Introduction

With the ever increasing and expanding economy, Indian economy is considered as a growth
engine of the world’s economy. And stock market of such robust economy is the face of the
growing market and companies in it. India has one of the oldest and the fastest stock market
platform i:e Bombay Stock Exchange (BSE). Stock market basically is an electronic platform
where the share of the companies are listed and traded. Because of this advanced platform it is
possible for companies to raise capital from public efficiently and effectively. With the economic
reforms in the country, stock exchanges have grown exponentially in terms of foreign
institutional investment and transaction turnover. This increase is mainly due liberalized and
supportive along with regulative role of government. The share prices of the listed companies
fluctuate on the basis of various factors which affect and build the sentiments of markets and
investor. In India, we have a very low level of economic literacy and if we quantify it then in a
population of more than 125 Crore, less than 2% of population actually invests in stock market.
Such low participation is because of the above mentioned low level of economic literacy plus
huge fluctuations in the market due to several factors. India is pioneer in Information
Technology industry and IT companies of India are one of the greatest contributors in total
export as well as fame for the country. Being a pioneer industry, shares of IT companies are
always remain in the limelight of stock market. Further return on this is again fluctuative due to
industry and market factors. Since so many fluctuations exist in the stock market, it creates an
urge to study about those factors which are responsible for the ups and downs in the market.

STOCK EXCHANGES IN INDIA

Stock Exchange (also known as stock market or share market) is one of the main integral part of
capital market in India. It plays a vital role in growing industries and commerce of a country
which eventually affect the economy. It is well organized market for purchase and sale of
corporate and other securities which facilitates companies to raise capital by pooling funds from
different investors as well as act as an investment intermediary for investors. Moreover, it
ensures that securities should be traded according to some pre defined rules and regulations.

London Stock Exchange is the oldest stock exchange in the world whereas Bombay Stock
Exchange is the oldest one in India.
In India, there are 7 Stock Exchanges out of which NSE and BSE are the two main indices. Most
of the trading in Indian Stock Market takes place on these two stock exchanges. Both the
exchanges follow the same trading hours, trading mechanism, settlement process etc. At the last
count, BSE comprises of 5800 listed firms whereas on the other hand its rival NSE consists of
1659 listed firms. Interestingly, out of all the firms listed on BSE, only around 500 firms
constitutes more than 90 % of its market capitalization.

Bombay Stock Exchange (BSE) is the leading and fastest stock exchange in India as well
as in South Asia established in 1875. Bombay stock exchange is the world's 11th largest stock
market by market capitalization at $1.7 trillion as of 31 January 2015 (Monthly Reports, World
Federation of Exchanges). More than 5,000 companies are listed on BSE. The main index of
Bombay stock exchange is Sensex which comprises of 30 stocks.

National Stock Exchange was incorporated in 1992 as a tax paying company and was
recognized as a stock exchange in 1993 under the Securities Contracts (Regulation) Act 1956.
NSE is the 12th largest stock exchange in the world with a market capitalization of more than
US$ 1.65 trillion as on 31 January 2015 (Monthly Reports, World Federation of Exchanges).
Moreover, it was the first exchange to provide fully automated screen based electronic trading
system. Nifty is the indices to measure overall performance of the National Stock Exchange
which comprises of 50 stock index.

Functions of Stock Exchange

The Stock Exchange serves two critical functions:

• It provides a critical link between companies that need funds to set up new business
or to expand their current operations and interested investors.
• Stock Exchange also acts as a guide for the investors that have excess funds to invest
in such companies.

The main aim of this study is to determine the impact of various economic variables on the
performance of stock market of selected listed IT companies on NSE.
SECTOR INDICATORS

There are number of sectors or industries which are listed on National Stock Exchange and
Bombay Stock Exchange. In addition to this, an individual sector comprises of number of
companies. There are around 73 sectors listed on NSE and BSE seperately. Some of the
important sectors present on both the exchanges are as follows:-

BANKING SECTOR

AUTOMOBILE SECTOR

INFORMATION TECHNOLOGY SECTOR

METAL SECTOR

REAL ESTATE SECTOR

FMCG SECTOR

MEDIA & ENTERTAINMENT SECTOR

PHARMACEUTICALS SECTOR

POWER SECTOR

PSU BANK SECTOR

INFORMATION TECHNOLOGY SECTOR

India’s service sector contributes a greatest part in the GDP of Indian economy accounting for 57
% in 2012 as compare to 15% in 1950. The service sector also generates employment to 27% of
the work force. Information technology is among the fastest growing sector. A short overview of
Indian Information Technology industry is presented here for better understanding of the
uniqueness that this industry possesses. Information technology industry has played a vital role
in the Indian economy during the last few years. A number of large, profitable Indian companies
today belong to the IT sector and a great deal of investment interest is now focused on the IT
sector. India’s IT services industry was born in Mumbai 1967 with the establishment of TATA
group in partnership with Burroughs. Majorly it consists of two main components: IT services
and BPO (Business Process Outsourcing). According to NASSCOM, in 2015 Information
Technology sector has contributed aggregated revenue of US$ 147 billion as well as the
contribution of IT industry in the country’s GDP has been raised from 1.2% in 1998 to 7.5% in
2012. Moreover, IT sector is currently generating around 2.5 million direct employments in India
which will further enhance and also it provides a large reservoir of highly skilled, low cost and
educated workers to meet the increased demand of foreign consumers. Besides, to enhance this
sector the Government has also come up with Digital India initiative, which highlights three
main components: creation of digital infrastructure, delivering services digitally and to increase
the digital literacy. At the last count, IT sector has been selected as it majorly contributes in the
free float market capitalization of stocks listed on BSE and NSE.
Contribution Of Different Nifty In Free Float Market Capitalization on NSE

FFMC on NSE Nifty Auto Index

2.30% Nifty Bank Index

0.40%
6.10% 8.60% Nifty Financial Services
13.90%
2.60% Nifty on FMCG
15.60% Nifty on IT
Nifty on Media
8%
19.20% Nifty on Metal
12.15%
8.60% Nifty on Farma
Nifty on Pvt. Bank
Nifty on PSU Bank
FFMC- Free Float Market Capitalization Nifty on Reality

FACTORS AFFECTING STOCK MARKET

Determining stock returns is a complex and conflicting task. There are number of forces which
influence the share returns of stock market. . Although, there is no pre-planned
planned system which can
trace the exact
act movement in the stock returns of the stock market. However, fundamental factors,
external factors and market behavior can cause increase and decrease in the demand and supply
of individual stock.

Major factors working

orking on this case consist of indicators of firm’s performance, investor’s
perception, market efficiency, and some macro economic variables such as Inflation, GDP, FDI,
Interest Rate, Oil Prices etc. Majorly, there are two thoughts related to this concept,
concept first is the
technical analysis and second one is fundamental analysis.. Former is a technique which is
actually a statistical tool used to predict share price by the use of past share prices data whereas
the later one is the method of stock valuation by using financial information with the help of a
specific model.
Fundamental Analysis is further classified in two categories one is company specific variables
and other is macro economic variables.
Company specific variables include Earning Per Share, Dividend Per Share, Price/Earning
Ratio, Book Value Per Share, Return On Equity, Net Asset Value etc and macro economic
variables include Gross domestic product, Inflation, Foreign Direct Investment, Interest Rate,
Oil Prices.

Review of Selected Literature

Year wise division of reviewed research paper:

Year No. of Research Paper

2008-2009 01

2009-2010 01

2010-2011 04

2011- 2012 04

2012-2013 04

2013-2014 05

2014-2015 03

2015-2016 08

Geographical Area Covered in the Review:

National International

14 16
The Review of literature plays a vital role in carrying out further research work. Various sources
have been used here for research work reviewed such as journals, internet sites, etc. The review
of literature has been divided on the basis of various fundamental factors affecting the stock
market.
Macro economic Variables:
• Guru, U. Idris I (2009) have done a number of studies to evaluate the relationship
between stock market returns and various macro economic variables. The present
research has been undertaken to examine the macroeconomic variable that are
responsible for fluctuations in the stock prices of Nigeria Stock Market . Findings of the
study reveal that stock prices moves in the same direction with Gross Domestic Product,
Money Supply, Total Deficits, and Interest Rate while Inflation Rate and Index of
Industrial Production moves in opposite direction.
• Nasif AL, F.Shubiri (2010) empirically examines the effect of micro and macro
economic factors on the movement of the stock prices of 14 commercial banks of
Amman Stock Exchange for the period 2005 -2008. and the results portrays that Net
Asset Value Per Share, Dividend Percentage and Gross Domestic Product have highly
positive significant relationship with Market Price of Stock whereas there is a negative
significant relationship between Inflation and Lending Interest Rate with Market Price of
Stock.
• Girard, EC (2010) investigates the connection between investability and return
dynamics of stocks traded in emerging markets. The results depict that investable
premium also act as an important fundamental factor which influence the stock market.
Girard, EC (2010)
• Shen, CH. & Lin, KL (2010) investigates whether corporate governance affects the
impact of the relationship between fundamental signals and stock returns using
Taiwanese data in which they observed that in a strong governance regime, the responses
of stock returns to the fundamental signals are found to be greater than those in weak
governance regimes.
• Butt, B.Z. Rehman, K.Khan, M. Safwan,N. (2010) attempt to reveal the connection
between specific economic variables and return variations of stocks traded in Karachi
Stock Exchange. However, they finds out that market index, consumer price index, risk
free rate of return, exchange rate, industrial production index, money and individual
industrial production are the economic variables which influence the stock prices of
banking and textile industry. Moreover, it has also been identified that economic
exposure is higher at industry level as compare to firm level stock retuns.
• Olweny, T. Omondi, K. (2011) aims at describing the influence of three macroeconomic
variables on the stock return volatility in the Nairobi Stock Exchange, Kenya i.e. NSE 20
share index. As a result, it can be concluded that selected macroeconomic variables i.e
Foreign Exchange Rate, Interest Rate and Inflation Rate have significant impact on the
prices of stocks listed in Nairobi Stock Exchange.
• Moreover, Le, TH. Chang, Y. (2011) evaluated the impact of oil prices on the stock
prices of Japan, Malaysia, Singapore & South Korea. The main finding of the study is
that oil and stock prices have highest correlation in South Korea followed by Singapore,
Malaysia and Japan.
• Bayezid Ali (2011) tried to analyze the influence of micro and macro economic variables
on the all share price index of Dhaka stock Exchange and reached to a conclusion that
inflation and foreign remittance have negative influence whereas industrial production
index, market P/E & MKTPE have positive influence on stock returns.
• Naik & Padhi (2012) studied the relationship between Indian stock Market Index (BSE
Sensex) and five macro economic variables and results reveal that there exists co
integration between BSE Index & macro economic variables which proves that there is a
long term relationship between them.
• Dr. Aurangzeb (2012) made an attempt to make out the factors influencing the
performance of stock market in South Asia and the study indicate that Exchange Rate and
FDI have positive impact on Stock Market and Interest Rate has negative but significant
while Inflation has negative as well as insignificant impact on the performance of Stock
Market of South Asian countries.
• This paper analyze the influence of Money Supply, consumer Price Index, Gold Prices,
crude Oil Prices, Foreign Exchange Reserves, FDI, FII, Balance Of Trade, Foreign
 Exchange Rate, Call Money Rate, Repo Rate, Industrial Growth Rate on the market of
National Stock Exchange. In connection to this, the findings of the study suggests that
industrial performance significantly influence the stock market as well as market also rely
on macroeconomic environment to maintain macro stability.
• Joshi (2013) indentified the major factors held responsible to create movement in stock
market. He found from the study that the factors like growth of Gross Domestic Product,
flow of FIIs, Inflation, Political Stability, Liquidity and Different interest rate are the
major factors accountable for up and down movement in Indian stock market.
• The main motive of Sapna & Dani (2014) behind the study of this paper is to critically
examine the factors which affect the trading volume of BSE index. Findings of the study
reflect that there exist a significant relationship between price and trading volume and it
is affected by stock prices.
• Moreover Shah (2014) examined the trend and pattern of Foreign Institutional
Investments flow in India and also describes the relationship between between FII and
Nifty. From the research evidence, it has been observed that there is a moderate positive
correlation between Foreign Institutional Investment and CNX Nifty stock market.
• A study of interquantile behavior of stock returns of selected 19 companies listed at BSE
has been conducted by Kothari & Kothari (2015) which reveals that stock betas are not
symmetric they differ significantly over the bullish & bearish market state.
• Rajesh & Bhaskar (2015) try to explore the variation in share prices of selected Indian
manufacturing firms listed at Bombay Stock Exchange and it is concluded that Market
Return, Growth in market & Industrial Production positively influences the stock returns
at firm and industry level whereas rising inflation adversely affect the stock returns and
GDP is insignificant but positively related to stock returns of the firm.
• Ismail, Mustafa, Nijam. (2015) applied the correlation and multiple regression tool to
investigates the relationship between macro economic variables and performance of stock
market of Sri Lanka with the study period from 1980 to 2012. Findings of the study
confirm that macro economic factors continue to affect stock prices of Colombo Stock
Exchange.
• Ray & Vani unravel the relationship between macro economic variables and
performance of capital market in Indian context (BSE).After the analysis they found out
 that Interest Rate, Output, Money Supply, Inflation Rate and Exchange Rate has
considerable influence on the stock market while other variables have very negligible
impact.

Company Specific Variables:

Other wave of research is related to company specific variables.

• Sharma (2011) studied the impact of certain selected explanatory variables on the equity
prices of Indian companies which truly helped to identify that Dividend per Share &
Earning Per Share are considered to be the strongest determinants of share price. Further,
higher Book Value Per share depicts a sound financial position of a company which leads
to positive impact on share price.
• As mentioned previously, Malik, Qureshi & Azeem (2012) also studied the impact of
Book Value and Earning Per Share on the share price of selected fifty two companies
taken from Karachi Stock Exchange by using Ohlson model. The study reveals that there
is a high determination power according to Ohlson model of valuation while there is a
minor improvement after adopting the cross product term.
• (Allahawiah, S. & Amro, SA.(2012) determine, analyze and evaluate the impact of
internal factors responsible for the fluctuations in the share prices of listed stocks in
Amman Stock Exchange. The result of the study shows that many factors have
relationships, both positive and negative with share market out of which dividend policy
has major impact on the stock prices while least one was the nature of firm’s business.
• Das & Pattanayak (2013) talks about the effect of corporate fundamental factors on the
stock prices including the Sensex and Nifty. Conclusion reveals that share prices of
companies registered at NSE and BSE are greatly influenced by the corporate
fundamental factors.
• Tandon, K. & Malhotra, N. (2013) investigated the firm’s specific variables which
affect the share prices in the context of National Stock Exchange (NSE) 100 companies.
They found a significant positive association of firms book value, EPS & P/E Ratio with
firm’s stock price whereas Dividend Yield is having significant inverse association with
market price of firm’s stock.
• Conducting research in Dhaka Stock Exchange Haque & Faruquee. (2013) concluded
that stock prices at Dhaka Stock Exchange is more influenced by other factors as
compare to company specific factors.
• Sindhu, Bukhari & Hussain (2014) tried to identify the factors responsible for the ups
and downs in the share price of some listed companies in Karachi Stock Exchange and it
has been observed that 65 percent of the variation in stock price is due to the internal
factors which includes cash flows, leverage, profitability, growth, market capitalization,
and dividend.
• Geetha & Swaaminathan (2015) did a study of four automobile and IT industry listed
at NSE and BSE and concluded that there is a significant effect of Earning per Share,
Price/Earning Ratio and Book Value per Share on the movement of stock prices whereas
dividend per share doesn’t have any effect on the market price.
• Sharif, Purohit & Pillai (2015) explored Bahrain Stock Exchange to study the impact of
company specific variables on the stock prices of companies listed in Bahrain Stock
Exchange. Moreover, the results indicates that ROE, Book Value per share, Dividend per
share, Dividend Yield, Price Earning ratio, Firm’s Size are significant determinants of
share price in the Bahrain stock Market.
 Table No. 1: Reviewed Articles

S. Author Title Study Country/ Source of Findings

No Name Objective/Stu Geographica Data
dy l Area Collection/
Description covered
Data
Analysis
Method

1. Ahmed, S Aggregate This paper India Website of Movement of

Economic studies the NSE and BSE stock prices is not
(2008) Variables and casual only affected by
Stock relationship key macro
Markets in between stock Johansen’s economic
India. prices and the approach of variables but also
key co integration influenced by
macroeconomi & Toda & other macro
c variables Yamanoto dimensions in the
representing Granger economy.
real and Casuality
financial sector Test, BVR
of the econoy. Modelling

2. Guru, U. Environment Examination of Nigeria Issues of Stock prices

Idris I. al factors macro – Central Bank moves in the
Influencing economic of Nigeria same direction
(2009) Fluctuation variables that with GDP, money
of Share are responsible Multiple supply, total
prices on for fluctuations Regression deficit & interest
Nigeria Stock in Nigeria rate while
Exchange Stock Market. inflation rate &
Market. index of industrial
moves in opposite
direction.
3. Nasif AL, Analysis the To find out the Jordan Amman Stock Highly positive
F.Shubiri Determinants impact of Exchange and relation between
of Market various micro banks’ annual Market Price of
(2010) Stock Price and macro reports/ Stock & NAVPS ,
Movements: economic Dividend
An Empirical factors Simple and percentage, &
Study of affecting stock multiple Gross Domestic
Jordanian market of regression Product.
Commercial Jordan. analysis
Banks Negative
relationship on
inflation and
lending interest
rate .

4. Girard, Empirical To investigate US (SP/IFC) The average

EC. Evidence of the connection EMDB return and
the Existence between Reports) volatilityof more
(2010) of Investable investability investable stocks
Premiums in and return Factor is greater than the
Emerging dynamics of Analysis average return of
Market stocks traded less investable
Investable in emerging stocks.
Stocks market.
5. Shen, CH. The Impact This study Taiwan Endogenous It has been
& Lin, of Corporate investigates Switching observed that in a
KL Governance whether Model (ESM) strong governance
(2010) on the corporate of Hu and regime, the
governance Schiantarelli responses of stock
Relationship affects the (1998), returns to the
Between impact of the fundamental
Fundamental relationship signals are found
Information between to be greater than
Analysis and fundamental those in weak
Stock signals and governance
Returns stock returns regimes.
using
Taiwanese
data.

6. Butt, B.Z. Do economic To examine Pakistan Website of It is founded that

Rehman, factors the stock (KSE) KSE & economic
K.Khan, influence return variation Business exposure is higher
M. stock to specific records, State at industry level
Safwan,N. returns? A economic Bank of than firm level
firm and variables by Pakistan, stock returns.
(2010) industry level multi- factor Economic
analysis. model. survey of
Pakistan.

GARACH
Model
7. Ali, MB. Impact of To examine Bangladesh Monthly Inflation and
Micro and the impact of Review Foreign
(2011) Macroecono three macro Publication Remittance have
mic and two issued by negative influence
Variables on company DSE & and IPI, Market
Emerging specific monthly P/E & MKTPE
Stock Market variables on economic have positive
Return :A the all share trend issued influence on stock
Case Study price index of by returns.
on Dhaka DSE. Bangladesh
Stock bank
Exchange
(DSE) Multivariate
Regression
Model

8. Sharma, Determinants To examine India CMIE All these

Dr S. Of Equity the empirical Monthly variables affect
Share Prices relationship reviews, SEBI market price of
(2011) In India between equity annual share in positive
share reports, BSE direction & helps
price & annual the investors to
explanatory reports, forecast future
variables. Financil stock prices.
Journal

Correlation &
Linear
Multiple
Regression
9. Olweny, The effect of To investigate Kenya NSE, Central Stock returns are
T. macro- the effect of Bank of affected by
Omondi, economic macro Kenya & Foreign Exchange
K. factors on economic Kenya Rate, Interest
stock return factors on the National Rate, Inflation
(2011) volatility in stock return bureau of Rate.
the Nairobi volatility in the Statistics.
Stock Nairobi
Exchange, Securities Econometric
Kenya Exchange, Model &
Kenya. GARCH
Model

10. Le, TH. The impact To evaluate the Japan, Website Oil & stock prices
Chang, Y. of oil price impact of oil Malaysia, have the highest
fluctuations prices on the Singapore & Regression correlation in
(2011) on stock stock prices of South Korea South Korea
markets in Japan, followed by
developed Malaysia, Singapore,
and emerging Singapore & Malaysia and
economies. South Korea Japan.

11. Naik, P. The Impact Investigates India Website of Reveals that BSE
Padhi, P. of the relationship NSE and Index and
Macroecono between Indian BSE. Macroeconomic
(2012) mic Stock Market variables are co
Fundamental Index (BSE Johansen’s co integrated and
s on Stock Sensex) & five integration & hence there exist
Prices macroeconomi Vector Error a long term
Revisited : c variables. Correction relationship
Evidence Model between them.
from Indian
Data.
12 Dr. Factors To identify the South Asian Official It indicates that
Aurangze Affecting macro Countries database of FDI and
b Performance economic including World Bank, Exchange Rate
of Stock factors Pakistan, stock market have positive
(2012) Market: affecting the India, Sri and official impact and
Evidence performance of Lanka website of Interest Rate &
from South stock market in yahoo finance Inflation have
Asian South Asia. . negative impact
Countries on performance of
stock market in
South Asian
countries

13. Malik, Determinatio Is share price Pakistan Balance Sheet The study reveals
MF. n of Share significantly Analysis of that there is a high
Qureshi, Price: determinable PLC at KSE, determination
MU. & Evidence by the Book Annual power by using
Azeem, from Karachi Value Per reports of Ohlson while
M. (2012) Stock Share and companies, there is a minor
Exchange Earning Per Website of improvement
Share using ICAP & after adopting the
Ohlson model? SECP. / cross product
term.
Regression
Analysis,
Fixed Effects
Model
14. Allahawia Factors To determine , Jordan Website of Among are
h,S. affecting analyze & Amman Stock mentioned factors
Amro, SA Stock Market evaluate the Exchange dividend policy
prices in impact of has major impact
(2012) Amman internal factors Anova, Factor on the stock
Stock on prices of Analysis, prices while least
Exchange: A listed stocks in Correlation one was the
Survey Study Amman Stock and nature of firm
Exchange. Regression business.

15. Kumar, R. The effective To analyze the India Website of All the variables
Macroecono influence of NSE are divided as
(2013) mic factors macro Macro
on Indian economic Factor Environmental,
Stock Market variables on Analysis Industrial
Performance: the market of Performance &
A factor National Stock Policy Rates. It
Analysis Exchange. has been
Approach. identified that
industrial
performance
significantly
influence the
stock market.
Market also rely
on
macroeconomic
environment to
maintain macro
stability.
16. Das, N. & The Effect of To study the India Secondary Corporate
Pattanaya Fundamental effect of data collected fundamental
k, J K . Factors on corporate from the factors have a
Indian Stock fundamental website of great impact on
(2013). Market: A factors on NSE and BSE the share prices
Case Study Indian stock / of companies
of Sensex market registered at NSE
and Nifty including NSE Correlation & and BSE.
and BSE Regression

17. Joshi, M. Factors To identify India Multiple The major factors

affecting major factors Regression that affect the
(2013) Indian Stock affecting Analysis Indian Stock
Market Indian stock Various stock Market are Flow
market. brokers & of Foreign
their Institutional
employees Investors,
listed at NSE Political Stability,
and BSE , and Growth of Gross
having their Domestic
branch at Product, Inflation,
Surat City. Liquidity and
Factor different interest
Analysis rate, Global level
factors
18. Tandon, Determinants To examine India Correlation & Firms Book
K. & of Stock the relationship Linear Value, EPS, P/E
Malhotra, Prices: between stock Multiple Ratio are having a
N. Empirical prices and Regression positive
Evidence company association with
(2013) from NSE specific factors firm.
100 such as book
Companies value per
share, dividend
per share,
earning per
share, price
earnings ratio,
dividend yield
etc

19. Haque, S. Impact of To examine Bangladesh Annual It has been

Faruquee, Fundamental the influence Reports of observed that
M. Factors on of various Companies there is no
Stock Price : fundamental significant co-
(2013) A Case factors in Multiple relation between
Based determining Regression stock price and
Approach on the market Analysis companies
Pharmaceutic price of Dhaka fundamental
al Companies Stock variables.
Listed With Exchange.
Dhaka Stock
Exchange
20. Sindhu, Macroecono To analyze the Pakistan Library of Various selected
MI. mic Factors factors KSE and factors influence
Bukhari, do responsible in Annual the stock prices of
SMH. & influencing identifying the Reports of KSE.
Hussain, Stock Price: share price of companies
A. A Case Study some listed
on Karachi companies in Regression
.(2014) Stock Karachi Stock Analysis
Exchange Exchange.

21. Sapna. Stock Market To understand India Convenience There is a

Dani, Dr and Factors the relationship sampling was significant
V. Affecting between price (BSE Index) used to select relationship
Trading and trading 30 between price and
(2014) Volume volumeof BSE respondents trading volume of
Index. (relationship BSE Index.
managers) and
& a Majorly trading
questionnaire volume is affected
To determine by stock prices,
the factors was used to
take their liquidity, news
affecting and media
trading responses.
reports.
volume. Factor
Analysis,
Cross
Tabulation,
Chi square
22. Shah, M. Flows of FIIs Examines the India Bulletins of CNX nifty has
and Indian trend & pattern RBI, SEBI increased over a
(2014) Stock Market of FII flow in handbook, period of 13
India & also NSE website, years from 2001
examines the Publication to 2013 .
relationship from ministry
between FII & of commerce. There is a
Nifty. moderate positive
Correlation & correlation
Regression between FII &
CNX nifty stock
market.

23. Suriani,S. Impact of Evaluates the Pakistan KSE 100 There is no

Kumar, Exchange relationship Index, State relationship exist
M. Rate on between stock Bank of between exchange
Farhan, Stock market & Pakistan and rate and stock
Jamil. Market. exchange rate Forex. price and both the
Muneet, of Pakistan variables are
Saqib. (KSE – 100) Regression independent of
Analysis Test each other.
(2015)

24. Kothari, R Asymmetric Study the India Prowess The stock betas
.& Stock Beta effect of the database of are not symmetric
Kothari, R Behavior : A change in CMIE / they differ
. Quantile market significantly over
Regression portfolio Quantile the bullish &
(2015) Analysis returns on Regression bearish market
selected 19 state.
companies
listed at BSE
in lower,
medium &
higher return
range during
the up and
 down state.

25. Geetha, E. A Study on To analyze and India Website of It has been

& the factors compare the NSE and observed that
Swaamina influencing affect of BSE/ fundamental
than, Ti. share prices: fundamental factors have great
M. A factors Ratio impact on the
Comparative influencing the Analysis share prices
(2015) Study of movement of movement of
Automobile stock prices of selected
and selected companies.
Information companies of
Technology automobile and
Industries IT industry.
Stocks in
India

26. Rajesh, Impact of To study the India World Growth in market

M. & Fundamental factors like Development return , Industrial
Bhaskar, Factors on Change in Indicators / Production &
K. Share Price MPS, GDP positively
Movements - PPP,GDP, Pearson’s influences the
(2015) A Study on Inflation Correlationan stock returns of
Select Listed (INFL), alysis and most of the firms
Companies Money Supply Regression and industries
of Indian (M2) and analysis whereas Inflation
manufacturin Industrial is not.
g industries Production
in Bombay (INP) that
Stock affects the
select listed
 Exchange companies in
BSE of Indian
manufacturing
industries.

27. Ismail, The Impact Investigates Sri Lanka Central Bank The study
SMM. of Macro- the relationship Annual confirms that
Musthafa Economic between macro Reports 1977- macro economic
, AMM. Variables on economic 2012, factors continue
Nijam, Stock Market variables and Economic & to affect stock
HM. Performance; performance of social prices of
Evidence stock market Statistics in Colombo Stock
(2015) From Sri of Sri Lanka Sri Lanka Exchange
Lanka. 1990- 2012

Correlation
and Multiple
regression

28. Ray, P. What Moves To unravel the India Handbook on It reveals that IR,
Vani, V. Indian Stock relationship Statistics output, M2,
Market : A between the (RBI) & inflation rate &
study on the economic Economic ER has
linkage with variables and Survey (Govt. considerable
Real the capital of India). influence on the
Economy in market in stock market
the Post- Indian context VAR & while other
Reform Era. (BSE). Artificial variables have
Neaural negligible impact.
Network
(ANN).
29 Sharif, T. Analysis of To determine Bahrain Website of the Results indicates
Purohit, factors the effect of Bahrian Stock that ROE, BVPS,
H. Pillai, Affecting company Exchange. DPS, Dividend
R. Share Prices: specific Yield, P/E Ratio,
The case of variables on Regression firms size are
Bahrian the shares of and significant
Stock companies Correlation determinants of
Exchange. listed in share prices in the
Bahrian Stock Bahrain Market.
Exchange.

30. Sharma, Impact of To explore and India Federal Reveals that

G. Macroecono study the effect Reserve exchange rate and
mic of Statistical, gold price have
Mahendru Variables on macroeconomi RBI, significant
, M. Stock Prices c variables on NASDAQ, relationship with
in India stock prices BSE website stock prices as
(BSE Index) & &Money compare to
also the Control. inflation and
correlation FER.
between them. Mutiple
Regression
Model

Research Gap :

A number of fundamental factors affect the stock market which has been proved by various
researchers but the lacking areas that was found in the above given research papers are

• Most of the researchers have focused on either macro-economic variables or company

specific variables. Very few have worked on both the variables.
• Majority of the research work has been conducted on the top players of stock exchange.
Very few researchers have worked on specific industry.
• Not more than 6-7 variables have been studied in the research papers reviewed.
• As per the reviewed papers the study on factors affecting stock market has been mainly
conducted at International level.
Relevance of the Study :

The undertaken research will be helpful in the following areas:

• Facilitates professionals, investors and various other people in their investment decision
making process.
• Many researches have been done by different researchers using either company specific
or macroeconomic variable. But present research will emphasize in establishing an
important linkage between stock returns & both company specific and macro economic
variables.
• Assists the interested group to take managerial, operational decision efficiently.
Research Framework

Explore company specific &

macroeconomic variables

Association of company specific

variables and stock returns

Association of
macroeconomic variables and
stock returns
Theoretical Framework

Independent Variable Dependent Variable

Macroeconomic Variables Stock Returns
&
Company Specific Variables

Independent Variable: Macroeconomic Variables &Company Specific Variables.

Dependent Variable: Stock Returns

Variable Selection

Data used in the study has been categorized into three parts.

1. Stock Returns – It includes the data related to the stock returns of selected IT companies
listed on NSE.
2. Company Specific Variables – It comprises of the data related to company specific
variables such as Earning per Share, Book Value, Dividend per Share, Return on Equity,
Price Earnings Ratio.
3. Macroeconomic Variables – It consists of the information related to macroeconomic
variables such as Exchange Rate, Foreign Exchange Reserve, Industrial Growth Rate,
Inflation, Repo Rate, Gold Prices, Foreign Direct Investment, Crude Oil Prices.

These factors have been selected on the basis of review of literature and availability of data for
past years starting from 1 April 2006 to 31 March 2016.
Research Objectives

The research will be undertaken with the aim of the following objectives:

• To study the impact of selected company specific variables on the stock returns of
selected IT companies.
• To study the impact of selected macro economic variables on the stock returns of
selected IT companies.

Hypotheses of the Study

Hypothesis 1:

H01: There is no significant impact of Macroeconomic variables on stock returns.

Ha1: There is a significant impact of Macroeconomic variables on stock returns.

Hypothesis 2:

H02: There is no significant impact of Company specific variables on stock returns.

Ha2: There is a significant impact of Company specific variables on stock return.

 Research Methodology

Research Design:

The proposed study will be based on the following Research Design:

Exploratory Descriptive Empirical

• Review of Literature Representation of data as it is Testing the Hypotheses.

has been undertaken collected.
and will also be
referred to in future.
• Various variables to be
used in study have
been explored.

Universe of the study

For the purpose of the study, universe comprises of all the IT companies listed on National
Stock Exchange (NSE).

Sample Details

Sample selection has been done by using following methodology:

1. From different stock exchanges National Stock Exchange has been selected as it is the
first demutualized electronic exchange in the country as well as the largest stock
exchange in India by market capitalization $1.65 trillion as on 23 Jan 2015 and trade
value $ 442 billion as on June 2014 ( NSE Site) .
2. Thereafter, top 30 IT Companies has been selected out of all the listed IT companies
present on NSE on the basis of market capitalization and also by keeping in view its
major contribution which is more than 60% of total market capitalization of IT sector.
 Sampling Process Undertaken

1. Identifying the Target population All listed IT companies on NSE

2. Specifying the sampling frame Top 30 IT Companies
3. Determination of the sample Size 30 Companies

Period of Study:

The time frame for the purpose of research covers the study period of 10 years starting from 1
April 2006 to 31 March 2016. Basis for selection of this period are as follows:

• This duration faced both boom as well as recession phases which may help to measure
the performance of micro economic along with macro economic variables in the
movement of Indian stock market.
• This time frame witnessed so many structural as well as substantial policy changes.

Sources of Data Collection:

This study is primarily based on secondary data that were extracted from various sources
mentioned below:

Macroeconomic Variables

S.No Variables Symbol Source Unit of Measurement

1. Exchange Rate ER Dbie.rbi.org.in Rs vs $
2. Foreign Exchange Reserve FER Dbie.rbi.org.in Rs. Billions
3. Industrial Growth Rate IGR Dbie.rbi.org.in %
4. Inflation Inf Dbie.rbi.org.in Decimal
5. Repo Rate Repo Dbie.rbi.org.in Rs crore
6. Gold Prices GP www.mcxindia.com Rs/Barrel
7. Foreign Direct Investment FDI Dipp.nic.in US$ million
8. Crude Oil Prices COP www.mcxindia.com Rs / Barrel

Company Specific Variables

S.No Variables Symbol Source Unit of Measurement

1. Earning Per Share EPS Financial Statements of the Rs
companies under study.
2. Book Value BV Financial Statements of the Rs.
companies under study.
3. Dividend Per Share DPS Financial Statements of the Rs
companies under study.
4. Return On Equity ROE Financial Statements of the Rs
companies under study.
5. Price Earning Ratio P/E Ratio Financial Statements of the Rs
companies under study.

Stock Returns : IT Nifty has been selected as the stock return index and monthly
average data will be collected from the National Stock Exchange (NSE) website.
Tools & Techniques:

The below mentioned techniques and tools will be used in order to derive the results of the
proposed study. The techniques used will be:

• For Descriptive Statistics: Arithmetic Mean & Standard Deviation and Graphical
Presentation.

• To check the stationarity of data : Unit Root Testing.(ADF – Augmented Dickey Fuller
Test) ( PP – Phillips Perron Test)

• To find out the relationship: Multiple Correlation and Multiple Regression.

• Software Metlab and E-Views will be used to analyze the data.

Scheme of Chapterization

Chapter Topic Page No.

List of Tables
List of Figures
List of Abbreviations
1. Introduction
1.1 Introduction
1.1.1 Stock Exchanges
1.1.2 Information Technology Sector
1.1.3 Variables Affecting Stock Returns
1.1.3.1 Macroeconomic Variables
1.1.3.2 Company Specific Variables
1.2 Relevance of the Study
1.3 Conceptual Framework
2. Review of Literature
2.1 Review related to Macroeconomic Variables
2.2 Review related to Company Specific Variables
3. Research Methodology
3.1 Research Gap
3.2 Need and Significance of the study
 3.3 Objectives of the Study
3.4 Hypotheses
3.5 Scope of the Study
3.6 Universe of the Study
3.7 Sample
3.8 Period Of Study
3.9 Data Collection
3.10 Tools & Techniques
3.11 Processing of data
3.12 Statistical Analysis
4. Descriptive Analysis and Interpretation
5. Empirical Analysis and Interpretation

6. Conclusion
Conclusion and Findings
Suggestions
Application of the Research
Limitations of the Study
Scope for further Research
Bibliography
References
Webliography (Websites)
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Girard, EC.(2010). Empirical Evidence of the Existence of Investable Premiums in

Emerging Market Investable Stocks. The Financial Review, 45, 1025–1051.

Shen, CH. & Lin, KL. (2010). The Impact of Corporate Governance on the
Relationship Between Fundamental Information Analysis and Stock Returns.
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Butt, BZ. Rehman, KU. Khan, MA. & Safwan, N.(2010). Do Economic Factors
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Sharma, Dr S. (2011). Determinants Of Equity Share Prices In India. International

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Le, TH. & Chang, Y. (2011). The impact of oil price fluctuations on stock markets in
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Dr Aurangzeb. (2012). Factors Affecting Performance of Stock Market: Evidence

from South Asian Countries . International Journal of Academic Research in Business
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Malik, MF. Qureshi, MU. & Azeem, M. (2012). Determination of Share Price:
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117.

Allahawiah, S. & Amro, SA.(2012). Factors affecting Stock Market Prices in Amman
Stock Exchange : A Survey Study. European Journal of Business and Management ,
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Kumar, R. (2013). The Effect of Macroeconomic Factors on Indian Stock Market

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Das, N. & Pattanayak, JK. (2013). The Effect of Fundamental Factors on Indian
Stock Market: A Case Study of Sensex and Nifty. The IUP Journal of Applied
Finance,19(2), 1-4.

Joshi, M. (2013). Factors affecting Indian Stock Market. International Journal of

Contemporary Research in Management, Engineering and Health Science, 002(001), 37-
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Tandon, K. & Malhotra, N. (2013). Determinants of Stock Prices: Empirical

Evidence from NSE 100 Companies. International Journal of Research in
Management & Technology (IJRMT),3(3),86-95.

Haque, S. & Faruquee, M. (2013). Impact of Fundamental Factors on Stock Price : A

Case Based Approach on Pharmaceutical Companies Listed With Dhaka Stock
Exchange. International Journal of Business and Management Invention, 2(9), 34-41.

Sindhu, MI. Bukhari, SMH. & Hussain, A.(2014). Macroeconomic Factors do

influencing Stock Price: A Case Study on Karachi Stock Exchange. Journal of
Economics and Sustainable Development, 5(7), 114-121.

Sapna. & Dani, V. (2014). Stock Market and Factors Affecting Trading Volume.
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Studies,2(3),47-53.
Shah, M. (2014). Flows of FIIs and Indian Stock Market. Retrieved from
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Shah.pdf as on 19 jan 2016.

Kothari, R. & Kothari, R. (2015) . Asymmetric Stock Beta Behavior : A Quantile

Regression Analysis . Indian Journal of Commerce, 7(3), 76-93.

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-THANK YOU-
 CHAPTER-1
INTRODUCTION

1.0 INDIAN STOCK MARKET

Before liberalization, Indian economy was tightly controlled and protected by number
of measures like licensing system, high tariffs and rates, limited investment in core
sectors only. During 1980’s, growth of economy was highly unsustainable because of
its dependence on borrowings to correct the current account deficit. To reduce the
imbalances, the government of India introduced economic policy in 1991 to
implement structural reforms. The financial sector at that time was much unstructured
and its scope was limited only to bonds, equity, insurance, commodity markets,
mutual and pension funds. In order to structure the security market, a regulatory
authority named as SEBI (Security Exchange Board of India) was introduced and first
electronic exchange National Stock Exchange also set up. The purpose behind this
was to regularize investments, mobilization of resources and to give credit.
Mark Twain once has divided the people into types: one who has seen the
great Indian monument, The Taj Mahal and the second, who have not. The same can
be said about investors. There are two types of investors: those who are aware of the
investment opportunities available in India and those who are not. A stock market is a
place where buyers and sellers of stocks come together, physically or virtually.
Participants in the market can be small individuals or large fund managers who can be
situated anywhere. Investors place their orders to the professionals of a stock
exchange who executes these buying and selling orders. The stocks are listed and
traded on stock exchanges. Some exchanges are physically located, based on open
outcry system where transactions are carried out on trading floor. The other exchanges
are virtual exchanges whereas a network of computers is composed to do the
transactions electronically. The whole system is order-driven, the order placed by an
investor is automatically matched with the best limit order. This system provides more
transparency as it shows all buy and sell orders. The Indian stock market mainly
functions on two major stock exchanges, the BSE (Bombay Stock Exchange) and
NSE (National Stock Exchange). In terms of market capitalization, BSE and NSE
have a place in top five stock exchanges of developing economies of the world. Out of
total fourteen stock exchanges of emerging economies, BSE stood at fourth position

1
with market capitalization of $1,101.87b as on June, 2012 and NSE at fifth position
with market capitalization of $1079.39b as on June, 2012.

1.1 Bombay Stock Exchange

Bombay Stock Exchange is located on Dalal street, Mumbai. In terms of market
capitalization, BSE is the eleventh largest stock exchange in the world on 31st
December, 2012. BSE is the oldest stock exchange in India. In the beginning during
1855, some stock brokers were gathering under Banyan tree. But later on when the
number of stock brokers increased, the group shifted in 1874. In 1875, the group
became an official organization named as “The Native Chor and Stock Brokers
Association”. In 1986, BSE developed its Index named as SENSEX to measure the
performance of the exchange. Initially, there was an open outcry floor trading system
which in 1995 switched to electronic trading system. The exchange made the whole
transition in just fifty days. BSE Online Trading, known as BOLT is a automated,
screen based trading platform with a capacity of 8 millions orders per day. BSE
provides an transparent and efficient market for trading in equities, debentures, bonds,
derivatives and mutual funds etc. It also provides opportunity to trade in the equities
of small and medium term enterprises. About 5000 companies are listed in Bombay
Stock Exchange. As on January 2013, the total market capitalization of the companies
listed in BSE is $1.32 trillion. In terms of transactions handling, BSE Ltd. is world’s
fifth exchange. As far as Index Options trading is concerned, BSE is one of the
world’s leading exchanges. Some other services like risk management, settlement,
cleaning etc. The purpose of BSE automated systems and techniques are to protect the
interest of the investor, to stimulate market and to promote innovations around the
world. It is the first exchange across India and second across world to get an ISO
9000:2000 certification.

1.2 National Stock Exchange

The National Stock Exchange is located in Mumbai. It was incorporated in 1992 and
became a stock exchange in 1993. The basic purpose of this exchange was to bring
the transparency in the stock markets. It started its operations in the wholesale debt
market in June 1994. The equity market segment of the National Stock Exchange
commenced its operations in November, 1994 whereas in the derivatives segment, it
started it operations in June, 2000. It has completely modern and fully automated

2
screen based trading system having more than two lakh trading terminals, which
provides the facility to the investors to trade from anywhere in India. It is playing an
important role to reform the Indian equity market to bring more transparent, integrated
and efficient stock market. As on July 2013, it has a market capitalization above than
$989 billion. The total 1635 companies are listed in National Stock Exchange. The
popular index of NSE, The CNX NIFTY is extremely used by the investor throughout
India as well as internationally. NSE was firstly introduced by leading Indian financial
institutions. It offers trading, settlement and clearing services in equity and debt
market and also in derivatives. It is one of India’s largest exchanges internationally in
cash, currency and index options trading. There are number of domestic and global
companies that hold stake in the exchange. Some domestic companies include GIC,
LIC, SBI and IDFC ltd. Among foreign investors, few are City Group Strategic
Holdings, Mauritius limited, Norwest Venture Partners FII (Mauritius), MS Strategic
(Mauritius) limited, Tiger Global five holdings, have stake in NSE.
The National Stock Exchange replaced open outcry system, i.e. floor trading
with the screen based automated system. Earlier, the price information can be
accessed only by few people but now information can be seen by the people even in a
remote location. The paper based settlement system was replaced by electronic screen
based system and settlement of trade transactions was done on time. NSE also created
National Securities Depository Limited (NSDL) which permitted investors to hold
and manage their shares and bonds electronically through demat account. An investor
can hold and trade in even one share. Now, the physical handling of securities
eliminated so the chances of damage or misplacing of securities reduced to minimum
and to hold the equities become more convenient. The National Security Depository
Limited’s electronically security handling, convenience, transparency, low transaction
prices and efficiency in trade which is affected by NSE, has enhanced the reach of
Indian stock market to domestic as well as international investors.

1.3 Stock Market Volatility

To invest money in stock market is assumed to be risky because stock markets are
volatile. There is volatility in stock market because macro economic variables
influence it and affect stock prices. These factors can affect a single firm’s price and
can be specific to a firm. On the contrary, some factors commonly affect all the firms.
For example, when stock market crashed on September 2008, the price of almost all

3
listed companies came down. Volatility is the variation in asset prices change over a
particular time period. It is very difficult to estimate the volatility accurately.
Volatility is responsible to make the stock market risky but it is this only which
provides the opportunity to make money to those who can understand it. It gives the
investor opportunity to take advantage of fluctuation in prices, buy stock when prices
fall and sell when prices are increasing. So, to take advantage of volatility it is need to
be understood well.
If the performance of Indian stock market is seen during last 20 years, it is
found that its all about only four years 2003-2007. Some people believe that
investment in stock market for longer period is always give fair returns but that’s not
true. According to one study, returns in September 2001 were just 49% higher as
compared to returns in September 1991, a compound return that is even lesser as
compared to the return on a saving bank account deposit. In the last five years, from
2007 till 2012, the total market returns are only 5.9% per year.

Source: capitalmind.in
Fig 1.1: SENSEX Journey

The whole growth in stock market is attained during 2003 and 2007, besides
this time period, the stock market has given only substandard returns. The scrip prices
have high returns but overall stock market doesn’t raise much.

1.4 Volatility Index (VIX)

India VIX is a volatility index based on the index option prices of NIFTY. India VIX
is computed using the best bid and ask quotes of the out-of-the-money near and mid-
month NIFTY option contracts which are traded on the F&O segment of NSE. India

4
VIX indicates the investor’s perception of the market’s volatility in the near term. The
index depicts the expected market volatility over the next 30 calendar days. i.e. higher
the India VIX values, higher the expected volatility and vice-versa. Basu et. al. (2010)
focused on explaining the merits and demerits of the volatility index (VIX). The
Volatility Index (VIX) measures the implied volatility in the market using the price
levels of the index options. The attractiveness of VIX stems from the fact that it is
negatively correlated with the underlying index, and that it creates a new asset class
which bases itself on non directional volatility views.

1.5 Investor Sentiment and Volatility

Investor psychology plays an import role in the stock market. How an investor reacts
to information and regulatory procedures of the market has an immediate effect on
equity market which in turn brings volatility. Sehgal et. al. (2009) believed that better
regulatory framework does influence investor sentiment especially with regard to
legal provisions relating to corporate governance and investor grievance redressal
mechanism. Investor sentiment and market returns were highly correlated and in fact
influence each other and so with the volatility.

1.6 Causes of Volatility

There are number of factors which are contributing to stock market volatility. Some of
these are as follows:
1.) Fear Factor: Fear is the reason because of which an investor can see to avoid
losses. It can be few people opinion giving a trigger to sell. Fear of loss makes
the investor vary defensive which results into selling. Others also feel the same
and start selling at the larger level.
2.) Double –Dip Worries: There are two types of people risk taker and risk
averse. Risk taker believes that market is going to be rise and there is positive
signal in the market. On the other hand, risk averse feels that market can sink
any time. So these mixed reactions in the equity market make it more volatile.
3.) Changes in Economic Policy: FOMC (Federal Open Market Committee)
monetary policy has its influence in the market. The market receives a positive
response when news arrives that Fed is going to expand its quantitative easing
programme, on the contrary, negative sentiments cover the market on arriving
the news of tapering of quantitative easing programme by Fed.

5
 4.) Economic Crisis: Market reacts negatively to any major economic crisis, the
more severe the crisis, the more strongly is reacted by the investors. Because
of fear of loss, most of the investors start selling, and only few people take this
as an opportunity to buy. Investors don’t go for fundamental and technical
analysis of their portfolio instead they just got influenced by the negativity of
economic crisis.

1.7 Capital Asset Pricing Model and Portfolio Returns

Capital Asset Pricing Model establishes the relationship between risks and returns in
the efficient capital market. It is assumed that there is a combination effect of the
parameter CAPM to determine the security/portfolio returns. Manjunatha and
Mallikarjunappa (2009) showed in their study that there is variation in security
returns but when beta is considered alone in the two parameter regressions, does not
explain the variation in security returns.

1.8 Volatility in Indian Stock Market post liberalization

The high volatility is due to much foreign equity inflows. This results into dependence
of Indian equity market on global capital market variations. It means any happening
outside India will have its impact here as well. As when US economy was improving,
resulted into falling rupee led negative sentiments to stock market crash. Domestic
savings are lower which is increasing more foreign investments. According to RBI
Handbook of Statistics (September, 2013), only 3.1% of incremental financial assets
of household sector in fiscal year 2013 is invested in shares and debentures. Retail
investor is participating less in equity market. Bank accounts consist of about 54% of
the total household financial savings show that people want to invest less in risky
assets. So, decline in domestic equity savings is biggest problem.

2.0 STOCK MARKET EFFICIENCY

It is general notion in the market that stock markets are efficient and prices reflect all
available information. There is extensive research literature available to see whether
stock markets are efficient or not. Some academicians believe that stock market is
weak efficient (Cootner, 1962; Fama, 1965; Kendall, 1953; Granger & Morgenstern,
1970). While some others have belief that stock markets are not weak efficient
(Chaudhary, 1991; Ranganatham & Subramanian, 1993). The present study is an
attempt to see the efficient form of Indian stock market.

6
 An ‘efficient’ market is defined as a market where there are large numbers of
rational, profit ‘maximizes actively competing, with each trying to predict future
market values of individual securities, and where important current information is
almost freely available to all participants. In an efficient market, competition among
the many intelligent participants leads to a situation where, at any point in time, actual
prices of individual securities already reflect the effects of information based both on
events that have already occurred and on events which, as of now, the market expects
to take place in the future. In other words, in an efficient market at any point in time
the actual price of a security will be a good estimate of its intrinsic value. (Fama,
1970)
Market efficiency is very important for any stock market because investment
decisions of an investor are very much influenced by this. An investor can earn
abnormal profits by taking benefit out of inefficient market whereas there is no scope
of earning extra profits in an efficient market. The random walk hypothesis states that
future prices are not predictable form the past. Successive price changes are not
dependent over the past periods and past trends are not followed in future exactly.
There is no information available in the market which is not reflected in the stock
prices. Random walk basically means that prices vary randomly and there is not any
significant pattern which followed in the market.
According to Jensen (1978), “A market is efficient with respect to information
of it is impossible to make economic profits by trading on the basis of information.”
Malkiel (1992), “A capital market is said to be efficient if it fully and correctly
reflects all relevant information in determining security prices. Formally, the market is
said to be efficient with respect to some information, if security prices would be
unaffected by revealing that information to all participants. Moreover, efficiency with
respect to information implies that it is impossible to make economic profits by
trading on the basis of information.”
Dyckman and Morse (1986) states that “A security market is generally defined
as efficient if the price of the security traded in the market act as though they fully
reflect all available information and these prices react instantaneously, or nearly so,
and in unbiased fashion to new information”.

7
2.1 Types of Efficient Market Hypothesis
According to Fama (1965), Efficient Market Hypothesis suggests that security prices
fully reflect all available information. There are three forms of efficient market
hypothesis. These are as follows:

Weak Form Efficiency: This theory states that current prices reflect all past
prices information which means if anyone has some extra ordinary
information beyond this, he can earn profit by use of that information. It
means that past information is reflected in stock price. Beyond past
information, no information even publically available information can also
have an impact on share price.

Semi-Strong Efficiency: The theory suggests that not only past prices are
reflected in the current price but all publicly available information is also
adjusted in the stock prices. It states that all relevant publicly available
information is going to reflect in the stock price. It means if there is any new
information reaches to the market, that is immediately digested by the market
resulted into change in demand and supply and a new equilibrium level of
prices is attained.

Strong Form of Efficiency: It states that current prices not only reflect
publicly available information but insider information such as data given in
company’s financial statements and company’s announcements etc. is also
reflected in the present prices. For example, if company is planning to go for
corporate restructuring in future, is also can’t be used by investor. All
information is available to the investors and that is reflected to the market
price. In normal circumstances what happens that if someone has nay private
information then that person can make the profits by the use of that
information by buying shares. He will continue doing that until this excess
demand of shares will bring the price below, means no extra information. So
he will stop to buy the shares and the stock price will be stable at the
equilibrium level. This level is called strong form of market.

8
2.2 Efficiency and Market Returns
The all three forms of market efficiency have different consequences as far as excess
returns are concerned:-
If market is weak-form efficient, no excess returns can be received on the
basis of study of past prices. This type of study is called technical analysis
which is based on the past prices study without any further information.
If market is semi-strong efficient, no excess returns can be received by the
study of any publically available information. This study is called fundamental
analysis, the study of companies, sectorals and the whole economy can’t
produce much returns than expected compared to risk involved.
If market is strong-efficient, as prices are adjusted even for secret or privately
held information so no excess return can be received even by insider trading.

3.0 SEASONAL ANOMALIES IN STOCK MARKET

“A seasonal price tendency is the propensity for a given market to move in a given
direction at certain times of the year.” There is lots of research available which
emphasized that seasonal anomalies lie in the stock market. There are different
seasonal anomalies such as Monday effect or Friday effect or Day-of-the-week effect,
Turn-of-the-month effect, Holiday effect, Semi-month effect, January Effect or
December Effect or Month-of-the-year effect etc. Within these calendar anomalies,
day-of-the-week effect and month-of-the-year effect is analyzed under the present
study. The day-of-the-week has its importance because it has its impact on the stock
market volatility. If there is any king of seasonal patterns then the investor has the
opportunity to take benefit out of it and earn abnormal profit.

3.1 Day-of-the-week effect

The Day-of-the-week effect means the average daily returns of all the days of the
week are not the same. It is generally seen that Monday has a lower return as
compared to other days Monday returns are on average lower than returns on other
days known as Monday effect whereas Friday has higher returns as compared to
returns of other days known as Friday effect (Cross, 1973; French, 1980; Gibbons &
Hess, 1981, Jaffe & Westerfield, 1985). Fama (1965) documented that Mondays has
20% greater variances as compared to other days. There are different factors which
cause day-of-the-week effect like settlement patterns, opening and closing of the

9
market, ups and downs of the market, international factors, information etc. It is very
difficult to consider any particular reason which is ultimate responsible for the
seasonality in stock market. It is believed that investor prefers to sell more on
Monday because he would like to adjust the impact of information received in prior
week as generally bad news are released on Friday after the closing of the market. So,
day-of-the-week effect is a normal practice which is observed in equity market and
there is disparity on the issue whether calendar effects exist or not.

Source: Jeremy J. Siegel “Stocks for the Long Run”

Fig 1.2: Monday Effect in DJIA

3.2 Month-of-the-Year Effect

“Monthly data provides a good illustration of Black's (1986) point about the difficulty
of testing hypotheses with noisy data. It is quite possible that some month is indeed
unique, but even with 90 years of data the standard deviation of the mean monthly
return is very high (around 0.5 percent). Therefore, unless the unique month
outperforms other months by more than 1 percent, it would not be identified as a
special month.”(Lakonishok and Smidt, 1988). The seasonal anomaly is Month-of-
the-Year effect. It means that returns in the market are not same for all the months of
the year. According to one study in US, it is found that January has higher returns as
compared to other months whereas December has lower returns (Rozeff and Kinnney,
1976; Gultekin and Gultekin, 1983; Keim, 1983).

3.3 January Effect

January Effect was first observed in 1942 by an investment banker Sidney B.
Wachtel. The January effect means average stock prices are high in January month.
The reason being is the tendency of the market where stock prices rise during last
trading days in the month of the December and continue to rise in the month of

10
January. It is believed that stock would be purchased at lower price in last days of
December and sell the same at higher rates in January to earn profits.

Source: Ibbotson
Fig 1.3: January Effect in S&P 500

3.4 Causes of January Effect

Tax-Loss Selling: Stock prices come down in December because of tax
reasons as some investors sell their stock in the year end to show capital loss
and the same money is reinvested in the first months of the coming year
(Jones, Lee & Apenbrink, 1991; Poterba & Weisbenner, 2001; Dai, 2003).
Bonus Payments: Bonus is paid by the corporate at the end of the year and
the same money is used to purchase stock in the first month of year driving
prices high.
Investor Psychology: Investor psychology is also playing an important role.
The new year is assumed to be a new start to invest money in the market
resulting higher stock prices.
Window Dressing: According to Window Dressing developed by Haugen &
Lakonishok (1988), mutual fund managers sell stocks which have not
performed well during the year so that they can reduce bad investments from
their portfolio.

3.5 December Effect

There is evidence that traders have started purchasing some beaten up shares at the
end of the year in expectation of market rise in new year. So, December is also an
important month of the year, known as December Effect.

11
3.6 October Effect
October is treated as lowest returns month as if we look at the history it is seen that
major crashes happened in October. The great depression of 1930’s started on October
29, 1929, known as black Tuesday, the day when DJIA (Dow Jones Industrial
Average) declined 12% in a single day. October 19, 1987 known as Black Monday,
DJIA (Dow Jones Industrial Average) declined 23%. October 13. 1989, DJIA (Dow
Jones Industrial Average) declined 7% in the last hours of trading. Although, there is
not any reason that why October is considered as bad month as some other months
like September, 2008 when Lehman Brothers failed on March, 2000 crashed in
NASDAQ market are also proved to be bad months. The present study is an attempt
to identify the day-of-the-week effect and month-of-the-year effect in Indian stock
market. Generally, markets have high returns during summer months, while in
September, returns are less. During October, average returns are positive except in
few cases like a record fall of -19.7% in 1929 and -21.5% in 1987.

Source: Ibbotson
Fig 1.4: September Effect in S&P 500

4.0 INDIAN AND INTERNATIONAL STOCK MARKETS

In the present era of liberalization, privatization and globalization, the international
investments and diversification of portfolio internationally is an important issue,
especially in the time period when stock markets are highly volatile. Normally, people
invest in the stock market with the purpose of earning returns. An investor designs his
portfolio in which he includes different stocks or group of stock on sectoral basis to
achieve his purpose of maximum returns with minimum risk. International
diversification can be an option as rationale behind this is that stock returns within a
county can be highly correlated because of similar environment but internationally

12
conditions can be different. On account of different factors like economic condition,
political stability, tax and tariff rates and inflationary conditions, there are chances
that less correlation in stock returns across different countries is possible.
In recent years, the interest in country fund especially in emerging economies
has increased. Emerging markets are an attractive place for investment because of
various reasons like open market system, liberal guidelines towards Foreign Direct
Investment and Foreign Institutional Investment. At the time of allocation of the funds
in internationally diversified portfolio, an investor would like to compare returns and
risk across different countries. The benefit of internationally diversified portfolio can
be enjoyed only when there is less correlation between international stock markets.
Further, while constructing internationally diversified portfolio of securities, the
correlation in the returns of stocks from two different countries required to be
calculated. According to a report by Morgan Stanley, Indian markets are about three
times more volatile as compared to other emerging markets and almost five times
more than the volatility in developed markets. Other emerging markets such as China,
Brazil and Russia have very less volatility in comparison to Indian market.

Source: Morgan Stanley

Fig 1.5: Indian Stock Market Volatility vs. Other Emerging Markets

4.1 Contribution of Developed and Emerging Economies in Financial Crisis:

A Controversial Issue

After Financial Crisis, whether the integration between emerging and developed
economies has increased or not, this issue is always get attention from researchers and
academicians. Few studies are in favor that integration between developed and
emerging economies has increased after the financial crisis. Bahng (2003), who found
that the influence of other Asian markets has increased on Indian stock market during

13
and after the Asian Financial Crisis, this result gives an indication that Indian stock
market, is moving closer towards other Asian stock markets integration. Wong et al.,
(2004) highlighted that there was a trend of increasing interdependence between most
of developed markets and emerging markets after the 1987 market crash. After the
1997 financial crisis, the interdependence between these have gone more intensified
resulted into international diversification benefits reduction. Bose (2005), found
whether there are any common forces which driving the stock index of all economies
or there was some country specific factors which controlling the each individual
country’s economy. Indian stock market returns were highly correlated with the
returns of rest of Asia and US during post Asian crisis and till mid 2004. Not only
this, Indian stock market influenced some major Asian stock market returns. Co-
integration between India and other market in Asian region was not very high but
sufficient enough to design portfolio internationally. Huang (2013), supported that
after Asian financial crisis from 1997-1999, the stock markets integration not getting
weekend rather it improved and getting stronger.

4.2 Emerging and Developed economies Indices

A brief introduction of some indices from emerging economies and developed
economies is given as follow:

4.2.1 DJIA (Dow Jones Industrial Average)

The Dow Jones Industrial Average is an index which is created by Wall Street Journal
editor and Dow Jones & Company co-founder Charles Dow. It is at present owned
by S&P Dow Jones Indices. It was first published on February 16, 1885. The averages
are named after the name of Charles Dow and one of his business associates,
statistician Edward Jones. It shows how 30 large publicly owned companies based in
the United States have done in trading during a standard trading session in the stock
market. Dow Jones Industrial Average is the second oldest U.S. market index after
the Dow Jones Transportation Average. The Industrial part of the name is largely
chronological, as most of new modern 30 companies have little or nothing to do with
traditional heavy industry.

4.2.2 DAX (Deutscher Aktien IndeX)

The DAX is a blue chip German stock market index of Frankfurt Stock Exchange
which consist of the 30 major German companies. DAX measures the performance of

14
the Prime Standard’s 30 largest German companies by their volume and market
capitalization. It is the alike FT30 and the Dow Jones Industrial Average, but because
of its small assortment it does not essentially represent the economy as whole.

4.2.3 HangSeng
The HangSeng Index is a free float-adjusted market capitalization index. It is a
weighted stock market index in Hong Kong. It is basically used to record and observe
daily variation in the prices of the largest companies of the Hong Kong equity market.
In Hong Kong, this is the main indicator of the overall market performance in Hong
Kong. The 48 component companies of Hang Seng represent about 60% of market
capitalization of the Hong Kong Stock Exchange. It was started on November 24,
1969, and Hang Seng Indices Company Limited is currently maintaining and
compiling the index. Hang Seng Indices Company Limited is a wholly owned
subsidiary of Hang Seng Bank, which is one of the largest banks listed in Hong Kong
in terms of market capitalization.

4.2.4 RTSI (Russia Trading System)

The RTS Index (Russia Trading System) is a free-float capitalization-weighted index
of 50 Russian stocks traded on the Moscow Exchange in Moscow, Russia. The RTS
Information Committee reviews the list of stocks in every three months. The RTS
Index value is calculated in a real-time mode. The index was introduced on September
1, 1995 with a base value of 100. In addition to the RTS Index, MICEX-RTS also
computes and publishes the RTS Standard Index (RTSSTD), RTS-2 Index, RTS
Siberia Index and seven sectoral indices (Telecommunication, Financial, Metals &
Mining, Oil & Gas, Industrial, Consumer & Retail, and Electric Utilities). The RTS
Standard and RTS-2 are compiled similarly to the RTS Index, from a list of top 15
large-cap stocks and 50+ second-tier stocks, respectively.

4.2.5 S&P BSE SENSEX

The Bombay stock exchange most popular index is S&P BSE SENSEX, the sensitive
index is also known as BSE30. It is a index which is free-float and market weighted
stock market index. BSE consist of 30 companies which are well settled and
financially very strong. These companies are large and very actively traded stocks
comprise different industrial sectors of the Indian economy. SENSEX from its
inception has become the major indicator to see the health of Indian equity market.

15
The base value of S&P BSE SENSEX was decided to be 100 on 1st April. 1979 and
the base year taken was 1978-79. The free-float market capitalization of BSE was
US$240 billion the 21st April, 2011. During the period of 2008-12, S&P BSE
SENSEX market capitalization reduced from 49% to 25% because some other indices
were introduced like BSE PSU, Bankex, BSE-TECK etc.
The 30 companies constituted BSE SENSEX index are continually assessed
and changed according to changes in their position so that it can indicates the true
market conditions. SENSEX is calculated by the use of method free float
capitalization. Its different from traditional method in the sense that in free float
market capitalization method, at a particular point of time, it reflects free float market
value of the 3o companies proportional to the base year. To calculate the market
capitalization of a company, the price of the company’s share is multiplied by the
number of the shares.

4.2.6 FTSE Straits Times Index (STI)

The FTSE Straits Times Index (STI) is a benchmark index for the Singapore equity
market. It consists of 30 companies listed on the Singapore stock exchange. It is
calculated by Singapore Press Holdings, FTSE and Singapore Exchange. STI has been
replaced from STII (Straits Times Industrials Index) when there was a sectoral
reclassification of the companies listed in the Singapore Exchange and resulted in the
removal of industrial category. STI started trading on August 1998 when STI left off.

4.2.7 FTSE 100

The FTSE 100 Index, also called FTSE 100, FTSE, is a share index of the
100 companies listed on the London Stock Exchange with the highest market
capitalization. It is one of the most widely used stock indices and is seen as a gauge of
business prosperity for business regulated by UK company law. The index is
maintained by the FTSE Group, a subsidiary of the London Stock Exchange Group.
The index began on 3 January 1984 at the base level of 1000; the highest value
reached to date is 6950.6, on 30 December 1999. The FTSE 100 consists of the largest
100 qualifying UK companies by Total market value. The constituents of the index
are determined quarterly, on the Wednesday after the first Friday of the month in
March, June, September and December.

16
4.2.8 Nikkei 225
The Nikkei 225 more commonly called the Nikkei, the Nikkei index, or the Nikkei
Stock Average is a stock market index for the Tokyo Stock Exchange (TSE). It has
been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since 1950. It
is a price-weighted index (the unit is yen), and the components are reviewed once a
year. Currently, the Nikkei is the most widely quoted average of Japanese equities,
similar to the Dow Jones Industrial Average. In fact, it was known as the "Nikkei
Dow Jones Stock Average" from 1975 to 1985. The Nikkei 225 began to be
calculated on September 7, 1950, retroactively calculated back to May 16, 1949.
Since January 2010 the index is updated every 15 seconds during trading sessions.

4.2.9 BOVESPA
The BM&FBOVESPA is a stock exchange located at São Paulo, Brazil. On May 8,
2008, the São Paulo Stock Exchange (Bovespa) and the Brazilian Mercantile and
Futures Exchange (BM&F) merged, creating BM&FBOVESPA. The benchmark
indicator of BM&FBOVESPA is the Índice Bovespa. There were 381 companies
traded at Bovespa as of April 30, 2008. On May 20, 2008 the Ibovespa index reached
its 10th consecutive record mark closing at 73,516 points, with a traded volume of
USD 4.2 billion or R$ 7.4 billion.

4.2.10 AORD
January 1980, the All Ordinaries (colloquially, the "All Ords"; also known as the All
Ordinaries Index, AOI) is the oldest index of shares in Australia, so called because it
contains nearly all ordinary (or common) shares listed on the Australian Securities
Exchange(ASX). The market capitalization of the companies included in the All Ords
index amounts to over 95% of the value of all shares listed on the ASX. The 3-letter
exchange ticker in Australia for the All Ordinaries is "XAO". When established, the
All Ords had a base index of 500; this means that if the index is currently at 5000
points, the value of stocks in the All Ords has increased tenfold since January 1980,
not factoring in inflation.

4.2.11 Shanghai Composite Index

The SSE Composite Index is a stock market index of all stocks (A shares and B
shares) that are traded at the Shanghai Stock Exchange. SSE Indices are all calculated
using a Paasche weighted composite price index formula. This means that the index is

17
based on a base period on a specific base day for its calculation. The base day for SSE
Composite Index is December 19, 1990, and the base period is the total market
capitalization of all stocks of that day.

5.0 LITERATURE REVIEW

Extensive researches have been done to know whether Indian stock market is volatile
or not. In recent era of globalization and liberalization, the interdependence of various
stock markets on each other has increased. Different factors not only national but
international will increase the volatility in the market and hence the returns will also
change. Lots of studies are available on this issue, support that Indian stock market
volatility is persistent and spillover is present. The present study is done to fill this
gap and to know the stock market volatility patterns in India. Some studies are in the
favor that conditional volatility models whether symmetric or asymmetric, are able in
capturing the stock market volatility.
5.1 Conditional Volatility Models
Karmakar (2005) estimated conditional volatility models in an effort to capture the
salient features of stock market volatility in India. It was observed that GARCH
model has been fitted for almost all companies. The various GARCH models provided
good forecasts of volatility and are useful for portfolio allocation, performance
measurement, option valuation etc. Because of the high growth of the economy and
increasing interest of foreign investors towards the country, it is important to
understand the pattern of stock market volatility to India which is time varying
persistent and predictable. Banerjee and Sarkar (2006) attempted to model the
volatility in the Indian stock market. It was found that the Indian stock market
experiences volatility clustering and hence GARCH type models predict the market
volatility better than simple volatility models, like historical average, moving average
etc.
Finally, it was seen that the change in volume of trade in the market directly affects
the volatility of assets returns.

Kumar (2006) evaluated the ability of ten different statistical and econometric
volatility forecasting models to the context of Indian stock and forex markets. These
competing models were evaluated on the basis of two categories of evaluation
measures – symmetric and asymmetric error statistics. Based on an out - of - sample

18
forecasts and using a majority of evaluation measures find that GARCH methods will
lead to Netter volatility forecasts in the Indian stock market and GARCH will achieve
the same in the forex market. All the measures indicated historical mean model as the
worst performing model in the forex market and in the stock market.

Karmakar (2007) investigated the heteroscedastic behaviour of the Indian stock

market using different GARCH models. First, the standard GARCH approach was
used to investigate whether stock return volatility changes over time and if so,
whether it was predictable. Then, the E-GARCH models were applied to investigate
whether there is asymmetric volatility. It was found that the volatility is an
asymmetric function of past innovation, rising proportionately more during market
decline.

Bordoloi and Shankar (2010) explored to develop alternative models from the
Autoregressive Conditional Heteroskedasticity (ARCH) or its Generalization, the
Generalized ARCH (GARCH) family, to estimate volatility in the Indian equity
market return. It was found that these indicators contain information in explaining the
stock returns. The Threshold GARCH (T-GARCH) models explained the volatilities
better for both the BSE Indices and S&P-CNX 500, while Exponential GARCH (E-
GARCH) models for the S&P CNX-NIFTY.

Srinivasan and Ibrahim (2010) attempted to model and forecast the volatility of the
SENSEX Index returns of Indian stock market. Results showed that the symmetric
GARCH model performed better in forecasting conditional variance of the SENSEX
Index return rather than the asymmetric GARCH models, despite the presence of
leverage effect.
Few are against conditional volatility models. Pandey (2005) believed that
there have been quite a few extensions of the basic conditional volatility models to
incorporate observed characteristics of stock returns. It was found that for estimating
the volatility, the extreme value estimators perform better on efficiency criteria than
conditional volatility models. In terms of bias conditional volatility models performed
better than the extreme value estimators.

Kumar and Gupta (2009) investigated and identified the adequate densities for fitting
distribution of first difference of change in log prices of stocks. Four different ways

19
were adopted to test whether the first difference of log of daily closing prices follows
normal or Gaussian distribution. These provided strong evidence against Gaussian
hypothesis for return distributions and fat tails are observed.

5.2 Relationship between Return and Volatility

Volatility is a measure of deviation from the mean return of a security. Volatility is
measured by standard deviation. When the fluctuation in prices is large, standard
deviation would be high and when there is less variation in prices, standard deviation
would be less. Generally, higher the risk, higher is the chances of less than expected
return. If volatility increases return decreases. Stock returns are uncertain because
there is volatility in stock prices. Mahajan and Singh (2008) examined the empirical
relationship between volume and return, and volume and volatility in the light of
competing hypothesis about market structure by using daily data of Sensitive Index of
the Bombay Stock Exchange. Consistent with mixture of distribution hypothesis,
positive contemporaneous relationship between volume and volatility was observed.

Mubarik and Javid (2009) investigated the relationship between trading volume and
returns and volatility of Pakistani market. The findings suggested that there was
significance effect of the previous day trading volume on the current return and this
implied that previous day returns and volume has explanatory power in explaining the
current market returns.

Pandian and Jeyanthi (2009) made an attempt to analyze the return and volatility. It
was found that the outlook for India is remarkably good. Bank, corporate and personal
balance sheets are strong. Corporations are experiencing high profits. The stock
market is at a record high. Commodity markets are at their strongest.

Abdalla (2012) discussed stock return volatility in the Saudi stock market. Results
provided evidence of the existence of a positive risk premium, which supported the
positive correlation hypothesis between volatility and the expected stock returns.

Nawazish and Sara (2012) examined the volatility patterns in Karachi Stock
Exchange. They proposed that higher order moments of returns should be considered
for prudent risk assessment. While there are some who believe that there is not much
significant relationship between returns and volatility.

20
Léon (2008) studied the relationship between expected stock market returns and
volatility in the regional stock market of the West African Economic and Monetary
Union called the BRVM. The study revealed that expected stock return has a positive
but not statistically significant relationship with expected volatility and volatility is
higher during market booms than when market declines.

Karmakar (2009) investigated the daily price discovery process by exploring the
common stochastic trend between the NIFTY and the NIFTY future based on vector
error correction model (VECM). The results are that the VECM results showed the
NIFTY futures dominate the cash market in price discovery.

Madhavi (2014) proved that stock market plays a very important role in the Indian
economy.
The economy directions can be measured by how the volatility index moves.
Although financial industry affected by the financial crisis so stock market is
perceived to be very risky place. But still, CAPM, Portfolio Diversification and APT
always proved to be effective to manage the risk of market.

5.3 Time varying volatility and Negative Innovations

Mehta and Sharma (2011) focused to examine the time varying volatility of Indian
stock market specifically in equity market. The findings of the study documented that
the Indian equity market has witnessed the prevalence of time varying volatility where
the past volatility has more significant impact on the current volatility.

Joshi (2010) investigated the stock market volatility in the emerging stock markets of
India and China. The findings revealed that the persistence of volatility in Chinese
stock market is more than Indian stock market.

Gupta et. al. (2013) aimed to understand the nature and different patterns of volatility
in Indian stock market on the basis of comparison of two indices which are BSE
index, SENSEX and NSE index, NIFTY. GARCH models were used to see the
volatility of Indian equity market and it was concluded that negative shocks do have
greater impact on conditional volatility compared to positive shocks of the same
magnitude in both indices i.e. SENSEX and NIFTY of the Bombay Stock Exchange
and National Stock Exchange.

21
5.4 Volatility after the Introduction of Derivatives

Mallikarjunappa and Afsal (2008) studied the volatility of Indian stock market after
the introduction of derivatives. Clustering and persistence of volatility was seen in
volatility before and after the introduction of derivatives and the nature of volatility
patterns altered after the derivatives.

Gahan et al. (2012) studied the volatility pattern of BSE Sensitive Index (SENSEX)
and NSE Nifty (Nifty) during the post derivative period. The various volatility models
were developed in the present study to get the approximately best estimates of
volatility by recognizing the stylized features of Stock market data like
heteroscedasticity, clustering, asymmetry autoregressive and persistence. When
compared, it was found that there was difference between the volatility of pre and post
derivative period. Conditional volatility determined under all the models for SENSEX
and Nifty were found to be less in post derivative period than that of the post
derivative period.
So, there is a gap whether there is any relationship in return and volatility as
well as to see whether volatility is time varying or not. To fill this gap, the present
study is done. This gives the formulation of first objective which is to see the patterns
of volatility (with conditional volatility models) in Indian stock market and the effect
of introduction of derivatives on stock market volatility.

5.5 Weak-Form Efficiency of Indian Stock Market

Efficiency of stock market has its implications for the whole economy and economic
development of any country. As, if stock market is efficient enough then there is no
need of government interference in the market movements. But, on the other side, in
an inefficient market investor would like to take the benefit of extra ordinary
information available to them. The role of government and the regulators increase in
this situation to keep a control on significant high differences in the stock prices. Lots
of research work has been done to know the efficiency of Indian stock market. Some
studies are supporting that Indian stock market are not weak form efficient.
Poshakwale (1996) provided evidence of day of the week effect and that the stock
market is not weak form efficient. The day of the week effect observed on the BSE
pose interesting buy and hold strategy issues.

22
Azarmi et. al. (2005) examined the empirical association between stock market
development and economic growth for a period of ten years around the Indian market
“liberalization” event. The data suggested that stock market development in India is
not associated with economic growth over a twenty-one year study period. The results
were consistent with the suggestion that the Indian Stock market is a casino for the
sub-period of post liberalization and for the entire ten-year event study period.

Gupta and Basu (2007) explained that hypothesis of market efficiency is an important
concept for the investors who wish to hold internationally diversified portfolios. With
increased movement of investments across international boundaries owing to the
integration of world economies, the understanding of efficiency of the emerging
markets is also gaining greater importance. The evidence suggested that the series do
not follow random walk and there is an evidence of autocorrelation in both markets
rejecting the weak form efficiency hypothesis.

Chander et al. (2008) documented extensive evidence on price behavior in the Indian
stock market. The random behavior of stock prices was quite visible, but could not
undermine the noted drifts because randomness alone does not signify weak form
market efficiency and vice-versa.

Singh (2008) studied some of the issues related to the estimation of beta. It was found
that beta varies considerably with method of computation and the major reason for
variation seems to be the interval between data points. While the correlation between
weekly and daily betas was very high, this was not the case with weekly and monthly
betas. The variability of betas was higher with longer interval periods and more stocks
were classified as aggressive when monthly returns were used.

Srinivasan (2010) examined the random walk hypothesis to determine the validity of
weak-form efficiency for two major stock markets in India. He suggested that the
Indian stock market do not show characteristics of random walk and was not efficient
in the weak form implying that stock prices remain predictable.

Khan et al. (2011) proposed that testing the efficiency of the market is an important
concept for the investors, stock brokers, financial institutions, government etc. Based

23
on the result of runs test alternate hypothesis was rejected and it was proved that
Indian Capital market neither follow random walk model nor is a weak form efficient.

Jethwani and Achuthan (2013) investigated the weak form efficiency during, before
and after Financial Crisis which took place in the year 2002 (Dot Com Bubble) and
2007 (Sub Prime Crisis). The result shows that Indian stock market is not weak form
efficient in all periods however after 2002 stock market behaves in more efficient
manner.
On the other hand, some studies reflect that Indian stock market is weak form
efficient and no investor has the option to take benefit of this. Sehgal and Gupta
(2007) discussed that technical indicators do not outperform Simple Buy and Hold
strategy on net return basis for individual stocks. Technical indicators seemed to do
better during market upturns compared to market downturns. The empirical results
suggested that technical analysis provides statistically significant returns for the entire
nine technical indicators on gross return basis during the entire study period.

Gupta (2010) briefed that the behavior of stock returns has been extensively debated
over the past few years. The validation of random walk implied that market is
efficient and current prices fully reflect available information and hence there was no
scope for any investor to make abnormal profits. The result of the study indicated that
the Indian stock market are weak form efficient and follow random walk.

Singh et al. (2010) aimed to present theoretical framework of efficiency of stock

markets and test the Indian stock market for weak form efficiency. Statistically, the
study shows that Indian stock market is weak form efficient and price changes follow
a random walk.

Aggarwal (2012) emphasized that weak form of efficient market hypotheses is an area
of attraction for researchers and academicians as proved by numerous studies
investigating efficient market phenomenon at global level. It was found that Indian
markets are random and successive index value changes are independent. The past
index changes do not help the investor or analyst to forecast the future.

Rehman et al. (2012) explained that how they tested the weak-form efficiency of
emerging south Asian stock markets i.e. Karachi Stock Exchange of Pakistan,

24
Bombay Stock Exchange of India and Colombo Stock Exchange (CSE) of Sri Lanka.
It was found that CSE is the Weak form efficient market.

Loomba (2012) attempted to develop an understanding of the dynamics of the trading

behaviour of FIIs and effect on the Indian equity market. The study provided the
evidence of significant positive correlation between FII activity and effects on Indian
Capital Market. The analysis also found that the movements in the Indian Capital
Market are fairly explained by the FII net inflows.

Mobarek and Fiorante (2014) determined whether the equity markets of Brazil,
Russia, India and China (BRIC) may be considered weak-form efficient in recent
years. The major findings indicated that the results from the last sub-periods,
including the subprime crisis, support the belief that these markets may have been
approaching a state of being fairly weak-form efficient, which reflects the future
prospects of BRIC countries.

Bhat et. al. (2014) focused on analyzing and comparing the efficiency of the capital
markets of India and Pakistan. The results derived by using various parametric and
non-parametric tests clearly reject the null hypothesis of the stock markets of India
and Pakistan being efficient in weak form. The study provides vital indications to
investors, hedgers, arbitragers and speculators as well as the relevance of fundamental
and technical analysis as far as the trading/investing in the capital markets of India
and Pakistan is concerned. A gap is seen between the studies as some are in favor that
Indian stock market are weak form efficient while other are against it, so this gap
helped in formulating the another objective which is to seek the weak form efficiency
of Indian stock market.

5.6 Seasonality in Indian Stock Market

Seasonal anomalies are a regular practice to be seen in equity market. Extensive
research is being conducted to understand this. Some of the studies are supporting that
there are seasonal anomalies existing in Indian stock market. Berument and Kiymaz
(2001) tested the presence of the day of the week effect on stock market volatility by
using the S&P 500 market index. The findings showed that the day of the week effect
was present in both volatility and return equations.

25
Kiymaz and Berument (2003) investigated the day of the week effect on the volatility
of major stock market indexes. It was found that the day of the week effect was
present in both return and volatility equations. The highest volatility occurred on
Mondays for Germany and Japan, on Fridays for Canada and the United States, and
on Thursdays for the United Kingdom. For most of the markets, the days with the
highest volatility also coincided with that market’s lowest trading volume.

Sarma (2004) explored the day-of-the-week effect o the Indian stock market returns in
the post-reform ear. The Monday-Tuesday, Monday-Friday, and Wednesday-Friday
sets had positive deviations for all the indices. It was concluded that the observed
patterns were useful in timing the deals thereby explored the opportunity of exploiting
the observed regularities in the Indian stock market returns.

Chan et al. (2004) proposed that Monday seasonal is stronger in stocks with low
institutional holdings and that the Monday return is not significantly different from
the mean Tuesday to Friday returns for stocks with high institutional holdings during
the 1990–1998 period. The study provided direct evidence to support the belief that
the Monday seasonal may be related to the trading activities of less sophisticated
individual investors.

Chander and Mehta (2007) emphasized on that investors and analysts are unable to
predict stock price movements consistently so as to beat the market in informationally
efficient markets. It was seen whether anomalous patterns yield abnormal return
consistently for any specific day of the week even after introduction of the
compulsory rolling settlement on Indian bourses. The findings recorded for post-
rolling settlement period were in harmony with those obtained elsewhere in the sense
that Friday returns were highest and those on Monday were the lowest.

Chia and Liew (2010) studied the existence of day-of-the-week effect and
asymmetrical market behavior in the Bombay Stock Exchange (BSE) over the pre-
9/11 and post-9/11 sub-periods. They found the existence of significant positive
Monday effect and negative Friday effect during the pre-9/11 sub-period. Moreover,
significant day-of-the-week effect was found present in BSE regardless of sub-
periods, after controlling for time-varying variance and asymmetrical market
behavior.

26
Keong et al (2010) investigated the presence of the month-of-the-year effect on stock
returns and volatility in eleven Asian countries- Hong Kong, India, Indonesia, Japan,
Malaysia, Korea, Philippines, Singapore, Taiwan, China and Thailand. Results
obtained exhibit positive December effect, except for Hong Kong, Japan, Korea, and
China. Meanwhile, few countries do have positive January, April, and May effect and
only Indonesia demonstrates negative August effect.

Sah (2010) believed the main cause of seasonal variations in time series data is the
change in climate. The study found that daily and monthly seasonality were present in
NIFTY and NIFTY Junior returns. It was found that Friday Effect in NIFTY returns
while NIFTY Junior returns were statistically significant on Friday, Monday and
Wednesday. In case of monthly analysis of returns, the study found that NIFTY
returns were statistically significant in July, September, December and January.

Sewraj et al (2010) investigated the day of the week effect, more precisely the
Monday effect and the January effect on the Stock Exchange of Mauritius (SEM) in
order to get the information whether these anomalies exist or not. The result showed
that Monday effect was nonexistent in SEM. It was found that a significant positive
January effect is present at market level.

Swami (2011) investigated four calendar anomalies, viz., Day of the Week effect,
Monthly effect, Turn of the month effect and Month of the year effect across five
countries of South Asia. The day of the week effect, was found to exist in Sri Lanka
and Bangladesh; and the intra-month return regularity, in terms of Monthly effect and
Turn of the month effect, was present in the Indian market. The anomalous behavior
was not pervading across the five countries and there was little influence of one
market over the other, so far as calendar anomalies were concerned.

Anuradha and Rajendran (2012) attempted to investigate whether the Foreign

Institutional Investment (FII) in Indian capital market has any calendar effect in net
FII(NFII), net FII in equity(EFII) and net FII in debt(DFII). After 2003, November
effects were also present in both the series in addition to February effect in net FII and
in equity. In the case of DFII, January effect has reappeared which has started in the
month of December itself. Since the equity market was so efficient and volatile, the
FII have chosen the debt instruments for assured returns. When checked for the

27
monthly seasonality in market return, January effect is present in the first period.
During the early stages of opening the market to the global players (after 1992 but
before 2003), the market itself was in a developing stage and slightly in the weak
form of inefficiency. That is the reason for the January effect in the first period of the
study. But later on the effect has disappeared leading to the conclusion that the market
has become efficient, making abnormal returns impossible. Also there exists
interaction influence on the NFII in the recent period.

Siddiqui and Narula (2013) investigated the persistence of such regularities in the
form of weekend effect, monthly effect and holidays effect employing twelve-year
data from 2000 to 2011 of S&P CNX Nifty. The results indicated the occurrence of
weekend effect in long run but reject the hypothesis of positive weekends and
negative Mondays. On the contrary, the mean return on Tuesday is negative for the
entire period. Instead of March effect, the study comes out with November effect and
hence nullifies the ‘Tax-Loss Selling Hypothesis’. On dividing the entire period into
three-year lags, anomalies instantaneously disappear confirming the fact that any
seasonality takes some time to establish itself.

Sharma and Deo (2014) studied existence of the January Effect and Turn of the
month year effect in the Indian stock markets. The significant April month was found
and the return of March was significantly lower. This was the result of tax-loss
hypothesis.

Maheta (2014) carried out this study to measure effect of festivals on the return of
selected stock indices of Indian stock market. The researcher took the closing price of
two indices i.e. Sensex and Nifty from January 2003 to December 2012 and applied
paired t test on daily return series. The main findings of this paper are there is
significant influence of festivals like Holi, Janmashthami and Diwali on the mean
return of selected indices.
Few studies are not supporting that seasonal anomalies i.e. day of the week
effect and month of the year effect is not present in Indian stock market. Pandey
(2002) examined the presence of the seasonal or monthly effect in stock returns in
Indian stock market. The statistically significant coefficient for March- the month for
tax payment- was consistent with the tax-loss selling hypothesis. It was implied that

28
the stock market in India was not informationally efficient, and hence, investors can
time their share investments to earn abnormal returns.

Kaur (2004) investigated the nature and characteristics of stock market volatility in
Indian stock market in terms of its time varying nature, presence of certain
characteristics such as volatility clustering, day-of-the-week effect and calendar
month effect and whether there existed any spillover effect between the domestic and
the US stock markets. It showed that day-of-the-week effect or the weekend effect
and the January effect were not present.

Deb et. al. (2007) attempted to explore the market timing ability and the stock
selection ability of the Indian mutual fund managers. In both traditional and
conditional models it is found that there is very little evidence of market timing,
particularly using the monthly data frequency. It was observed that, while the number
of positive timers marginally increased, there was no improvement in the number of
significant positive timers.

Mittal and Jain (2009) found that the anomalies don’t exist in the Indian stock market
and this market can be considered as informationally efficient. It means that it is not
possible to earn abnormal returns constantly that are not commensurate with the risk.
Although the mean returns on Mondays were negative whereas the mean returns on
Fridays were positive but T-test results concluded that there was insignificant
difference between the returns on Monday and other week days. The Friday effect
was also found insignificant while comparing Friday returns with other day’s mean
returns.

Abdalla (2012) investigated the day of the week effect anomaly on stock market
returns and the conditional volatility of the Khartoum stock exchange (KSE) from
Sudan. The results indicated that the day of the week effect was not influenced by the
stock market risk based on using GARCH-M (1,1) model.

Nageswari and Selvam (2012) investigated whether Friday effect existed in Bombay
Stock Market. The analysis of seasonality results pointed out there was no significant
Friday Effect existed in Indian Stock Market. A gap exists between the studies as
some are in favor that Indian stock market does not have seasonal anomalies, on the

29
other hand, others are against seasonal anomalies behavior, so this gap helped in
formulating the another objective which is to know whether seasonality is present in
Indian stock market or not.

5.7 Extent of Influence of US Stock Market on Indian Stock Market

It is believed that US stock market has influence on Asian Emerging markets and any
event or happening in the US stock market affects the Asian markets returns and
hence portfolio diversification opportunities exist. Ahmad et al., (2005) revealed that
no long-term relationship exist between Indian stock market with US and Japanese
stock markets.

Majid et al. (2008) found that ASEAN (Association of South East Asian Nations)
stock markets i.e. Malaysia, Thailand, Philippine, Indonesia and Singapore are mostly
influenced by the US stock market and less by Japanese stock market.

Mariani et al. (2008) briefed that long-range power correlation is in existence

between emerging economies i.e. India, China and Taiwan with developed country
USA.

Aktan et al., (2009) found that BRICA economies and their relation with the US stock
market was identified and found that US stock market has sound effect on all BRICA
economies. An unexpected shock was immediately responded by all markets and
recovered themselves within a time period of five to six days.

Kim (2010) examined US stock markets impacted almost all East Asian economies
irrespective of financial crisis. Muthukumanan et al., (2011) examined the integration
of Indian stock market with the US stock market and US stock market has an
influence on Indian stock market so US financial crisis affect Indian equity market.

Gangadharan & Yoonus (2012) considered that there is feedback effect from US
stock market of Indian stock market means any crisis in the US has its influence on
Indian stock market but there is no feedback from Indian stock market to US stock
market i.e Indian stock market has no impact on US stock market. On the other hand,
there is literature supporting the view that USA stock market influence on other
emerging stock markets is decreasing and no long term correlation of US stock market
with other emerging stock markets is found.

30
Gupta & Guidi (2012) examined that there was less interdependence of Indian stock
market with the US market and other developed Asian markets. It was also suggested
that Indian stock market is not much affected by the international events. In
comparison with developed Asian markets, Indian stock market volatility is more
stable which give an opportunity to international investors for investment to improve
returns.

5.8 Interdependence between Developed and Emerging Economies

The integration between developed and emerging economies is increasing with the
passage of time. Chattopadhyay and Behera (2006) found that contrary to general
belief, Indian stock market is not co-integrated with the developed market as yet. Of
course, some short-term impact does exist, although it was found to be unidirectional
for obvious reasons. That is to say, the developed stock markets, viz., USA, UK and
Hong Kong stock markets Granger caused the India stock market but not vice versa.
However, the study did not find any causality between the Japanese stock market and
Indian stock market. It was derived from the study that although some positive steps
have been taken up, which were responsible for the substantial improvement of the
Indian stock market, these were perhaps not sufficient enough to become a matured
one and hence not integrated with the developed stock markets so far.

Dhankar and Chakraborty (2007) investigated the presence of non-linear dependence

in three major markets of South Asia, India, Sri Lanka and Pakistan. It was realized
that merely identifying non-linear dependence was not enough. The application of the
BDS test strongly rejects the null hypothesis of independent and identical distribution
of the return series as well as the linearly filtered return series for all the markets
under study.

Mukherjee (2007) captured to test the correlation between the various exchanges to
prove that the Indian markets have become more integrated with its global
counterparts and its reaction are in tandem with that are seen globally. It is validated
that in the later time periods, the influence of other stock markets increases on BSE or
NSE, but at a very low almost insignificant level. It can be safely said that the markets
do react to global cues and any happening in the global scenario be it macroeconomic
or country specific affect the various markets.

31
Mukherjee and Mishra (2007) revealed that apart from exhibiting significant annual
contemporaneous measures or same day inter-market relationship among India and
most of the other foreign countries, the contemporaneous feedback statistics also
reveals an increasing tendency in the degree of integration among the market over a
period of time, leading to a greater co-movements and therefore higher market
efficiency at the international scenario.

Kumar and Dhankar (2009) made efforts to examine the cross correlation in stock
returns of South Asian stock markets, their regional integration and interdependence
on global stock market. It is also examined what are the important aspects of
investment strategy when investment decisions are made under risk and uncertainty.
Its generalized models significantly explain the conditional volatility in all stock
markets in question.

Raju (2009) discussed the issues of volatility and risk as these have become
increasingly important in recent times to financial practitioners, market participants,
regulators and researchers. It is mainly due to the changes in market microstructure in
terms of introduction of new technology, new financial instruments like derivatives
and increased integration of national markets with rest of the world. First, developed
and emerging markets show distinct pattern in return and volatility behavior.

Mukherjee (2011) explored the relationship between volatility within not only the
Indian equity market but also within other developed and emerging markets as well. It
is found that Indian market returns also affect the returns in other markets such as
Japan, the Republic of Korea, Singapore and Hong Kong, China. In addition, return
volatility of the Indian market does not have an increasing or declining trend, but
exhibits sudden sharp increases over the Period.

Ranpura et al. (2011) examined the short-run causal linkages among equity markets
to better understand how shocks in one market are transmitted to other markets and
also try to study co-movement of Indian stock market index with developed as well as
developing countries’ stock market indices. It can be interpreted that SENSEX is
interdependent on Developed economies stock markets except NIKKEI.

32
Tripathi and Sethi (2012) examined the short run and long run inter linkages of the
Indian stock market with those of the advanced emerging markets viz, Brazil,
Hungary, Taiwan, Mexico, Poland and south Africa. It was found that short run and
long run inter linkages of the Indian stock market with these markets has increased
over the study period. Unidirectional causality is also found. Some of these studies are
against that there is interdependence of Indian stock market with international stock
markets.

Siddiqui (2009) looked at that in recent years, globalization, economic assimilation

and integration among countries and their financial markets have increased
interdependency among major world stock markets. Results show that stock markets
under study are integrated. The degree of correlation between the markets, but Japan,
varies between moderate to very high. Furthermore, it provided that no stock market
is playing a very dominant role in influencing other markets.

Paramati et al. (2012) aimed to investigate the long-run relationship between

Australia and three developed (Hong Kong, Japan and Singapore) and four emerging
(China, India, Malaysia and Russia) markets of Asia. While bivariate Johansen co-
integration test provides results in supporting the long-run relationship between
Australia-Hong Kong, Australia-India, and Australia-Singapore in the post-crisis
period, the causal relationship from Australia to Asian markets disappears after the
crisis. Results of VAR models demonstrated that there is no consistent lead-lag
association between the observed markets.

Singh and Sharma (2012) examined the inter linkages of Brazil, Russia, India and
China. The results revealed that there are visible effects of stock exchanges on each
other. Russian, Indian and Brazilian stock markets affect each other and also effected
by each other but Chinese stock market was not affected by these markets and these
markets were affected by Chinese stock market.

Dasgupta (2014) found only one co-integration, i.e., long-run relationships and also
short-run bidirectional Granger relationships in between the Indian and Brazilian
stock markets. It was found that the Indian stock market has strong impact on
Brazilian and Russian stock markets. The interdependencies (mainly on India and
China) and dynamic linkages were also evident in the BRIC stock markets. Overall, it

33
was found that BRIC stock markets are the most favorable destination for global
investors in the coming future and among the BRIC the Indian stock market has the
dominance. On the basis of above, it is seen that a gap is prevalent. This gave an
origin to the objective of whether Indian stock market is interdependent on
international stock markets or not so that this gap can be filled.

34
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