A Project Report Submitted to Utkal University in the Partial

Fulfillment of Degree of Master of Finance & Control.

(2009-
(2009-11)
Submitted by:

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43706V094011

Under the Guidance of

Prof. Jayanta Kumar Parida
Co--ordinator,
Co
Master of Finance & Control
Utkal University

Master of Finance & Control

P.G. Department of Commerce
Utkal University
Prof. Jayanta Kumar Parida
Co-ordinator, MFC
P.G. Department of Commerce
Utkal University

Certificate

This to certify that the project entitled “An

Empirical Study on the Relationship between Gold
Market and Stock Market of India”
India” is a record of bona
fide research work carried out by Dillip Khuntia under
my supervision and guidance. It embodies result of his
original contribution. The project has reached the
standard of fulfilling the requirements of the regulation
relating to the degree of Master of Finance and Control.
No part of this project has been submitted to any other
institution for the award of any other degree.

I wish him all success in his future endeavours.

PLACE: BHUBANESWAR
DATE: (Prof. Jayanta Kumar Parida)
Parida)
P.G. Dept. of Commerce
Utkal University.
 DECLARATION

I do hereby declare that the project entitled “An

Empirical Study on the Relationship between Gold

Market and stock Market of India”

India” is submitted to

Utkal University for the partial fulfillment of degree of

Master of Finance and Control,

Control Utkal University. The

project is an authentic piece of work done by me under

the guidance of Prof. Jayanta Kumar Parida,

Parida Co-

ordinator, MFC, P.G. Department of Commerce, Utkal

University and it has neither been submitted for award

of any other degree to any other University, Academy,

Institution nor published in any magazine or anywhere

else in part or full to best of my knowledge.

PLACE: BHUBANESWAR (DILLIP KHUNTIA)

KHUNTIA)

DATE:
 ACKNOWLEDGEMENT
The satisfaction that accompanies the successful completion of
any task would be incomplete without mentioning people who made
it possible, whose encouragement and consistent guidance crowned
my efforts with success.

I would like to express our heartfelt indebtedness and deep

sense of gratitude to my faculty guide Prof. Jayanta Kumar Parida
Parida,
arida,
Co-
Co-ordinator, Master of Finance & Control,
Control, P.G. Department of
Commerce, Utkal University for sharing his knowledge and giving
me guidance and generous co-operation.

I am also thankful to faculties of P.G. Department of

commerce, Utkal University, Prof. Samson Moharana, Prof. R.K.
Bal, Dr. P.K. Pradhan, Dr. K.B. Das, Dr. P.K. Hota, Dr. M.
Sahoo, Dr. A.K. Swain, Dr. S.K. Digal, Mr. R.K. Swain and Mr. J.
Jhunjhunwale for their support and encouragement.

I would like to thank my friends for their support and

encouragement without which completion of this project would be
difficult.

PLACE: BHUBANESWAR (DILLIP KHUNTIA)

KHUNTIA)

DATE:
 EXECUTIVE SUMMERY

The study of the stock market of a country in terms of a wide range of

macro-economic and financial variables has been the subject matter of many
researches since last few decades. Empirical studies reveal that once financial
deregulation takes place, the stock markets of a country become more sensitive to
both domestic and external factors and one such factor is the gold.

In this project “An Empirical Study of Relationship between Gold Market

and Stock Market of India”, the major objective was to find out the relationship
between the volatility of stock market with that of the investment pattern of the
gold market in Indian scenario i.e. the impact of the volatility of stock market on
the gold market.

For pursuing the study relevant data were collected from various secondary
sources, which include the website of Reserve Bank of India (RBI), Securities and
Exchange Board of India (SEBI), Multi-commodity Exchange of India (MCX)
and others. Various journals and publications of the regulatory bodies and the
exchanges are followed for carrying out the research. The data collected are
tabulated and classified for analysis. The analysis is done by computerized
programs like SPSS Statistical Package, MS Excel etc.

From the study it is revealed that the volatility of the stock market is
relatively very high as compared to the gold market. The gold market imparted a
low growth in volatility, whereas the stock market has shown a wider range of
fluctuation. This is mainly due to the global financial crisis and its impact. FII
investment and under-developed mutual fund industry also contributed to this
volatility.

From the regression analysis, it is found that there exists a strong

relationship between the gold and the stock market of India. The volatility of stock
market has a significant impact on the gold market. It is observed that, when the
stock market is very volatile, investors generally shift to gold market for the safety
of their investment.

Thus the suggestions that emerged from the study are;

The government and the regulatory bodies should take aggressive steps to
bring down the volatility of the stock market.
Mutual fund industries should be encouraged and the investors should be
trained. The regulator, the exchanges and the other concerned government
bodies should conduct awareness programs to make the investors aware
about various facets of the stock market.
 CONTENT
Certificate……………………………………………………………………………………………………………………………i
Declaration…………………………………………………………………………………………………………………………ii
Acknowledgement………………………………………………………………………………………………………………iii
Executive Summery……………………………………………………………………………………………………….....iv

CHAPTER ONE: INTRODUCTION

1.1 Introduction……………………………………………………………………………………………………………..2
1.2 Rationale………………………………………………………………………………………………………………….2
1.3 Objective………………………………………………………………………………………………………………..3
1.4 Research Methodology………………………………………………………………………………………….3
1.5 Limitation…………………………………………………………………………………………………………….....4
1.6 Chapterisation………………………………………………………………………………………………………..4

CHAPTER TWO: THE STOCK MARKET OF INDIA

2.1 Introduction to Capital Market…………………………………………………………………………………7
2.2 Primary Market………………………………………………………………………………………………………7
2.3 Secondary Market: The Stock Market……………………………………………………………………9
2.4 History of Indian Stock Market – The Origin…………………………………………………………10
2.4.1 Pre-independence Scenario – Establishment of different Stock Exchanges…11
2.4.2 Post Independence Scenario………………………………………………………………..………….12
2.5 Present Scenario……………………………………………………………………………………………………14

CHAPTER THREE: THE GOLD MARKET OF INDIA

3.1 Indian Gold Market………………………………………………………………………………………………..22
3.2 Jewellery Consumption………………………………………………………………………………………..23
3.3 Investment Demand………………………………………………………………………………………………24
 3.4 Gold Exchange Traded Funds………………………………………………………………………………..25
3.5 Decorative and Industrial Demand……………………………………………………………………….26
3.6 Gold Imports…………………………………………………………………………………………….……………27
3.7 Reserves with Reserve Bank of India…………………………………………………….…………….27
3.8 Recycled Gold Supply…………………………………………………………………………….……………..27
3.9 India in World Gold Industry………………………………………………………………….……………..28
3.10 Indian Gold Market – Present Scenario………………………………………………………………28
3.11 Market Moving Factors…………………………………………………………………………………………29

CHAPTER FOUR: VOLATILITY AND REGRESSION ANALYSIS

4.1 Volatility…………………………………………………………………………………………………………..……32
4.2 Regression……………………………………………………………………………………………….…………..33
4.2.1Simple Regression……………………………………………………………………………………………....33
4.2.2 Multiple Regression……………………………………………………………………………………………37
4.3 Essential Assumptions and Statistical Properties of Regression………………………39

CHAPTER FIVE: ANALYSIS AND INTERPRETATION

5.1 Volatility………………………………………………………………………………………………………….43
5.2 Regression Analysis………………………………………………………………………………………46

CHAPTER SIX: CONCLUSION

6.1 Major Findings………………………………………………………………………………………………….50
6.1.1 Volatility…………………………………………………………………………………………………………50
6.1.2 Gold Market of India………………………………………………………………………………………51
6.1.3 Regression……………………………………………………………………………………………………52
6.2 Recommendations…………………………………………………………………………………………..54
6.3 Conclusion………………………………………………………………………………………………………55
BIBLIOGRAPHY ………………………………………………………………………………………………………………….56
ANNEXTURE………………………………………………………………………………………………………………………..59
 LIST OF FIGURES
Figure – 2.1 Total Capital Raised Through IPO…………………………………………………………………….8

Figure – 2.2 Resources Mobilized from the Primary Market…………………………………………….9

Figure – 2.3 Share of Broad Categories of Issues in Resource Mobilization…………………..15

Figure – 2.4 Sector-wise Resource Mobilization………………………………………………………………16

Figure – 2.5 Movement of Benchmark Stock Market Indices (2009-10)…………………………17

Figure – 2.6 Movement of Sectoral Indices of BSE (2009-10)…………………………………………17

Figure – 2.7 Movement of Sectoral Indices of NSE (2009-10)…………………………………………18

Figure – 2.8 Turnover of SENSEX and Nifty………………………………………………………………………19

Figure – 2.9 Market Capitalization of SENSEX and Nifty…………………………………………………..20

Figure – 3.1 Total Gold Demand…………………………………………………………………………………………22

Figure – 3.2 India gold market as a % of global gold market, tonnage terms (2009)……23

Figure – 4.3 Gold Jewellery Consumption in India…………………………………………………………..23

Figure – 4.4 Indian Gold Investment Demand…………………………………………………………………..24

Figure – 3.5 Gold ETFs………………………………………………………………………………………………………25

Figure – 4.6 Gold Volatility against Indian Indices……………………………………………………………26

Figure – 4.7 Indian Gold Decorative and Industrial Demand……………………………………………26

Figure – 5.1 Comparison between Spot and Future Market Volatility of Gold in Indian
Context………………………………………………………………………………………………………………………………43
Figure – 5.2 Comparison between Prices of Spot and Futures Market of Gold in Indian
Context………………………………………………………………………………………………………………………………44

Figure – 5.3 Comparison between Volatility of SENSEX, Spot and Futures Market of
Gold…………………………………………………………………………………..……………………………………………….44

Figure – 5.4 Comparison of Volatility of SENSEX and Gold Spot Market…………..……………45

Figure – 5.5 Volatility of Gold Futures and SENSEX…………………………………………………………46

LIST OF TABLES
Table – 5.1 Regression Model between Gold Spot and Volatility of SENSEX……………………46

Table – 5.4 R2 between Gold Futures and SENSEX…………………………………………………………..47

Table – 5.3 Regression between Gold Futures and Volatility of SENSEX…………………………47

Table – 5.2 R2 between Volatility of S ENSEX and Gold Spot over the Years……………..……48
Introduction
1.1 INTRODUCTION

The study of the stock market of a country in terms of a wide range of macro-
economic and financial variables has been the subject matter of many researches since
last few decades. Empirical studies reveal that once financial deregulation takes place,
the stock markets of a country become more sensitive to both domestic and external
factors and one such factor is the gold. From 1900 to 1971, with the global systems of
gold standard and USD standard, gold price was regulated. But, since 1972, gold has
been disconnected from the USD. Particularly in 1976 when the International Monetary
Fund (IMF) passed Jamaica Agreement, did gold begin to evolve from currency to
ordinary merchandise and since then gold price has been determined by market supply
and demand. And, in India, the government started the process of globalization and
liberalization since 1991 which allowed prices to be determined by the market forces.

Since then, the government has been taking a number of steps to reform the
gold sector and ensure that India benefits from the demand-influence that it has on the
gold business internationally. The liberalization of the gold sector has been made in
stages; first allowing a number of banks to import gold – braking the monopoly of the
State Trading Corporations; then considerably reducing the import duty – destroying a
lucrative parallel smuggling channel and now, allowing traders, manufacturers as well
as investors to trade in gold futures in India itself.

Thus the gold market after deregulation exhibited more volatility and there is
subsequent increase in the price and investment pattern of gold market. Though the
volatility of gold market increased, but still it is considered as one of the safest venture
of investment. In India it is the second most preferred investment venture. For this
reason, investors prefer to invest in gold market, when the stock market is very volatile.

1.2 RATIONALE

The globalization policy of government has opened up the economy and

deregulated the markets. But these market deregulations, structural reforms in global
trade and technological development has revolutionized the financial market. A by-
product of this revolution is increased volatility of the market. The volatility of the
market is influenced by many factors. Gold is one of them.
 Similarly the volatility of the stock market has a significant impact on the gold
market. A higher volatility in the stock market results higher investment in the gold
market, as gold is considered as a secure investment. This is because, gold is not
affected by the fluctuation in market fundamentals and it is used as a hedging
instrument for risk minimization. In this concern the study of the relationship between
the volatility of stock market with that of the investment in gold market is of prime
importance. A comprehensive study of the gold market and its volatility pattern and its
comparison with the stock market will depict the relationship between these two
markets. From which the investors can better assess the risk and return of the markets
and can take investment decisions accordingly.

1.3 OBJECTIVE OF THE STUDY

On the above premise, the following are laid down as the objectives of this study;

I. To analyze the causes and effects of volatility of stock market and compare it
with the volatility of gold market of India.

II. To carry out a comprehensive analysis of the gold market of India.

III. To find the relationship of gold spot and futures market.

IV. To study the relationship between the volatility of stock market of India with
that of the Gold market.

1.4 RESEARCH METHODOLOGY

1.4.1 SCOPE

The scope of this project is confined to the study the causes and effects of the
volatility of stock market, study of the gold market of India and the study of the
relationship the volatility of the stock market with the gold market. The software used
for this purpose, details about the process and the tools of analysis and the various
problems faced in this project.
 1.4.2 SOURCES OF DATA

The data has been collected from the secondary source only. The secondary data
are collected from various books and journals, Securities and Exchange Board of India
circulars, annual report of Securities and Exchange Board of India, Handbook on
Statistics of Reserve Bank of India and the Securities and Exchange Board of India and
the Commodity Year Book of Multi Commodity Exchange Limited. Most of the price
information of both gold market and the stock market is collected from various
websites like, www.bseindia.com, www.sebi.gov.in, www.mcxindia.com,
www.rbi.gov.in, etc.

1.4.3 TOOLS AND TECHNIQUES

The data so collected were classified and tabulated for analysis and
interpretation. The tools and techniques used in this project are all computerized
programming. The data are programmed in MS Excel for finding out the volatility of
gold and the stock market of India. To find out the relationship between the gold
market and the stock market, regression models are built. For this purpose SPSS
Statistical Package is used.

1.5 LIMITATIONS

Some of the limitations that are faced during the study are;

I. The information collected is limited by authenticity and accuracy. Also some of

the relevant information is not available in the website of the exchanges or the
regulatory body.

II. The time predefined for this project is very short for covering such a vast study.

1.6 CHAPTERISATION

This project focuses on the relationship between the stock market and the gold
market of India. Various technicalities that are involved in this process has been
extensively discussed and dealt with this report. The report contains the following
seven chapters, which are summarized below.
 Chapter one starts with introduction to the project report, stating the importance,
objectives and research methodology adopted. Limitations faced during the study are
also laid down. Chapter two deals with the capital market of India. A detailed study of
the stock market of India is carried out, which includes the history and present
prospects of the stock market. Chapter three gives an idea of the gold market of India,
which is a comprehensive analysis of the gold market of India and has been carried out
both in spot and futures market. Chapter four contains the conceptual aspects of
volatility and regression. A detailed theoretical prospect of both volatility and the
regression was presented therein. The fifth chapter comprises of the analysis and
interpretation of the data. The ultimate chapter aims at giving the findings, summary
and the conclusion of this project.
The Stock Market
of India
2.1 INTRODUCTION TO CAPITAL MARKET

Essentially, capital is wealth, usually in the form of money or property. Capital

markets exist when two groups interact: those who are seeking capital and those who
have capital to provide. The capital seekers are the businesses and governments who
want to finance their projects and enterprises by borrowing or selling equity stakes. The
capital providers are the people and institutions who are willing to lend or buy,
expecting to realize a profit.

Investment capital is wealth that you put to work. You might invest your capital
in business enterprises of your own. But there’s another way to achieve the same goal:
Let someone else do the investing for you. By participating in the stock and bond
markets, which are the pillars of the capital markets, you commit your capital by
investing in the equity or debt of issuers that you believe have a viable plan for using
that capital. Because so many investors participate in the capital markets, they make it
possible for enterprises to raise substantial capital, which is enough to carry out much
larger projects than might be possible otherwise. The amounts they raise allow
businesses to innovate and expand, create new products, reach new customers, improve
processes, and explore new ideas. They allow governments to carry out projects that
serve the public through building roads and firehouses, training armies, or feeding the
poor, for example. All of these things could be more difficult, perhaps even impossible
to achieve without the financing provided by the capital marketplace.

The capital market can be categorized into two parts, i.e. primary market and
the secondary market. The primary market deals with the raising of capital by the
government and the corporate entities, whereas the secondary market deals with the
trading of the shares of the companies.

2.2 PRIMARY MARKET

There are actually two levels of the capital markets in which investors
participate: the primary markets and the secondary markets. Businesses and
governments raise capital in primary markets, selling stocks and bonds to investors and
collecting the cash. Essentially primary market is one of the mechanisms from where
the government or the corporate entities raise capital for the first time through initial
public offerings (IPO). FPO is another way of raising capital from the market in which
the entity raises capital from the market for the second time. The primary market also
includes the rights issue and private placement. When new shares are issued infavour of
the existing shareholders or the owners, it is known as rights issue. Similarly, when the
shares are privately issued to the institutional investors or high net-worth individuals, it
is known as private placement.

The figures below depict the present scenario of the primary market of India.
Figure 2.1 show about the capital raised through initial public offerings and figure 2.2
shows the trend of primary market in India.

Figure – 2.1
Total Capital Raised Through IPO
45000
40000
35000
30000
25000
20000
15000
10000
5000
0

IPO (Rs. Crore)

The above figure shows about the amount of capital mobilized from the primary
market through initial public offerings (IPOs). It can be seen from the figure that the
more than 15,000 Cr rupees was raised from IPO issue in 1993-94, but after that, the
amount raised through IPOs came down. It was nearly about zero in 1998-99. But from
there the amount raised through IPOs increased and it was highest in 2007-08.
Suddenly, in 2008 there was a down fall in number of IPOs issue, because of the
recessionary effect in the global market. But recently there are some IPO issues, which
got a good response in the market.
 From 1998-99 to 2003-04, the IPOs market in India was virtually non-existence.
This may be due to increased volatility of the market at that point of time and because
of the scams that hit the market one after another, demising the investor’s confidence in
the market. But from 2003-04, the market showed an upward trend, because of good
economic conditions. The IPOs market in India is also very much volatile; it needs
certain reforms for its growth and development.

Figure – 2.2
Resources Mobilized from the Primary Market
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0

Resources Mobilised from the Primary Market

The above figure depicts the amount of capital that is being raised from the
primary market of India from 1993 to 2009. It can be seen that, more capital is being
mobilized for productive purposes from 2002-03. During 2007-08, the primary market
of India is at its pick. But it all down suddenly, because of the economic downfall.

2.3 SECONDARY MARKET: THE STOCK MARKET

In secondary markets, investors buy and sell the stocks and bonds among
themselves or more precisely, through intermediaries. While the money raised in
secondary sales doesn’t go to the stock or bond issuers, it does create an incentive for
investors to commit capital to investments in the first place. The stock markets are
essentially the secondary market, where buying and selling of the shares take place.

The working of stock exchanges in India started in 1875. BSE is the oldest
stock market in India. The history of Indian stock trading starts with 318 persons taking
membership in Native Share and Stock Brokers Association, which we now know by
the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanent
recognition from the Government of India. National Stock Exchange comes second to
BSE in terms of popularity. BSE and NSE represent themselves as synonyms of Indian
stock market. The history of Indian stock market is almost the same as the history of
BSE.

The 30 stock sensitive index or SENSEX was first compiled in 1986. The
SENSEX is compiled based on the performance of the stocks of 30 financially sound
benchmark companies.

2.4 HISTORY OF THE INDIAN STOCK MARKET - THE ORIGIN

Stock markets refer to a market place where investors can buy and sell stocks.
The price at which each buying and selling transaction takes is determined by the
market forces i.e. demand and supply for a particular stock. Let us take an example for
a better understanding of how market forces determine stock prices. ABC Co. Ltd.
enjoys high investor confidence and there is an anticipation of an upward movement in
its stock price. More and more people would want to buy this stock (i.e. high demand)
and very few people will want to sell this stock at current market price (i.e. less
supply). Therefore, buyers will have to bid a higher price for this stock to match the ask
price from the seller which will increase the stock price of ABC Co. Ltd. On the
contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the
stock of ABC Co. Ltd. in the market, its price will fall down.

In earlier times, buyers and sellers used to assemble at stock exchanges to make
a transaction but now with the dawn of IT, most of the operations are done
electronically and the stock markets have become almost paperless. Now investors
don’t have to gather at the Exchanges, and can trade freely from their home or office
over the phone or through Internet. One of the oldest stock markets in Asia, the Indian
Stock Markets has a 200 years old history.

18th East India Company was the dominant institution and by end of the
Century century, business in its loan securities gained full momentum
1830's Business on corporate stocks and shares in Bank and Cotton presses
started in Bombay. Trading list by the end of 1839 got broader

1840's Recognition from banks and merchants to about half a dozen brokers

1850's Rapid development of commercial enterprise saw brokerage business

attracting more people into the business

1860's The number of brokers increased to 60

1860-61 The American Civil War broke out which caused a stoppage of cotton
supply from United States of America; marking the beginning of the
"Share Mania" in India

1862-63 The number of brokers increased to about 200 to 250

1865 A disastrous slump began at the end of the American Civil War (as an
example, Bank of Bombay Share which had touched Rs. 2850 could only
be sold at Rs. 87)

2.4.1PRE-INDEPENDENCE SCENARIO - ESTABLISHMENT OF DIFFERENT

STOCK EXCHANGES

1874 With the rapidly developing share trading business, brokers used to gather
at a street (now well known as "Dalal Street") for the purpose of
transacting business.

1875 "The Native Share and Stock Brokers' Association" (also known as "The
Bombay Stock Exchange") was established in Bombay

1880's Development of cotton mills industry and set up of many others

1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association"

1880 - 90's Sharp increase in share prices of jute industries in 1870's was followed by
 a boom in tea stocks and coal

1908 "The Calcutta Stock Exchange Association" was formed

1920 Madras witnessed boom and business at "The Madras Stock Exchange"
was transacted with 100 brokers.

1923 When recession followed, number of brokers came down to 3 and the
Exchange was closed down

1934 Establishment of the Lahore Stock Exchange

1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange

1937 Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.)
Limited led by improvement in stock market activities in South India with
establishment of new textile mills and plantation companies

1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange
Limited was established

1944 Establishment of "The Hyderabad Stock Exchange Limited"

1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi
Stocks and Shares Exchange Limited" were established and later on
merged into "The Delhi Stock Exchange Association Limited"

2.4.2 POST INDEPENDENCE SCENARIO

The depression witnessed after the Independence led to closure of a lot of

exchanges in the country. Lahore Stock Exchange was closed down after the partition
of India, and later on merged with the Delhi Stock Exchange. Bangalore Stock
Exchange Limited was registered in 1957 and got recognition only by 1963. Most of
the other Exchanges were in a miserable state till 1957 when they applied for
recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that
were recognized under the Act were:
1. Bombay

2. Calcutta

3. Madras

4. Ahmedabad

5. Delhi

6. Hyderabad

7. Bangalore

8. Indore

Many more stock exchanges were established during 1980's, namely:

1. Cochin Stock Exchange (1980)

2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)

3. Pune Stock Exchange Limited (1982)

4. Ludhiana Stock Exchange Association Limited (1983)

5. Gauhati Stock Exchange Limited (1984)

6. Kanara Stock Exchange Limited (at Mangalore, 1985)

7. Magadh Stock Exchange Association (at Patna, 1986)

8. Jaipur Stock Exchange Limited (1989)

9. Bhubaneswar Stock Exchange Association Limited (1989)

10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)

11. Vadodara Stock Exchange Limited (at Baroda, 1990)

12. Coimbatore Stock Exchange

13. Meerut Stock Exchange

 Now there are about 25 recognized stock exchanges in India, out of which 19
are regional exchanges and 6 are national level stock exchanges. From these only two
stock exchanges are efficiently working with a nationwide reach, i.e. NSE and BSE.
The other stock exchanges are virtually non-existence.

2.5 PRESENT SCENARIO

The primary market segment witnessed positive trend during 2009-10. Earlier,
in 2008- 09, the volatility in stock markets, slowdown in economic growth, slackening
of expansion plans by corporate and poor investor response had led to a sharp fall in the
number of issues and amounts raised through the primary market. About 87.7 percent
of resource mobilization was through public issues of issue-size above Rs.500 crore
during 2009-10 compared to 78.1 percent during the previous financial year. Also, the
number of issues under category of issues having size of Rs.500 crore or above
increased to 21 in 2009- 10 from six in 2008-09. The average size of the issue more
than doubled in 2009-10 to Rs.757 crore from Rs.345 crore in 2008-09. Not only the
average size of issues improved substantially in 2009- 10, but also the fact that issues
under Rs.100 crore constituted just 2.2 percent of total resources mobilization shows
that bigger issues were clearly the flavour of the market.

During 2009-10, 76 issues accessed the primary market and raised Rs.57,555
crore through public (47) and rights issues (29) as against 47 issues which raised
Rs.16,220 crore in 2008-09 through public (22) and rights issues (25) . Due to better
financial environment, there were 39 IPOs during 2009-10 as against 21 during 2008-
09. The amount raised through IPOs during 2009-10 was significantly higher at
Rs.24,696 crore as compared to Rs.2,083 crore during 2008-09. The share of public
issues in the total resource mobilisation increased to 85.6 percent during 2009-10 from
22.1 percent in 2008-09 whereas share of rights issues declined from 77.9 percent in
2008-09 to 14.5 percent in 2009-10. It is observed that the share of IPOs has ranged
from 12.8 percent to 85.1 percent; FPOs from zero percent to 80.9 percent and rights
issues from 4.3 percent to 77.9 percent.

Sector-wise classification reveals that 70 private sector and six public sector
issues mobilised resources through primary market during 2009-10 as compared to 47
private sector issues in 2008-09. These companies raised Rs.57,555 crore though 76
issues in 2009-10 as compared to Rs.16,220 crore through 47 issues in 2008-09. The
share of private sector in total resource mobilisation declined from 100 percent in 2008-
09 to 45.9 percent in 2009-10. The analysis of last eight years since 2002-03 reveals
that 2008-09 was the only financial year wherein the public sector companies did not
participate in resource mobilisation through primary market.

Industry-wise classification reveals that Power sector accounted for 43.9 percent
of total resource mobilisation in the primary market as number of power sector
companies, namely, Adani Power, Indiabulls Power, NTPC, NHPC etc, accessed the
primary market. The power sector was followed by Banks/FIs with 5.5 percent, Cement
and Construction with 4.8 percent and Entertainment sector with 4.3 percent. In terms
of number of issues, Entertainment sector led the pack with nine issues during 2009-10
as compared to Textile sector seeing the highest number of five issues during 2008-09.

Figure – 2.3
Share of Broad Categories of Issues in Resource Mobilization
 Figure – 2.4
Sector-wise Resource Mobilization

Equity markets witnessed significant uptrend during 2009-10 as compared to

downward and volatile trend in 2008-09. However, at times, the domestic markets
reflected the uncertainties in international financial market during the financial year
under review.

Markets were characterized by some bouts of volatility during the year, but it
rewarded investors by giving five year best return in 2009-10. The BSE SENSEX and
S&P CNX Nifty appreciated by 80.5 percent and 73.8 percent, respectively, over
March 31, 2009. The BSE SENSEX increased 7819 points to close at two year high
level at 17528 on March 31, 2010 from 9709 on March 31, 2009. The S&P CNX Nifty
also increased 2228 points to close at 5249 points at the end of March 2010 over 3021
at the end of March 2009 mainly driven by higher growth rate, positive sentiments in
market, better global environment, and FII inflows.

Indian markets had recorded substantial decline and volatility in 2008-09.

However, the environment improved in 2009-10 and got better with every subsequent
quarter. In tandem with the increase in stock prices in 2009-10, there was a significant
increase in turnover and market capitalization across the board.

Figure – 2.5
Movement of Benchmark Stock Market Indices (2009-10)

Figure – 2.6
Movement of Sectoral Indices of BSE (2009-10)
 Figure – 2.7
Movement of Sectoral Indices of NSE (2009-10)

In the cash segment, the turnover at BSE and NSE increased by 25.4 percent
and 50.4 percent respectively during 2009-10 as compared to decline witnessed at BSE
and NSE by 30.3 percent and 22.5 percent, respectively during 2008-09. Derivatives
turnover showed substantial decline at BSE by 98.1 percent while that at NSE gained
by 60.4 percent over the previous year.

In 2009-10, global equity markets improved significantly and some markets

especially emerging markets showed sharp turnaround. This was unlike the situation
witnessed in 2008-09 when the global equity markets were dominated by the financial
turmoil and the signs of severe recession inflicted by the deteriorating financial
markets.

During 2009-10, all the equity markets witnessed uptrend, however, in different
magnitude. The upward trend was the highest for BUX index of Hungary (118.9
percent) followed by Argentina IBG (112.7 percent) and Russian CRTX index (104.8
percent). However, the Indian benchmark indices namely BSE SENSEX and S&P
CNX Nifty gave year on year return of 80.5 percent and 73.8 percent respectively in
2009-10.

In tandem with the upward trend in equity prices, there was an increase in the
trading volumes in stock exchanges in 2009- 10. During 2009-10, turnover of all stock
exchanges in the cash segment increased by 43.3 percent to Rs.55,18,470 crore from
Rs.38,52,579 crore in 2008-09. BSE and NSE together contributed 99.9 percent of the
turnover, of which NSE accounted for 74.9 percent in the total turnover in cash market
whereas BSE accounted for 24.9 percent to the total. Apart from NSE and BSE, the
only two stock exchanges which recorded turnover during 2009-10 were Calcutta Stock
Exchange Ltd. and UPSE. There was hardly any transaction on other stock exchanges.
Month-wise, BSE and NSE together recorded the highest turnover in June 2009
followed by July 2009 and May 2009.

Figure – 2.8
Turnover of SENSEX and Nifty

600000

500000

400000

300000

200000

100000

0
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
Jun-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10

Turnover BSE (Rs. In Crores) Turnover NSE (Rs. In Crores)

The market capitalization of BSE increased by 99.8 percent to Rs.61,65,619

crore in 2009-10 from Rs.30,86,075 crore in 2008-09. The upward trend in the stock
markets resulted in similar trend in market capitalization of many indices in 2009-10.
Among the indices of BSE, increase in market capitalization was the highest for
Bankex (136.9 percent), BSE PSU (82.6 percent) and BSE Teck (80.3 percent) over the
previous year (Table 2.13). However, in terms of absolute value, among these three
indices, BSE PSU led the pack with market capitalization of Rs.17,33,662 crore
followed by BSE Teck at Rs.7,40,817 crore and BSE Bankex at Rs.5,54,127 crore . At
NSE, market capitalization increased by 107.5 percent to Rs.60,09,173 crore from
Rs.28,96,194 crore at the end of March 2009. At NSE, among sectoral indices, increase
in market capitalisation was the highest for CNX Pharma (101.1 percent). This was
followed by CNX Bank (41.6 percent) and CNX IT (13.3 percent).

Figure – 2.9
Market Capitalization of SENSEX and Nifty

8000000
7000000
6000000
5000000
4000000
3000000
2000000
1000000
0
Jun-06

Jun-07

Jun-08

Jun-09
Apr-06

Aug-06
Oct-06
Dec-06
Feb-07
Apr-07

Aug-07
Oct-07
Dec-07
Feb-08
Apr-08

Aug-08
Oct-08
Dec-08
Feb-09
Apr-09

Aug-09
Oct-09
Dec-09
Feb-10
Market Capitalisation BSE (Rs. In Crores) Market Capitalisation NSE (Rs. In Crores)
The Gold Market
of India
 Gold has a very special place in history. It has been treasured since ancient
times and simple gold ornaments are among the earliest known metal objects made by
humans. Gold was so sought after that, in early times, alchemists tried to turn other
metals into precious gold! Gold has affected where and how people live, and many
towns have been developed by the wealth from gold mining.

Gold has featured in many myths and legends, including King Midas, King
Solomon, and Jason and the Argonauts. Fairytales often mention golden objects such as
eggs or harps, and most people have heard of the golden pot at the end of the rainbow.
Even today, achievements are rewarded by gold medals, and we associate the word
gold with greatness - as in ‘golden rules’ or ‘good as gold’. Gold has always been, and
still is, a very important metal. Its rarity and unique properties make it one of the most
prized and useful metals.

3.1 INDIAN GOLD MARKET

India’s centuries‐old gold industry is the worldʹs biggest market for the metal,
with imports meeting almost all the country’s requirements for jewellery and
investment. India owns over 18,000 tonnes of above ground gold stocks worth
approximately $ 800 billion and representing at least 11 per cent of global stock,
according to estimates of World Gold Council.

Figure – 3.1
Total Gold Demand
 Figure – 3.2
India gold market as a % of global gold market, tonnage terms (2009)

Gold jewellery demand in India, the world’s largest gold jewellery market, rose
67% year‐on‐year to 272 tonnes in the first half of 2010. Over the same period, the
average domestic gold price surged to almost Rs 52,800/oz, before hitting a new high
of Rs 60,460/oz on 15 October 2010. Over the past ten years, the value of gold demand
in India has increased at an average rate of 13 % per year, outpacing the countryʹs real
GDP, inflation and population growth by 6 %, 8 % and 12 % respectively.

3.2 JEWELLERY CONSUMPTION

Gold jewellery accounted for around 75% of total Indian gold demand in 2009,
the remainder being investment (23%) and decorative and industrial (2%). Indian
consumers also regard gold jewellery as an investment and are well aware of gold’s
benefit as a store of value.
Figure – 4.3
 Wedding‐related demand accounts for a substantial proportion of overall
jewellery demand. This is particularly true in the south of India, where the most popular
wedding jewellery sets tend to be the more traditional, intricate but bulky styles in
heavier weights. In the northern cities there has been a trend towards more ‘western’
styles, and lighter wedding sets, as well as diamond‐set pieces, are becoming
increasingly popular.

In 2010, Indian gold jewellery consumption is likely to recover to near precredit

crisis level following the fall in demand in 2009. As consumers have adjusted their
price expectations upwards, a further rise in demand is anticipated.

In the longer term, India’s favourable demographic and age profile are likely to
ensure buoyant consumption growth, especially given the existing strong affinity to
gold in Indian culture. The improving economic position of many domestic consumers
will also play a part in determining demand for gold in coming years.

3.3 INVESTMENT DEMAND

Gold is an integral part of Indian society and a foundation of wealth and savings
in India. It is viewed as a secure, liquid investment, a capital and value preserver and is
the second preferred investment after bank deposits. Saving rates are estimated at
around 30% of total income of which we believe around 10% is invested in gold.
India’s gold investment revolution is gathering pace.

Figure – 4.4
Indian Gold Investment Demand
3.4 GOLD EXCHANGE TRADED FUNDS

The tonnage of gold in Indian gold Exchange Traded Funds (ETFs) remains
relatively small but there have been significant recent developments with the Indian
ETF market as investors seek greater access to more liquid gold investments. ETFs,
first brought to the Indian market just over 3 years ago, have grown in popularity as
investors seek exposure to gold within a fund structure. Total holdings from the Gold
Benchmark Exchange Traded Scheme, KOTAK Gold ETF, Quantum Gold Fund,
Reliance Gold Exchange Traded, UTI Gold Exchange Traded Fund, Religare Gold
Exchange Traded Fund and State of Bank of India (SBI) Gold Exchange Traded
Scheme amounted to approximately 11 tonnes by the end of August 2010, up 250% on
June 2007 from 3 tonnes.

Figure – 3.5

Gold ETFs
 Figure – 4.6

3.5 DECORATIVE AND INDUSTRIAL DEMAND

Since 1992, approximately 22 tonnes of gold per annum have been used in
domestic decorative and industrial applications. This sector accounted for nearly 3% of
Indian gold demand in 2009. Industrial and decorative demand for gold in the country
is driven primarily by the use of jari, a gold thread used in clothing (particularly in the
weaving of wedding saris).

Figure – 4.7
Indian Gold Decorative and Industrial Demand
 There is also growth in the electronics manufacturing sector in India,
particularly in regions such as Bangalore and this may well provide an additional driver
for gold demand in the coming years. The recent demand performance is seen as a
trough, given the increasing acceptance of higher prices, the recovering global
economic outlook and improving domestic living standards.

3.6 GOLD IMPORTS

Indian gold imports play an important role in the domestic gold market since
India currently produces around 0.5% of its annual gold consumption. The value of
annual gold imports increased by 1,015% between 1992 and 2009. In 1992, gold
imports were approximately Rs88 bn, this increased to Rs881 bn by the end of 2009.

3.7 RESERVES WITH RESERVE BANK OF INDIA

Recent developments have seen the Reserve Bank of India (RBI) purchasing
200 tonnes of gold from the IMF as a result of partially restoring a prior relationship
within its reserves. The deal was completed in October 2009, when the gold price was
trading around Rs 49,000/oz (or US$1,048), and was announced in early November
2009.

3.8 RECYCLED GOLD SUPPLY

Since 1992, Indians have recycled an average of 92 tonnes of gold per annum.
In 2009, the supply of domestic recycled gold rose 29% to 116 tonnes while domestic
gold demand fell by 19%. Historically, recycling activity has been sensitive to general
economic conditions, the price of gold and price expectations. This is attributable to the
fact that gold functions both as savings and as a form of money in India – i.e. gold is a
tradable, liquid asset.

3.9 INDIA IN WORLD GOLD INDUSTRY

India (In World (In %

(Rounded Figures)
Tons) Tons) Share

Total Stocks 15000 160000 9

Central Bank holding 558 30,100 2

Annual Production 3 2450 0

Annual Recycling 250 1100 23

Annual Demand 700 3550 20

Annual Imports 600 --- ---

Annual Exports 60 --- ---

3.10 INDIAN GOLD MARKET – PRESENT SCENARIO

• India is the world's largest consumer of gold. Indians normally buy about 25 per
cent of the world's gold, purchasing around 700 - 750 tonnes of gold every year.

• However, the sharp price increase in 2008 and 2009 has impacted demand with
total demand in 2008 dipping to 660 tonnes. It is further expected to shrink in 2009
with demand in first three quarters of 2009 totaling only around 265 tonnes against
553.5 tonnes in the same period of the previous year.

• As India's domestic primary production of gold is very less, at around 2-3

tonnes a year, the country imports most of its domestic requirement.

• Thus, India is also the largest importer of the yellow metal and has averaged
imports of around 600 tonnes a year. However, 2008 imports dipped to around 400
tonnes of gold and it is further expected to dip to around 200-220 tonnes in 2009 owing
to high prices.

• India's gold demand is firmly embedded in cultural and religious traditions. It is

also valued in India as a savings and investment vehicle and is the second preferred
investment after bank deposits.

• Gold hoarding tendency is well engrained in the Indian society and unofficial
stocks held by Indians is estimated to be well above 15,000 tonnes, which is around 9%
of the total global gold stocks.

• Domestic consumption is dictated by monsoon, harvest and marriage season.

Indian jewellery offtake is sensitive to price increases and even more so to volatility.

• In the cities gold is facing competition from the stock market and a wide range
of consumer goods.

• Facilities for refining, assaying, making them into standard bars, coins in India,
as compared to the rest of the world, are insignificant, both qualitatively and
quantitatively.

• In July 1997 the RBI authorized the commercial banks to import gold for sale or
loan to jewellers and exporters. At present, 13 banks are active in the import of gold.
This reduced the disparity between international and domestic prices of gold from 57
percent during 1986 to 1991 to 8.5 percent in 2001.

3.11 MARKET MOVING FACTORS

• Indian gold prices are highly correlated with international prices. However, the
fluctuations in the INR-US Dollar impact domestic gold prices and have to be closely
followed.

• The global prices are driven by a host of factors with macro-economic factors
like strength of the economy, rising importance of emerging markets, currency
movements, interest rates being major influencing factors.
• Supply-demand is a major influencer, amid rising global investor demand and
almost stable supplies.

• Shifts in official gold reserves, reports of sales/purchases by central banks act as

major price influencing factors, whenever such reports surface.

• The investment in gold is influenced by comparative returns from other markets

like stock markets, real estate other commodities like crude oil.

• Domestically, demand and consequently prices to some extent are influenced by

seasonal factors like marriages. The rural demand is influenced by monsoon,
agricultural output and health of the rural economy.
Volatility
And
Regression
Analysis
4.1 VOLATILITY

Peripatetic stock prices and their volatility, which have now become endemic
features of securities market, add to the concern. The growing linkages of national
markets in currency, commodity and stock with world markets and existence of
common players, have given volatility a new property – that of its speedy
transmissibility across markets.

To many among the general public, the term volatility is simply synonymous
with risk: in their view high volatility is to be deplored, because it means that security
values are not dependable and the capital markets are not functioning as well as they
should. Merton Miller (1991) the winner of the 1990 Nobel Prize in economics - writes
in his book Financial Innovation And Market Volatility …. “By volatility public seems
to mean days when large market movements, particularly down moves, occur. These
precipitous market wide price drops cannot always be traced to a specific news event.
Nor should th is lack of smoking gun be seen as in any way anomalous in market for
assets like common stock whose value depends on subjective judgement about cash
flow and resale prices in highly uncertain future. The public takes a more deterministic
view of stock prices; if the market crashes, there must be a specific reason.”

As a concept, volatility is simple and intuitive. It measures variability or

dispersion about a central tendency. To be more meaningful, it is a measure of how far
the current price of an asset deviates from its average past prices. Greater this deviation,
greater is the volatility. At a more fundamental level, volatility can indicate the strength
or conviction behind a price move. Volatility is measured by the standard deviation in
the price level of the stock or commodity.

Volatility or Standard deviation is the positive square root of the arithmetic

mean of the squares of the deviations of the given values from their arithmetic mean.
For the frequency distribution xi/fi; i = 1,2,…….,n.

σ = √1/N∑fi(xi-x)2

The annualized volatility σ is the standard deviation of the instruments yearly.

The generalized volatility σT for time horizon T in years is expressed as:

 Therefore, if the daily logarithmic returns of a stock have a standard deviation
of σSD and the time period of returns is P, the annualized volatility is

The formula used above to convert returns or volatility measures from one
o time
period to another assume a particular underlying model or process. These formulas are
accurate extrapolations of a, or Wiener process, whose steps have finite variance.
However, more generally, for natural stochastic processes, the precise relationship
relation
between volatility measures for different time periods is more complicated. Some use
the Lévy stability exponent α to extrapolate natural processes:

4.2 REGRESSION

Regression analysis is a statistical tool for the investigation of relationships

between variables. Usually, the investigator seeks to ascertain the causal effect of one
variable upon another—the
the effect of a price increase upon demand, for example, or the
effect of changes in the money supply upon the inflation rate. To explore such issues,
is
the investigator assembles data on the underlying variables of interest and employs
regression to estimate the quantitative effect of the causal variables upon the variable
that they influence. The investigator also typically assesses the “statistical
“statistica significance”
of the estimated relationships, that is, the degree of confidence that the true relationship
is close to the estimated relationship.

4.2.1 SIMPLE REGRESSION

In reality, any effort to quantify the effects of education upon earnings without
careful
areful attention to the other factors that affect earnings could create serious statistical
difficulties (termed “omitted variables bias”), which I will discuss later. But for now let
us assume away this problem. We also assume, again quite unrealistically,
unrealistically that
“education” can be measured by a single attribute—years
attribute years of schooling. We thus
suppress the fact that a given number of years in school may represent widely varying
academic programs.

At the outset of any regression study, one formulates some hypothesis about the
relationship between the variables of interest, here, education and earnings. Common
experience suggests that better educated people tend to make more money. It further
suggests that the causal relation likely runs from education to earnings rather than the
other way around. Thus, the tentative hypothesis is that higher levels of education cause
higher levels of earnings, other things being equal.

To investigate this hypothesis, imagine that we gather data on education and

earnings for various individuals. Let E denote education in years of schooling for each
individual, and let I denote that individual’s earnings in dollars per year. We can plot
this information for all of the individuals in the sample using a two-dimensional
diagram, conventionally termed a “scatter” diagram. Each point in the diagram
represents an individual in the sample.

The diagram indeed suggests that higher values of E tend to yield higher values
of I, but the relationship is not perfect—it seems that knowledge of E does not suffice
for an entirely accurate prediction about I. We can then deduce either that the effect of
education upon earnings differs across individuals, or that factors other than education
influence earnings. Regression analysis ordinarily embraces the latter explanation.
Thus, pending discussion below of omitted variables bias; we now hypothesize those
earnings for each individual are determined by education and by an aggregation of
omitted factors that we term “noise.”

To refine the hypothesis further, it is natural to suppose that people in the labor
force with no education nevertheless make some positive amount of money, and that
education increases earnings above this baseline. We might also suppose that education
affects income in a “linear” fashion—that is, each additional year of schooling adds the
same amount to income. This linearity assumption is common in regression studies but
is by no means essential to the application of the technique, and can be relaxed where
the investigator has reason to suppose a priori that the relationship in question is
nonlinear.

Then, the hypothesized relationship between education and earnings may be

written

I = a + bE + e

Where

a = a constant amount (what one earns with zero education);

b = the effect in dollars of an additional year of schooling on income, hypothesized to

be positive; and

e = the “noise” term reflecting other factors that influence earnings.

The variable I is termed the “dependent” or “endogenous” variable; E is termed

the “independent,” “explanatory,” or “exogenous” variable; a is the “constant term” and
b the “coefficient” of the variable E.

Remember what is observable and what is not. The data set contains
observations for I and E. The noise component e is comprised of factors that are
unobservable, or at least unobserved. The parameters ‘a’ and ‘b’ are also unobservable.
The task of regression analysis is to produce an estimate of these two parameters, based
upon the information contained in the data set and, as shall be seen, upon some
assumptions about the characteristics of e.

To understand how the parameter estimates are generated, note that if we ignore
the noise term e, the equation above for the relationship between I and E is the equation
for a line—a line with an “intercept” of a on the vertical axis and a “slope” of b.
Returning to the scatter diagram, the hypothesized relationship thus implies that
somewhere on the diagram may be found a line with the equation I = a + bE. The task
of estimating a and b is equivalent to the task of estimating where this line is located.

What is the best estimate regarding the location of this line? The answer
depends in part upon what we think about the nature of the noise term e. If we believed
that e was usually a large negative number, for example, we would want to pick a line
lying above most or all of our data points, the logic is that if e is negative, the true value
of I (which we observe), given by I = a + bE + e, will be less than the value of I on the
line I = a + bE. Likewise, if we believed that e was systematically positive, a line lying
below the majority of data points would be appropriate. Regression analysis assumes,
however, that the noise term has no such systematic property, but is on average equal to
zero. Let us make the assumptions about the noise term more precise in a moment. The
assumption that the noise term is usually zero suggests an estimate of the line that lies
roughly in the midst of the data, some observations below and some observations
above.

But there are many such lines, and it remains to pick one line in particular.
Regression analysis does so by embracing a criterion that relates to the estimated noise
term or “error” for each observation. To be precise, define the “estimated error” for
each observation as the vertical distance between the value of I along the estimated line
I = a + bE (generated by plugging the actual value of E into this equation) and the true
value of I for the same observation. Superimposing a candidate line on the scatter
diagram, the estimated errors for each observation may be seen as follows:
 With each possible line that might be superimposed upon the data, a different
set of estimated errors will result. Regression analysis then chooses among all possible
lines by selecting the one for which the sum of the squares of the estimated errors is at a
minimum. This is termed the minimum sum of squared errors (minimum SSE)
criterion. The intercept of the line chosen by this criterion provides the estimate of α,
and its slope provides the estimate of β.

It is hardly obvious why we should choose our line using the minimum SSE
criterion. We can readily imagine other criteria that might be utilized (minimizing the
sum of errors in absolute value, for example). One virtue of the SSE criterion is that it
is very easy to employ computationally. When one expresses the sum of squared errors
mathematically and employs calculus techniques to ascertain the values of α and β that
minimize it, one obtains expressions for α and β that are easy to evaluate with a
computer using only the observed values of E and I in the data sample. But
computational convenience is not the only virtue of the minimum SSE criterion; it also
has some attractive statistical properties under plausible assumptions about the noise
term. These properties will be discussed in a moment, after we introduce the concept of
multiple regression.

4.2.2 MULTIPLE REGRESSION

Plainly, earnings are affected by a variety of factors in addition to years of

schooling, factors that were aggregated into the noise term in the simple regression
model above. “Multiple regression” is a technique that allows additional factors to enter
the analysis separately so that the effect of each can be estimated. It is valuable for
quantifying the impact of various simultaneous influences upon a single dependent
variable. Further, because of omitted variables bias with simple regression, multiple
regression is often essential even when the investigator is only interested in the effects
of one of the independent variables.

For purposes of illustration, consider the introduction into the earnings analysis
of a second independent variable called “experience.” Holding constant the level of
education, we would expect someone who has been working for a longer time to earn
more. Let X denote years of experience in the labor force and, as in the case of
education, we will assume that it has a linear effect upon earnings that is stable across
individuals. The modified model may be written:

I = a + bE + gX + e

Where g is expected to be positive.

The task of estimating the parameters a, b, and g is conceptually identical to the

earlier task of estimating only a and b. The difference is that we can no longer think of
regression as choosing a line in a two-dimensional diagram—with two explanatory
variables we need three dimensions, and instead of estimating a line we are estimating a
plane. Multiple regression analysis will select a plane so that the sum of squared
errors—the error here being the vertical distance between the actual value of I and the
estimated plane—is at a minimum. The intercept of that plane with the I-axis (where E
and X are zero) implies the constant term a, it’s slope in the education dimension
implies the coefficient b, and its slope in the experience dimension implies the
coefficient g.

Multiple regression analysis is in fact capable of dealing with an arbitrarily

large number of explanatory variables. Though people lack the capacity to visualize in
more than three dimensions, mathematics does not. With n explanatory variables,
multiple regression analysis will estimate the equation of a “hyperplane” in n-space
such that the sum of squared errors has been minimized. Its intercept implies the
constant term, and its slope in each dimension implies one of the regression
coefficients. As in the case of simple regression, the SSE criterion is quite convenient
computationally. Formulae for the parameters a, b, g . . . can be derived readily and
evaluated easily on a computer, again using only the observed values of the dependent
and independent variables.

The interpretation of the coefficient estimates in a multiple regression warrants

brief comment. In the model I = a + bE + gX + e, a captures what an individual earns
with no education or experience, b captures the effect on income of a year of education,
and g captures the effect on income of a year of experience. To put it slightly
differently, b is an estimate of the effect of a year of education on income, holding
experience constant. Likewise, g is the estimated effect of a year of experience on
income, holding education constant.

4.3 ESSENTIAL ASSUMPTIONS AND STATISTICAL PROPERTIES OF

REGRESSION

As noted, the use of the minimum SSE criterion may be defended on two
grounds: its computational convenience, and its desirable statistical properties. We now
consider these properties and the assumptions that are necessary to ensure them.

Continuing with our illustration, the hypothesis is that earnings in the “real
world” are determined in accordance with the equation I = a + bE + gX + e—true
values of a, b, and g exist, and we desire to ascertain what they are. Because of the
noise term e, however, we can only estimate these parameters.

We can think of the noise term e as a random variable, drawn by nature from
some probability distribution—people obtain an education and accumulate work
experience, then nature generates a random number for each individual, called e, which
increases or decreases income accordingly. Once we think of the noise term as a
random variable, it becomes clear that the estimates of a, b, and g (as distinguished
from their true values) will also be random variables, because the estimates generated
by the SSE criterion will depend upon the particular value of e drawn by nature for
each individual in the data set. Likewise, because there exists a probability distribution
from which each e is drawn, there must also exist a probability distribution from which
each parameter estimate is drawn, the latter distribution a function of the former
distributions. The attractive statistical properties of regression all concern the
relationship between the probability distribution of the parameter estimates and the true
values of those parameters.

We begin with some definitions. The minimum SSE criterion is termed an

estimator. Alternative criteria for generating parameter estimates (such as minimizing
the sum of errors in absolute value) are also estimators.

Each parameter estimate that an estimator produces, as noted, can be viewed as

a random variable drawn from some probability distribution. If the mean of that
probability distribution is equal to the true value of the parameter that we are trying to
estimate, then the estimator is unbiased. In other words, to return to our illustration,
imagine creating a sequence of data sets each containing the same individuals with the
same values of education and experience, differing only in that nature draws a different
ε for each individual for each data set. Imagine further that we re-compute our
parameter estimates for each data set, thus generating a range of estimates for each
parameter α, β and γ. If the estimator is unbiased, we would find that on average we
recovered the true value of each parameter.

An estimator is termed consistent if it takes advantage of additional data to

generate more accurate estimates. More precisely, a consistent estimator yields
estimates that converge on the true value of the underlying parameter as the sample size
gets larger and larger. Thus, the probability distribution of the estimate for any
parameter has lower variance15 as the sample size increases, and in the limit (infinite
sample size) the estimate will equal the true value.

The variance of an estimator for a given sample size is also of interest. In

particular, let us restrict attention to estimators that are unbiased. Then, lower variance
in the probability distribution of the estimator is clearly desirable16—it reduces the
probability of an estimate that differs greatly from the true value of the underlying
parameter. In comparing different unbiased estimators, the one with the lowest variance
is termed efficient or best.
 Under certain assumptions, the minimum SSE criterion has the characteristics
of unbiasedness, consistency, and efficiency; these assumptions and their consequences
follow:

(1) If the noise term for each observation, e, is drawn from a distribution
that has a mean of zero, then the sum of squared errors criterion generates estimates
that are unbiased and consistent.

That is, we can imagine that for each observation in the sample, nature draws a
noise term from a different probability distribution. As long as each of these
distributions has a mean of zero (even if the distributions are not the same), the
minimum SSE criterion is unbiased and consistent.17 This assumption is logically
sufficient to ensure that one other condition holds—namely, that each of the
explanatory variables in the model is uncorrelated with the expected value of the noise
term.18 This will prove important later.

(2) If the distributions from which the noise terms are drawn for each
observation have the same variance, and the noise terms are statistically independent of
each other (so that if there is a positive noise term for one observation, for example,
there is no reason to expect a positive or negative noise term for any other observation),
then the sum of squared errors criterion gives us the best or most efficient estimates
available from any linear estimator (defined as an estimator that computes the
parameter estimates as a linear function of the noise term, which the SSE criterion
does).

If assumptions (2) are violated, the SSE criterion remains unbiased and
consistent but it is possible to reduce the variance of the estimator by taking account of
what we know about the noise term. For example, if we know that the variance of the
distribution from which the noise term is drawn is bigger for certain observations, then
the size of the noise term for those observations is likely to be larger. And, because the
noise is larger, we will want to give those observations less weight in our analysis.
 Analysis
And
Interpretation
 In this paper, the volatility of gold futures market, the spot market and the stock
market (SENSEX) is being calculated. The price quote of MCX Gold Futures Contracts
and price quote of Mumbai spot market is considered for this purpose. For the stock
market the price quote of the BSE SENSEX is considered on a monthly basis. For
finding out the relationship between the stock market and the gold market, regression
models are analyzed. The SPSS statistical package is used for this purpose. The
relationship between the volatility of SENSEX and the gold spot market and the gold
futures market is taken into consideration for this paper.

5.1 VOLATILITY

The figure below shows the volatility of gold spot (Mumbai) and Futures
(MCX) market.

Figure – 5.1
Comparison between Spot and Future Market Volatility of Gold in Indian
Context
2500

2000

1500

1000

500

0
Apr-05

Oct-05
Jan-06
Apr-06

Oct-06
Jan-07
Apr-07

Oct-07
Jan-08
Apr-08

Oct-08
Jan-09
Apr-09

Oct-09
Jan-10
Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

VOLATILITY OF GOLD FUTURES MARKET VOLATILITY OF GOLD SPOT MARKET

From the above figure, it is quite clear that the volatility of spot and future
market moved almost in the same pattern over the years. This confirms the strong
relation between the spot and futures market of gold. It can also be analyzed that the
spot market is more volatile than the futures market in Indian context. The last two
years has shown a more volatile movement. This may be because of the recessionary
pressure of the global financial crisis. Similarly if the spot and futures market price is
compared, it can be seen that, they also moved on the same direction and more
fluctuations are seen in spot market rather than the futures market.

Figure – 5.2
Comparison between Prices of Spot and Futures Market of Gold in Indian
Context
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Apr-05
Jul-05

Apr-06
Jul-06

Apr-07
Jul-07

Apr-08
Jul-08

Apr-09
Jul-09
Oct-05
Jan-06

Oct-06
Jan-07

Oct-07
Jan-08

Oct-08
Jan-09

Oct-09
Jan-10
GOLD FUTURES PRICE GOLD SPOT PRICE (MUMBAI)

The above figure shows the movement of prices of both the spot and the futures
market of gold in India. It is quite clear from the figure that both the market has strong
correlation between them. Over last five years the spot price and the futures price has
shown a constant and steady growth, which even continued in the recessionary period
also.

Figure – 5.3
Comparison between Volatility of SENSEX, Spot and Futures Market of Gold
2500

2000

1500

1000

500

0
Apr-05
Jul-05

Apr-06
Jul-06

Apr-07
Jul-07

Apr-08
Jul-08

Apr-09
Jul-09
Oct-05
Jan-06

Oct-06
Jan-07

Oct-07
Jan-08

Oct-08
Jan-09

Oct-09
Jan-10

VOLATILITY OF SENSEX VOLATILITY OF GOLD SPOT MARKET

VOLATILITY OF GOLD FUTURE MARKET
 The above figure shows a comparative analysis of the volatility of SENSEX
(BSE’s Index), with that of the volatility of gold spot and futures market. From the
figure it is confirmed that the stock market is much more volatile than the gold market
in India. After June 2007, the SENSEX is very much volatile, whereas the gold spot
and futures market is quite relatively less volatile. For this reason, investor shift to gold
market, when the stock market is very volatile.

Figure – 5.4
Comparison of Volatility of SENSEX and Gold Spot Market
2500

2000

1500

1000

500

0
Apr-05
Jul-05

Apr-06
Jul-06

Apr-07
Jul-07

Apr-08
Jul-08

Apr-09
Jul-09
Oct-05
Jan-06

Oct-06
Jan-07

Oct-07
Jan-08

Oct-08
Jan-09

Oct-09
Jan-10
VOLATILITY OF SENSEX VOLATILITY OF GOLD SPOT MARKET

The volatility of the spot market of gold is quite less and it showed a steady
growth over the years. This may be due to supply and demand side effect on the gold
market. Also the international gold market has a significant impact on the gold market
of India, as India imports most of its gold from other countries. During 2008, the gold
market showed a relatively higher volatility, which was one of the impacts of the global
financial meltdown. On the other hand the volatility of stock market segment is much
higher in comparison to the gold market. Specifically, in 2008-09, the SENSEX
showed a higher range of variability in the volatility level. This is the consequence of
the financial crisis and the erosion of confidence of the investors from the market.
 Similarly, when the gold futures market and the stock market is analyzed that,
the volatility of the stock market is much more that the gold futures market. The
volatility of the gold futures market moved in a relatively slow and steady pattern,
where the SENSEX exhibit a higher volatility. The reason for the volatility of the stock
market is the erosion of the confidence between the investors is one of the reasons,
which was a by-product of the financial crisis.

Figure – 5.5
Volatility of Gold Futures and SENSEX
2500

2000

1500

1000

500

0
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
VOLATILITY OF SENSEX VOLATILITY OF GOLD FUTURE MARKET

5.2 REGRESSION ANALYSIS

Table – 5.1
Regression Model between Gold Spot And Volatility of SENSEX
Model Summary
R Adjusted Std. Error of
Model R Square R Square the Estimate

1 .222a .049 .032 541.42745

a. Predictors: (Constant), Gold Spot Market Price

b. Dependent Variable: Volatility of SENSEX

 The above table shows the linear regression model done with the gold spot price
as the independent variable and the volatility of the SENSEX as the dependent variable.
R2, which shows the degree of Association, is 0.049 and positive. Thus the degree of
association between the spot gold price and the volatility of SENSEX is positive and
both the markets are strongly correlated.

Table – 5.2
2
R between Volatility of S ENSEX and Gold Spot over the Years
Year R2

2005-06 .119

2006-07 .270

2007-08 .095

2008-09 .071

2009-10 .089

The value of R2 implies that the in year 2005 - 06, the total variation of
SENSEX nearly 11.9% is explained by the variation in gold spot price, which was 27%
in 2006 - 07 and then decreased to 9.5% in 2007-08, 7.1% in 2008-09 and 8.9% in
2009-10. Thus, over the years it is following a very random trend.

Table – 5.3
Regression between Gold Futures and Volatility of SENSEX
Model Summary

R Adjust Std. Error of

Model R Square ed R Square the Estimate

1 .343a .11 .102 521.66125

7
 Model Summary

R Adjust Std. Error of

Model R Square ed R Square the Estimate

1 .343a .11 .102 521.66125

7

a. Predictors: (Constant), Gold Futures Market

b. Dependent Variable: Volatility of SENSEX

The above table shows the linear regression model done with the gold futures
price as the independent variable and the volatility of the SENSEX as the dependent
variable. The co-efficient of regression, R2, which shows the degree of Association, is
0.117 and positive. Thus, the degree of association between the gold futures price and
the volatility of SENSEX is positive and both the markets are strongly correlated.

Table – 5.4
R2 between Gold Futures and SENSEX
Year R2

2005-06 .063

2006-07 .015

2007-08 .027

2008-09 .111

2009-10 .057

The value of R2 implies that the in year 2005 - 06, the total variation of
SENSEX nearly 6.3% is explained by the variation in gold futures price, which was
1.5% in 2006 - 07 and 2.7% in 2007-08, 11.1% in 2008-09 and 5.7% in 2009-10. Thus,
over the years it is following a very random trend.
Conclusion
6.1 MAJOR FINDINGS

On course of the study of the relationship between the gold market and the
stock market, the following observations are pointed out. Since the study is focused on
the equity market of the stock market only, the findings are concerned about the same.

6.1.1 VOLATILITY

The monthly volatility of the stock market is relatively very high in Indian
context. The SENSEX (BSE’s SENSetive indEX), showed higher volatility than the
gold market. Through it showed a normal volatility from April 2005 to June 2007, but
after July 2007 upto July 2009, it showed a very volatile movement. The price
fluctuation of SENSEX is very high. This may be due to the recessionary pressure at
that time. The lack of investor confidence and also Satyam scams contributed largely to
this volatility. The large participation of FIIs and lack of proper mutual funds industry
are yet some of the causes of stock market volatility. It can be easily marketed that
volatility of SENSEX was very high in the months of August 2007, January 2008,
April 2008, July 2008, October 2008 and April 2009.

If the volatility of both the gold spot market and the futures market is analyzed,
then it is found that it is relatively low than the stock market volatility. The volatility of
the gold spot market and the gold futures market, when compared showed almost the
same pattern of volatility. The spot market is relatively more volatile than the futures
market in Indian context. This may be due to non standardization of the gold spot
market. Since the futures are standardized and traded in recognized stock exchanges,
which gives guarantee on it, it exhibits a lesser volatility than the spot market. But this
difference of volatility is not significantly large.

When the volatility of the gold market is compared with the stock market of
India, it is observed that, both the markets are more volatile over the years. The
volatility of gold market is due to the variability of the demand and supply in gold. As
India produces only 0.5% of its total gold consumption, and depends largely on import,
the international market has a significant impact on the gold market of India. In 2009,
India imported more than Rs. 881 bn gold. The gold market has shown a higher
volatility in 2008-09, this is because of the global meltdown and recessionary pressure
at that time. Similar is the case, when a comparison is carried out between the gold
futures market and the stock market of India. It has also exhibited a lower volatility
than the stock market. The increase in volatility of gold futures market is just a
replication of the increase in the volatility of the gold spot market.

Since the gold market exhibit a lower volatility than the stock market, investors
prefer to shift to the gold market when the stock market is very much volatile. The
investors in India consider gold as the second best alternative of investment after bank
deposits because of lower risk involvement in gold market. This is also one of the
major reasons for lower volatility of gold than the stock market.

6.1.2 GOLD MARKET OF INDIA

The total demand for gold in India is increasing. It was around Rs. 160 bn in
1992, whereas, in 2008, it was more than Rs. 1000 bn. It can also be marked that there
was strip rise in the overall demand of gold after 2004.

India’s gold industry is world’s biggest market for gold, with imports meeting
almost all the requirement of the country. India owns over 18,000 tonnes of gold stock,
which worth approximately $800 billion and representing at least 11 percentage of
global gold stocks. This is because gold has a cultural significance in India. Gold is
needed in each and every occasion.

Gold jewellery accounted for around 75% of total Indian gold demand in 2009,
the remaining 23% is in investment and 2% in decorative and industrial. The jewellery
consumption of India also showed an increasing trend. It increased from Rs. 100 bn in
1992 to Rs. 750 bn in 2008. In longer term, India’s favourable demographic and age
profile are likely to ensure buoyant consumption growth.

In Indian context, gold is viewed as a secure, liquid investment, a capital and

value preserver and is second preferred investment alternative after bank deposits. This
is due to the risk averseness of the investors in India. Saving rates estimated at around
30% of the total income of which gold accounts around 10%. It can also be marked that
the investment in gold is increasing by day-by-day.
 One of the major innovations in the Indian stock market is gold ETFs. Since its
inception, it showed a regular growth. Many financial institutions are offering gold
ETFs. Gold ETFs are the benchmark performer in Indian capital market. It accounted
around 11 tonnes by the end of August 2010, which 250% times more on June 2007.

Since 1992, approximately 22 tonnes of gold per annum have been used in
domestic decorative and industrial applications. This sector accounted nearly 2% of the
Indian gold demand in 2009.

India produces only 0.5% of the total annual gold consumption, for rest, it
depends on import, thus the gold imports has increased significantly from Rs. 88 bn in
1992 to Rs 881 bn by the end of 2009.

Recently Reserve Bank of India (RBI) purchased 200 tonnes of gold from IMF.
This boosted the gold reserve of India. Currently India is in 11th position in the globe in
gold reserves.

India is recycling around 92 tonnes of gold every-year. In 2009, the supply of

domestic recycled gold rose by 29% to 116 tonnes.

There exist a strong correlation between the spot and future market of gold. The
volatility of both the market moved in the same direction and the spot market is more
volatile than the futures market. Similarly, the prices in both the market moved in the
same direction. The futures market is nothing but a replication of the spot market. Both
the markets are very closely related, thus both the markets move in the same direction
in all respect.

The volatility of gold is relatively low than the stock market indices. This may
be the reason; people invest in gold, when the stock market is very volatile.

6.1.3 REGRESSION

The regression analysis between the SENSEX and the gold spot market taking
SENSEX as the dependent variable and the gold spot price as the independent variable,
it is found that the degree of association between the SENSEX and the gold spot market
is found to be 0.049, which is positive. Thus, there exists a strong correlation between
both the markets. Hence any change in the SENSEX will have an impact equal to 4.9%
on the gold spot market.

The regression analysis between the SENSEX and the gold spot price over that
last five years, if analyzed found to be 11.9% in 2005-06, 27% in 2006-07, 9.5% in
2007-08, 7.1% in 2008-09 and 8.9% in 2009-10. This shows a random movement of
R2, which shows the degree of association between the gold spot market and the equity
market of India. R2 was high in 2005-06 and 2009-10, this is mainly due to the
favourable market conditions and various policies undertaken by the government of
India. Both the markets are bullion and were touching new heights at that time. The
economic condition prevailing at that point of time favoured the market to grow at a
rapid rate.

But from 2008, the stock market has seen many ups and downs, such as a peak
of 21000 and a lower point of 8000 within few hours. This is mainly due to the global
financial crisis that affected almost all the countries of the world. But the gold market
was relatively less affected by this crisis. This may be due to the consumption pattern
of gold and the less volatility of gold market. This is reason for which the R2 between
the gold spot market and the equity market reduced to 9.5% in 2007-08, 7.1% in 2008-
09 and 8.9% in 2009-10. So it can be said that gold market investment is not the only
factor that affects the volatility of the equity market. It is because of the bullion nature
or less riskiness of gold; people shift to or prefer to invest in the gold market, when the
equity market is very unstable and volatile.

Similarly, R2 between the volatility of SENSEX and the gold futures prices is
found to be positive, which is about .117 or 11.7%. Thus any change in volatility of the
SENSEX has an impact equal to 11.7% on the gold futures prices. The gold futures
market is more correlated to the stock market, because, it is an organized market and
the exchange provides guarantee on each contract. This encourages more trading in
gold futures and more over the hedging nature of gold futures make it a frequently
trading contract in Indian commodity market. Since both the markets; equity market
and the gold futures market are organized markets, there exists more correlation
between them.
 The value of R2 implies that the in year 2005 - 06, the total variation of
SENSEX nearly 6.3% is explained by the variation in gold futures price, which was
1.5% in 2006 - 07 and 2.7% in 2007-08, 11.1% in 2008-09 and 5.7% in 2009-10. Thus,
over the years it is following a very random trend. This may be due to the instability of
the equity market of India. It can also be seen that the degree of association is highest in
2008-09, when the equity market is very volatile due to global financial meltdown.

6.2 RECOMMENDATIONS

Based on the analysis of the stock market and the gold market of India, it is
observed that both the markets are strongly correlated to each other. The gold spot
market and the gold futures market have a significant impact on the volatility of stock
market and vice – versa. The stock market exhibits more volatility than the gold market
in India. Based on the study, the following are the recommendations;

o The volatility of the stock market should be checked by the government and the
concerned regulatory body. The reasons of volatility should be found out and
appropriate should be taken, which will help in reducing the volatility.

o The activities of the FII should be check properly. Though the Securities and
Exchange Board of India is regulating the activities of FII, still there is requirement of
more stringent regulations for FII.

o The mutual fund industry should be encouraged. One of the major reasons for
the slow growth of the mutual funds in India is lack of awareness among the investors.
Awareness programs should be conducted by the regulatory body, the stock exchanges
and the brokers to educate the investors. Though the SEBI and the stock exchanges are
carrying out some of the awareness campaigns, it is not sufficient and more such
activities should be undertaken. The stock brokers should also take initiatives in this
regard.

o Innovation in gold market like gold ETFs, derivatives in gold market should be
encouraged. This will encourage investment in the market and ultimately the volatility
will be low.
o Till date only 2 percent of the total population in India invests in the stock
market. More participation should be encouraged. This will help in better resource
mobilization and also help in stabilizing the financial market which leads to less
volatility.

6.3 CONCLUSIONS

After analyzing the nature of gold market and the stock market of India, it is
found that there exists a strong and positive correlation between both the markets,
especially the volatility of the stock market and the gold prices are strongly correlated.
Any change in the volatility of the shock market has a significant impact on the
investment pattern in the gold market. It is generally found that, when the stock market
is very much volatile and imparts large fluctuation, investors prefer the gold market for
investment.

In India, gold is considered as the second best alternative of investment. It is

considered as most secured investment avenue after the bank deposits. This may be the
reason, investors shift to gold market at large rather than any other market, when the
stock market exhibits a large volatility.

Although the investment pattern in gold market is significantly influenced by

the stock market volatility, but it cannot be said that, this is the only factor that affects
the gold market. There are a number of factors that influence the market. But when
there is a higher fluctuation in the stock market and the market is quite unstable, the
investment in gold market increases. This is because, gold is considered as a safer
investment avenue than the stock market and it also provides a relative return to the
investors.
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ANNEXTURE

Table – 1
Prices of SENSEX, Gold Spot and Gold Futures

GOLD SPOT MARKET GOL DFUTURES MARKET

TIME SENSEX (MUMBAI) (MCX)
Apr-05 6154.44 6151 6229
May-05 6715.11 6036 5966
Jun-05 7193.85 6142 6214
Jul-05 7635.42 6064 6084
Aug-05 7805.43 6248 6263
Sep-05 8634.48 6529 6731
Oct-05 7892.32 6878 6822
Nov-05 8788.81 7141 7416
Dec-05 9397.93 7585 7638
Jan-06 9919.89 7922 8166
Feb-06 10370.24 8030 8111
Mar-06 11279.96 8063 8382
Apr-06 12042.56 8963 9609
May-06 10398.61 9928 9526
Jun-06 10609.09 8958 9220
Jul-06 10743.88 9570 9560
Aug-06 11699.05 9539 9554
Sep-06 12454.42 9016 8859
Oct-06 12961.9 8699 8894
Nov-06 13696.31 9141 9269
Dec-06 13786.91 9127 9265
Jan-07 14090.92 9072 9242
Feb-07 12938.09 9541 9628
Mar-07 13072.1 9366 9339
Apr-07 13872.37 9331 9203
May-07 14544.46 8883 8694
Jun-07 14650.51 8707 8662
Jul-07 15550.99 8749 8706
Aug-07 15318.6 8828 8935
Sep-07 17291.1 9322 9530
Oct-07 19837.99 9695 10083
Nov-07 19363.19 10358 10033
Dec-07 20286.99 10293 10598
Jan-08 17648.71 11284 11707
Feb-08 17578.72 11889 12396
Mar-08 15644.44 12636 11920
Apr-08 17287.31 11834 11370
May-08 16415.57 12139 12199
Jun-08 13461.6 12356 12879
Jul-08 14355.75 13028 12618
Aug-08 14564.53 11863 11895
Sep-08 12860.43 12221 13192
Oct-08 9788.06 12757 11630
Nov-08 9092.72 12159 13125
Dec-08 9647.31 12905 13630
Jan-09 9424.24 13492 14452
Feb-09 8891.61 14779 15504
Mar-09 9708.5 15244 15132
Apr-09 11403.25 14477 14503
May-09 14625.25 14603 14923
Jun-09 14493.84 14639 14451
Jul-09 15670.31 14722 14802
Aug-09 15666.64 14962 15125
Sep-09 17126.84 15726 15703
Oct-09 15896.28 15859 15957
Nov-09 16926.22 17137 17614
Dec-09 17464.81 17147 16686
Jan-10 16357.96 16704 16200
Feb-10 16429.55 16531 16789
Mar-10 17527.77 16564 16295

Table – 2
Monthly Volatility of SENSEX, Gold Spot and Gold Futures

VOLATILITY OF VOLATILITY OF
VOLATILITY OF GOLD SPOT GOLD FUTURE
TIME SENSEX MARKET MARKET
May-05 396.45 81.32 185.97
Jun-05 338.52 74.95 175.36
Jul-05 312.24 55.15 91.92
Aug-05 120.22 130.11 126.57
Sep-05 586.23 198.70 330.93
Oct-05 524.79 246.78 64.35
Nov-05 633.91 185.97 420.02
Dec-05 430.71 313.96 156.98
Jan-06 369.08 238.29 373.35
Feb-06 318.45 76.37 38.89
Mar-06 643.27 23.33 191.63
Apr-06 539.24 636.40 867.62
May-06 1162.45 682.36 58.69
Jun-06 148.83 685.89 216.37
Jul-06 95.31 432.75 240.42
Aug-06 675.41 21.92 4.24
Sep-06 534.13 369.82 491.44
Oct-06 358.84 224.15 24.75
Nov-06 519.31 312.54 265.17
Dec-06 64.06 9.90 2.83
Jan-07 214.97 38.89 16.26
Feb-07 815.17 331.63 272.94
Mar-07 94.76 123.74 204.35
Apr-07 565.88 24.75 96.17
May-07 475.24 316.78 359.92
Jun-07 74.99 124.45 22.63
Jul-07 636.74 29.70 31.11
Aug-07 164.32 55.86 161.93
Sep-07 1394.77 349.31 420.73
Oct-07 1800.92 263.75 391.03
Nov-07 335.73 468.81 35.36
Dec-07 653.23 45.96 399.52
Jan-08 1865.55 700.74 784.18
Feb-08 49.49 427.80 487.20
Mar-08 1367.74 528.21 336.58
Apr-08 1161.68 567.10 388.91
May-08 616.41 215.67 586.19
Jun-08 2088.77 153.44 480.83
Jul-08 632.26 475.18 184.55
Aug-08 147.63 823.78 511.24
Sep-08 1204.98 253.14 917.12
Oct-08 2172.49 379.01 1104.50
Nov-08 491.68 422.85 1057.12
Dec-08 392.15 527.50 357.09
Jan-09 157.73 415.07 581.24
Feb-09 376.63 910.05 743.88
Mar-09 577.63 328.80 263.04
Apr-09 1198.37 542.35 444.77
May-09 2278.30 89.10 296.98
Jun-09 92.92 25.46 333.75
Jul-09 831.89 58.69 248.19
Aug-09 2.60 169.71 228.40
Sep-09 1032.52 540.23 408.71
Oct-09 870.14 94.05 179.61
Nov-09 728.28 903.68 1171.68
Dec-09 380.84 7.07 656.20
Jan-10 782.66 313.25 343.65
Feb-10 50.62 122.33 416.49
Mar-10 776.56 23.33 349.31

Table – 3
2
R between Volatility of SENSEX and Gold Spot 2005-06
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .344a .119 .021 158.23304

Table – 4
R2 between Volatility of SENSEX and Gold Spot 2006-07
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .520a .270 .197 303.79175

 Table – 5
R2 between Volatility of SENSEX and Gold Spot 2007-08
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .266a .071 -.022 696.11373

Table -6
2
R between Volatility of SENSEX and Gold Spot 2008-09
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .266a .071 -.022 696.11373

Table – 7
2
R between Volatility of SENSEX and Gold Spot 2009-10
Model Summary

Adjusted R Std. Error of the

Model R R Square Square Estimate

1 .298a .089 -.002 622.72121

 Table – 8
R2 between Volatility of SENSEX and Gold Futures 2005-06
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .396a .157 .063 154.78082

Table – 9
R2 between Volatility of SENSEX and Gold Futures 2006-07
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .323a .104 .015 336.51069

Table – 10
2
R between Volatility of SENSEX and Gold Futures 2007-08
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .340a .115 .027 646.65366

 Table – 11
R2 between Volatility of SENSEX and Gold Futures 2008-09
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .437a .191 .111 649.36638

Table – 12
R2 between Volatility of SENSEX and Gold Futures 2009-10

Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate

1 .239a .057 -.037 633.38549