expectation errors which is systematic. The paper tests the bias in the Indian forward exchange markets using one-month and three month forward contracts. The study finds that the three month contracts have larger prediction errors than the one-month contracts. The paper also finds that the prediction errors have information content which leads to assume the presence of risk premium. The study also finds that risk one-month contracts have lesser variability vis-à-vis the three month contracts.
This paper analyses the India sovereign yield to find out the principal factors affecting the ter... more This paper analyses the India sovereign yield to find out the principal factors affecting the term structure of interest rate changes. We apply Principal Component Analysis (PCA) on our data consisting of zero coupon interest rates derived from government bond trading using Nelson-Siegel functional form. This decomposition of the yield curve highlights important relationship between identified factors and metrics of the term structure shape. The empirical findings support statistical similarities between the Indian yield curve and term structure studies of major countries.
Collateralized Borrowing and Lending Obligations, more popularly known as CBLO, has been taking t... more Collateralized Borrowing and Lending Obligations, more popularly known as CBLO, has been taking the center stage in financial markets in recent months. CBLO has been a innovative product that provides tremendous flexibility to the user which a Repo does not provide. During the initial period of its launching, the volume in CBLO market was negligible as it was a new product. Any new product takes time to integrate with comparable products in the market. However as the time progressed, market participants realized the utility of the product and the restrictions imposed in call market for non-bank participants helped this market to grow. The CBLO, an infant in the financial world, stands on its own in this market, and the statistics display a calibrated integration of CBLO market with other markets due to its advantages like CRR exemption, SLR status for the securities remaining unencumbered in the gilt accounts of the bank maintained with the CCIL under the Constituents' Subsidiary General Ledger (CSGL) facility, lower risk weight etc.
The study has attempted to empirically examine the efficiency of Govt. securities auction in Indi... more The study has attempted to empirically examine the efficiency of Govt. securities auction in Indian market. It is observed that prices of the securities under auction generally move downward between the date of announcement of auction and the date of auction. The yield, duration, issue size, outstanding stocks of the security under auction have significant impact of the price changes of auctioned securities. Introduction of an open limit order book system for Government securities market has been found to be statistically significant. Before the introduction of limit order book system, the average price change was 1.89% while after introduction of limit order book system, the same came down drastically to 0.87%.
Bond Theory is an integral part of financial market. Understanding the same is essential for stud... more Bond Theory is an integral part of financial market. Understanding the same is essential for students entering the market for career options. There are various types of bonds and pricing logic is different for different type of bonds. The differential approach presented in this write up tries to make students understand bond pricing dynamics more intuitively. The concept of duration and convexity has been explained with graphical presentations. The write-up is an application based approach to bring clarity to the Bond theory topic. Indian bond market conventions (30/360E, Semi-annual payment of coupon, FV=100, quotation on Clean price, etc.) have been used for explanation.
The short term market is an important source for banks and institutions to secure funds to align ... more The short term market is an important source for banks and institutions to secure funds to align their short term asset liability mismatches. Central Banks use the market to signal policy stance changes. In India, Reserve Bank of India uses monetary policy not only to signal the policy stances but also uses the same to map growth dynamics of the economy. The short term rates generally synchronize with policy rates in a manner that helps smooth transmission of monetary policy. In India, the short term market heavily revolves around daily LAF of RBI as well as overnight inter-bank Call Money, Repo and CBLO markets. Effort to develop a term money market has not been very successful. The article looked at creating an indexed rate taking into account all three segments into consideration rather than picking up only one rate. The liquidity was estimated as ratio of LAF and Net Demand and Time Liability (NDTL). The relationship between indexed rate and liquidity was tested and found to be rational. The article also found rational relationship between the spread of Inter-bank Call and Repo and ratio of LAF and NDTL along with money market transaction volume.
Macroeconomics and Finance in Emerging Market Economies, 2015
Repo is used in India as an instrument for monetary policy by institutionalizing daily Liquidity ... more Repo is used in India as an instrument for monetary policy by institutionalizing daily Liquidity Adjustment Facility (LAF) which allows banks and Primary Dealers to manage their liquidity needs. Liquidity stress in the market has an impact on the short term interest rate. Entities not having adequate securities balances borrow funds from inter-bank uncollateralized call market and the call rates are prone to liquidity shocks in the system. The spread between Call and Repo rates is likely to widen when there is liquidity stress in the market. The study tried to find the determinant of the spread. It found that LAF window activity as well as total money market activity has an impact on the spread. In order to understand if the spread behaves in a different manner when the system has excess liquidity vis-à-vis shortage of liquidity, a Regime Switching model using Goldfeld and Quandt's Dmethod for switching regression was used. The tests found that the monetary policy is stable in both the regimes and the effectiveness of monetary policy in both the regimes are not statistically different.
Traditionally Indian banking system provided the much-needed financial support to industry and co... more Traditionally Indian banking system provided the much-needed financial support to industry and commerce. Till the onset of financial sector reforms in early 1990s the Indian industry depended heavily on banks and development financial institutions for their working capital and long-term projects respectively. Capital was scarce and hence, needed rationing to areas and sectors where the government wanted and prioritized. The existence of Controller of Capital Issues was the guiding force behind investment where public support was needed. At the time of its liberation from the British in 1947 India had only the traditional commercial banks and these banks were small and owned by private companies who had other interests in business and promoted banks to channelize resources to their activities. It was no different from earlier fragmented banking system of the USA. These banks supplied shorter maturity credit for working capital needs of the industry and commerce as major infrastructur...
ABSTRACT Value-at-Risk (VaR) has been widely promoted by the Bank for International Settlement (B... more ABSTRACT Value-at-Risk (VaR) has been widely promoted by the Bank for International Settlement (BIS) as well as central banks of all countries as a way of monitoring and managing market risk and as a basis for setting regulatory minimum capital standards. The revised Basle Accord, implemented in January 1998, makes it mandatory for banks to use VaR as a basis for determining the amount of regulatory capital adequate for covering market risk. Foreign exchange forms a major part of banks' holding and hence are subject to risk. We have adopted three categories of VaR methods, viz., Variance-Covariance (Normal) methods including Risk-Metric, Historical Simulation (HS) and Tail-Index Based approach. We have used the daily exchange rate data from March 1, 1993 to October 8, 2003 for our analysis. Empirical results show that most of the models are failing in 1 500 rolling window while the full sample data is over estimating the VaR.
The study attempts to capture the long term relationship between Crude Oil and Gold prices. Empir... more The study attempts to capture the long term relationship between Crude Oil and Gold prices. Empirical analysis shows that Gold and Crude oil prices are positively correlated but no long term plausible relation was established between them using Granger Causality test and Regression using lags. Study finds no strong evidence for causality running in either direction between gold prices and crude oil prices.
Liquidity is one of the most important factors after credit risk that affects the bond yields. Th... more Liquidity is one of the most important factors after credit risk that affects the bond yields. The paper uses various measures of liquidity to understand their determinants in Indian sovereign bond market. The Liquidity measured by parameters like Turnover Ratio and Amihud Illiquidity Indicator show that these parameters not only have instantaneous relationship with bond yield but contemporaneous relationship with themselves. Impact Cost is not found to have any explanatory power. Financial crisis had marginal impact on the Indian sovereign bond market. It functioned well during the crisis period without much deterioration in general market liquidity condition as RBI injected large amount of liquidity to the system within a limited time period to ensure stability in the financial markets in India. However, the notion of flight to safety was evident as traders started investing largely in Government bonds shunning credit products as the credit quality in general started to dip. This was duly supported by large issuances of Government bonds. The study also finds that the electronic order matching system for government bonds has been successful in improving liquidity and reducing volatility in the market.
The proactive measures undertaken by Reserve Bank of India (RBI) helped to develop the government... more The proactive measures undertaken by Reserve Bank of India (RBI) helped to develop the government securities market and added depth and liquidity. The proprietary deals constitute the largest part of the dealing in Government securities market. Commercial Banks offer constituent services to smaller entities like cooperative banks, corporates, etc. to facilitate their trading activities in Government securities. The constituent deals have almost stagnated as many smaller entities are given permission by RBI to directly deal in the market instead of going through a Bank. RBI has been taking measures to improve direct market access instead of going through intermediaries. The study finds that NDSOM system has helped to reduce price variations in Government securities to a large extent as bond traders can view the market online and take appropriate positions. There is a need to encourage smaller entities co-operative banks, pension funds with Gilt Accounts and currently participating through brokers or Primary Members like commercial banks to avail of the NDSOM to directly manage their positions and also to reduce their transaction costs. There is also a need for Foreign Institutional Investors to be given access to the NDSOM to be able to take advantage of the direct trading in this market.
This paper makes a serious attempt to explore whether there exists a need to study the use of non... more This paper makes a serious attempt to explore whether there exists a need to study the use of non -linear models to test the existence of long memory,in an emerging market like India. It starts by discussing how,various authors are challenging the efficient market hypothesis. This has ,led to the ,use of non-linear dynamic ,systems ,for modeling
Macroeconomics and Finance in Emerging Market Economies, 2008
The Clearing Corporation of India (CCIL) was set up with the prime objective to improve efficienc... more The Clearing Corporation of India (CCIL) was set up with the prime objective to improve efficiency in the transaction settlement process, insulate the financial system from shocks emanating from operations related issues, and to undertake other related activities that would help to broaden and deepen the Money, Gilts and Forex markets in India. The role of CCIL is unique as it provides guaranteed settlement of three different products under one umbrella. It has been instrumental in setting up and running NDS-OM, NDS-Call and NDS-Auction system for the central bank that had helped the Indian market to evolve and grow immensely. It had also immensely bolstered CCIL's image in terms of ability to provide transparent, efficient, robust and cost effective end to end solutions to market participants in various markets. The success of its money market product `CBLO' has helped the market participants as well as the central bank to find a solution to unusual dependence on uncollateralized call market. CCIL has introduced many innovative products/tools like ZCYC, Bond and Tbills indices, Sovereign Yield Curve, Benchmark reference rates like CCIL-MIBOR/MIBID and CCBOR/CCBID.
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Papers by Golaka Nath