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The report basicallyaims at identifying the volatility of Indian Stock markets through the volatility of BSE Sensex

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Acknowledgement

I take this opportunity to pay my gratitude to all those people who have

helped me carry out this project. This project could not have been complete

without the contribution and support of few individuals. They helped me a

lot in giving us a foresight of how to start, carry on and complete this

project.

I am grateful to my project guide Prof. Tamal Dutta Chaudhary for

the guidance, inspiration and constructive suggestions that helped me in

the preparation of this project.

I am thankful to all our teaching and non-teaching staff of IBS for

their constructive suggestions.

Last but not the least, I also thank all my friends and seniors who have

helped me in all possible ways and made this work a heavenly toil.

3

Executive Summery

This project mainly aims at the analyzing the current stock market

volatility. The Indian stock market benchmark index BSE Sensex has

witnessed some of the landmark events in the recent past. Sensex

reached its highest point ever around the same time last year and this

year the picture is just reversed. The current economic recession has

affected the Indian Stock Market or not has been analyzed in this

report.

The volatility for two time phases has been measured in the report

and some conclusions have been drawn. On the basis of results

obtained by the use of some statistical methods like calculation of

variance and standard deviation, we came to know that the volatility

has increased in the second time phase.

Also in this report, it has been tried to obtain the relationship

between the Sensex values and the prices of Crude Oil. Again with the

use of regression analysis we came to know that there is not a very

significant relationship between Sensex and Crude Oil prices. Thus

this report gives a statistical outlook to both the macro-economic

phenomenon.

4

Table of Content

Acknowledgement 2

Executive Summary 3

1. Introduction 5

2. Motivation 6

3. Hypothesis 7

4. Methodology 8-12

6. Conclusion 17

7. References 18

5

1. Introduction

for a given security or market index. Volatility can either

be measured by using the standard deviation or variance between

returns from that same security or market index. Commonly, the higher

the volatility, the riskier the security. Volatility is easily the most

common risk measure, despite its imperfections, which include the fact

that upside price movements are considered just as "risky" as downside

movements. We often estimate future volatility by looking at historical

volatility.

Looking at the Indian stock market benchmark index BSE Sensex we in

this report are looking forward to calculate the historical volatility in two

time Phases and will try to establish a relationship between the volatility

in these two time phases. Another thing we will be doing in this report is

to establish a relationship between the value of Sensex and Crude Oil

prices so also find out a reason for change in volatility.

6

2. Motivation:

minds of savers. The stock markets world over have taken a serious

impact on themselves and almost all of them have seen a series of steep

falls. India, being the second fastest growing economy after China has

also faced the impact of this global meltdown. The Indian Stock Markets

have also shown a steep decline in their values for last one year or so.

This global meltdown and its impact on Indian Stock Market is the

source of motivation for me in doing this project

Exchange Sensitivity Index (BSE Sensex). BSE Sensex as it is popularly

known as is a value-weight index composed of 30 stocks with the base

April 1984 = 100. It consist of 30 largest and most actively traded

stocks, representative of various sectors, on the Bombay Stock

exchange. As these companies are from different sectors they combined

together can give a broad idea about the Indian Economy as a whole.

Thus a study of volatility of Sensex can give us a idea about the volatility

of Indian Economy.

7

3. Hypothesis:

Sensex and its volatility, I have taken two hypothesis about the volatility

of Sensex.

less Volatile during the period of recession.

the period of recession.

These are the basic hypotheses which have been taken to carryon this

report. This hypothesis will be tested with a number of statistical tools

and conclusion will be drawn on the basis of the result obtained.

for the purpose of preparing this report.

1. While preparing this report it has been assumed that the period of

recession has started from 1st of January 2007 and is still not over.

2. The period of economic upswing is assumed to have started from 1stof

January 2005 and has continued till December 2006.

8

3. It has been assumed that the volatility is market only market driven

without the effect of any extraneous factor working behind it.

4. METHODOLOGY:

Volatility refers to the deviation from a normal mean. Volatility is

critical for risk measurement. Generally volatility refers to standard

deviation. From the mean. If the volatility is high then there is a higher

risk of value of a index moving up or down.

We often predict future volatility calculating the historical volatility.

This is very much important for future forecasting. For the purpose of

calculating the volatility of an index we need to take two steps

1. Compute a series of periodic returns for eg. Daily returns.

2. Choose a weighting scheme. This includes the decision on the length

or the size of the historical sample. In this report I have taken a

period of four years, which is from 2005 to 2008. This time period

has been divided into two phases

b. Economic downswing (bear phase) from 1/1/2007 to 31 12/2008.

9

The periodic returns could be calculated by the formula given below

Ui = ln (Vi / Vi-1 )

Where

a. Ui = Return from sensex in period ‘I’

b. Vi = Value of Sensex in period ‘I’

c. Vi-1 = Value of Sensex in period prior to ‘I’

formula given below.

Where

a. σ2n = variance rate per period

b. m = number of observations

c. ū = the mean of periodic returns

that variance and we get the volatility of the Sensex.

Volatility = (σ2)½

sensex values of both the time periods by using various statistical

packages like MS Excel and SPSS

10

Descriptive Statistics

N Range Minimum Maximum Mean Std. Deviation

Valid N 496

(listwise)

Looking at the descriptive statistic of both the Phases first thing we can

see that the range in Phase II has increased by 4553.03 points. Along

with that the standard deviation has also increased in the second Phase.

These are very clear indicators about the increased volatility of Sensex in

the second Phase.

a. Calculation of Volatility:

Using the above mentioned method for calculation the volatility and

taking the two different time frames as mentioned above we can get the

two different volatilities.

Phase I Phase II

Variance 0.00019 0.000527

Standard 0.013779 0.022962

Deviation

Volatility 0.013779 0.022962

11

b. Analysis: Looking at the above mentioned volatility of both the

Phases we can clearly see that the Volatility of Sensex has increased

in Phase II. This concludes that the null hypothesis which we have

taken is false and we have to reject the null hypothesis and accept the

alternate hypothesis that is “The volatility of Sensex has

increased in the period of recession.”

the next page.

Here from both the graphs we can see that the movement of the

Sensex has increased a lot in the second phase. We can clearly see

that in the first Phase the movement of Sensex has majorly been

upward moving. On the other hand the movement of Sensex has been

quite dynamic in the Phase II and it has moved both upward and

downward. This shows the volatility of Sensex has increased in the

Phase II.

12

5. Reasons for high volatility in Phase II:

As we clearly saw that the volatility of Sensex has increased in the phase

II, we should look about the possible reasons for increase in volatility of

Sensex. For this purpose we again need to carry out some statistical

tests depending upon the results of which we could give any conclusion

about the increase in volatility of Sensex.

13

1. Hypothesis: For finding out the reasons for high volatility of

Sensex, let us take Sensex values and crude oil prices as two

variables. We assume the value of Sensex as the dependent variable

and the crude oil prices as the independent variable. We now try to

find out that is there a relationship between the two variables by

taking two hypothesis.

2. Null Hypothesis: There is no relationship between the value of

Sensex and the crude oil prices and the increase in volatility of

Sensex is caused by some extraneous variable.

3. Alternate Hypothesis: There is some relationship between the

value of Sensex and crude oil prices and the increase in volatility of

Sensex is caused by the increase in volatility of crude oil prices.

be using the regression analysis. For the regression analysis I have

assumed that the sensex values are dependent on the crude oil prices

values. For this purpose I have taken the monthly closing values of

both BSE Sensex and crude oil prices. the movement of both the

variables in last 24 months have been shown in the graph below.

After taking the monthly values of both the variables and operating

them on SPSS for the calculation of correlation and regression I got

the following results.

24 month

14

Descriptive Statistics

Mean Std. N

Deviation

SENSEX 14965.1025 2992.70006 24

From the above given figures we can see the mean and standard

deviation of both the variables.

Correlations

SENSEX CRUDEOIL

Correlation

CRUDEOIL .456 1.000

CRUDEOIL .013 .

N SENSEX 24 24

CRUDEOIL 24 24

From the fig. given above we can see that the correlation between the

sensex values and the crude oil prices is o.456 This is though

correlated is not significant enough for concluding anything about

the relationship between the sensex volatility and crude oil prices.

Model Summary

Model R R Square Adjusted R Std. Error of

Square the Estimate

b Dependent Variable: SENSEX

15

From the values given above we get the value of adjusted R Square. R

Square value identifies the proportion of variance in Sensex values

which is accounted by variance in Crude oil prices. We can clearly see

that the Adjusted R Square value is 0.172. This indicates that the

variance of sensex values is very less to do with the variance in the

Crude oil price. Thus we can say that only 17.2% of the variance in the

value of sensex is explained by the values of Crude Oil Prices.

ANOVA

Model Sum of df Mean F Sig.

Squares Square

1 Regression 42864321.9 1 42864321.9 5.781 .025

35 35

Residual 163129511. 22 7414977.81

916 4

Total 205993833. 23

851

a Predictors: (Constant), CRUDEOIL

b Dependent Variable: SENSEX

From the figures above we can see that though the F statistic is 5.781 but

still the Sig F is also high (2.5 %) thus the value of F statistic is possible

by chance. Thus we can conclude that the value of volatility of Sensex

could be related to the Crude oil price movement by chance. Thus we

can say that the Volatility of Sensex has increased in the period of

recession but the reason for the increase in volatility could not be

attributed to the Crude Oil price movement only. There could be some

extraneous variables which are working behind this phenomenon.

5. Result:

Thus from the help of above statistical calculation we can see that the

there is a significant difference between the correlation of Sensex values

and the Crude Oil Prices. Thus we accept the null hypothesis that is

“There is no relationship between the value of Sensex and the

16

crude oil prices and the increase in volatility of Sensex is

caused by some extraneous variable”

6. Conclusion:

From the above shown analysis of the results obtained from statistical

tools we can conclude that the Volatility of Sensex has increased in the

period of recession. Indian Stock Markets have also suffered the impact

of the global meltdown and the risk has increased for the savers who

allocate their savings in the Stock Markets.

The other conclusion we can draw from this project report is that the

reason for the increased volatility could not be solely attributed to the

Volatility in the prices of Crude Oil. There are some extraneous variables

operating in the market which might have higher impact on the stock

17

markets. These could be attributed to various macroeconomic indicators

like expected growth rate (GDP growth), unstable inflation rates, and

lastly one of the most important reasons for Volatility of Sensex could be

the fluctuating movement of Foreign Institutional Investors (FII’s)

7. References:

b. Article by David Harper, CFA, titled “Using Historical Volatility To

Gauge Future Risk”

c. BSE Sensex, from Wikipedia

d. “SPSS for windows step by step” by Darren George and Paul

Mallery

18

e. Marketing Research by Naresh K. Malhotra

f. www.mopsi.nic.in

g. www.energy.gov

h. www.opec.org

i. www.rbi.org

j. www.Investopedia.com

k. www.bseindia.org

19

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