Indian Stock Market: An Empirical Analysis of Informational Efficiency

135 Pages·2014·2.36 MB·English

SPRINGER BRIEFS IN ECONOMICS
Gourishankar S. Hiremath
Indian Stock
Market
An Empirical Analysis
of Informational
Efficiency
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Gourishankar S. Hiremath
Indian Stock Market
An Empirical Analysis of Informational
Efficiency
123
Gourishankar S. Hiremath
Assistant Professorof Economics andFinance
Department of Humanities andSocial Sciences
IITKharagpur
Kharagpur,West Bengal
India
ISSN 2191-5504 ISSN 2191-5512 (electronic)
ISBN 978-81-322-1589-9 ISBN 978-81-322-1590-5 (eBook)
DOI 10.1007/978-81-322-1590-5
SpringerNewDelhiHeidelbergNewYorkDordrechtLondon
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To
My mother, Shakuntala
and
My father, Sharanayya Swami
Who exemplified through their life that love
of humanity is above an ideological talk
Foreword
ThereisapaucityofrigorousacademicworkonsecuritiesmarketsinIndia.Thisis
surprising, especially given the long tradition of statistical research pioneered by
Professors P.C. Mahalanobis, C.R. Rao, and their colleagues at the Indian Sta-
tistical Institute in Calcutta, and the availability of detailed data on Indian stock
and commodities markets, at least since the early 1990s. Indeed, despite the large
numbers of Indian Institutes of Technology and Indian Institutes of Management
thathave beenestablishedovertheyears,Indiacontinuestobeunder-represented
in research published in leading international academic journals, particularly in
finance and economics.
In this context, it is refreshing to read this monograph by Professor Gouri-
shankar S. Hiremath, which covers a broad array of topics on the major Indian
stock market indices, using daily data from the period following liberalization,
mostly since 1997, soon after the National Stock Exchange was established. The
topics covered range from assessing the efficiency of the Indian stock markets to
studying the hypotheses of mean-reversion and structural breaks in the data, to
analyzing the characteristics of the volatility process underlying the returns from
these indices.
Professor Hiremath’s analysis is thorough and comprehensive, and tries to
connect the conclusions of his research with the major economic events that
occurred during the past two decades in India, including major structural and
regulatorychangesin the economy at large, andthe stockmarket inparticular.In
particular, he places his statistical results firmly in the context of the most
important macro-economic and market developments of the period. He investi-
gates structuralbreaks inthe data and relatesthem to global and domestic shocks
to conclude that there are indications that the efficient market hypothesis may not
strictly hold in the Indian markets, which appear to be strongly mean-reverting.
This monograph provides much food for thought for future research on Indian
capitalmarketswithquestionsrelatingtoassetpricing,marketmicrostructure,and
the effect of capital flows on stock returns, and other, more tangential issues
relating to the disclosure of private information. I am sure that it will provide
vii
viii Foreword
usefulbackgroundinformationforacademics,institutions,andregulatorsthathave
aninterest inIndiansecurity markets. Any student oftheIndian marketswillfind
the book to be rewarding reading.
October 2, 2013 Marti G. Subrahmanyam
Leonard N Stern School of Business
New York University
New York
Charles E. Merill
Professor of Economics and Finance
Preface
Efficient market hypothesis is the well-known yet highly controversial theory of
the Neoclassical School of Finance. In an informationally efficient market, price
fully and instantly reflects available information in such a way that there are no
opportunities for the agents to predict prices and make excess profits. An ineffi-
cient market distorts efficient allocation of capital in the economy. This book
presents an empirical analysis of the informational efficiency of the Indian Stock
Market.
Indiabegantheprocessofeconomicreformsin1991inthewakeofthebalance
of payments crisis. The reforms were intended to achieve higher growth, effi-
ciency, and macro economic stability. A number offinancial sector reforms were
initiatedandmicrostructureandtradingpracticesintheIndianStockMarkethave
undergone drastic changes. The policy reforms in the financial sector have given
rise to a need for re-looking the behavior of stock returns in India. The past two
decades also witnessed the burst of the tech boom bubble, volatile exchange
markets, sub-prime crisis, and global financial crisis. The present work is moti-
vatedfromthesechangesandsituatestheobjectivesofthestudyinthesecontexts.
This volume examines random walk hypothesis and focuses on issues like non-
linear dynamics, structural breaks, and long memory properties of stock returns,
which are of special interest in recent times.
Thisbookcaterstotheneedsofawideraudience.Apartfromservingtheneeds
of students of Economics and Finance, the empirical work will be of special
interesttopeopleinacademiaandindecision-makingorganizations.Instructorsin
universities, who teach topics like market efficiency, will find the present volume
useful in relating the theory to the empirical evidence. The book also provides
good coverage on latest sophisticated time series techniques which are useful to
analyze time series data. The general reader, who is interested in knowing the
Indian Stock Market, will also find this book informative.
This volume would not have been possible without the help of several people.
The first encouragement I received was from Late Prof. Basavaraj Nimbur. I will
neverforgettheadviceofLateProf.MallappaAmravatiandhisconfidenceinme.
Igreatly miss these Teachers,who left theclassroom before the lecturewasover.
IparticularlywishtothankProf.B.SatyanarayanaandlateM.Upender,Osmania
University, Hyderabad for their continuous support, and more importantly for
introducing me to Prof. Kamaiah.
ix
x Preface
Words fail me while expressing my sincere gratitude to my affectionate Tea-
cher, Prof. Bandi Kamaiah, University of Hyderabad, India for introducing me to
theareaofFinanceandTimeSeriesAnalysis,supervisingmydissertation,andfor
hispersonalcare.IamindebtedtoProf.MartiSubrahmanyam,CharlesE.Merrill
Professor of Finance at the Leonord N Stern School of Business at New York
University, for writing the foreword to this volume and I express my profound
gratitude to him for the encouragement.
Over the years, I had opportunities to draw freely from the expertise of Drs.
Allen Roy,DebasishAcharya, Amaresh Samantarya, JitendraMahakud, Phanidra
Goyari, and late Amanulla. I would like to thank the Editors of International
Journal of Economics and Finance, Artha Vijnana, Journal of Quantitative Eco-
nomics, Banking and Finance Letters, Economics, Management and Financial
Markets and, Journal of Business and Economics Studies. I thank NSE India,
Wiley and Princeton University Press for the permissions.
The discussions with Ikshwaku, Ramesh, Santosh Dhani, Niranajan, and
Krishna ‘spoiled me’ and I thank them for the same. I got many insights by
probing questionsofmystudentsat ICFAI BusinessSchool, Hyderabad,Gokhale
Institute of Politics and Economics, Pune and Indian Institute of Technology,
Jodhpur.
I would like to acknowledge Indian Institute of Technology, Kharagpur for
providingthenecessaryresourcesandinfrastructuretocarryoutthiswork.Ithank
myHeadandcolleaguesintheDepartmentofHumanitiesandSocialSciences,IIT
Kharagpurfortheirencouragementandwishes.Iespeciallyappreciatethehelpof
Rajesh Acharya, Ansu Louis and Vidya Sarvesaran, highly valued friends and
colleagues. It is indeed K. J. George, my colleague and philosopher-friend, who
advised me to write this book. I thank him for his suggestion and support during
the project.
IowemythankstoSpringer,particularlytoSagarikaGhosh,PublishingEditor,
NoopurSingh fortheir guidance andkeeninterestfromthefirststageofproposal
to the last. It was pleasure to have the cheerful company of my friend, Shree
PrakashTiwari. Ithank himfor his support particularly at difficultand frustrating
times.
Back at home, I appreciate the help by Malappa Dandagunda, Ambaraya
Hagargi,MallinathRasureandSantoshMadkitomyparentsinmyabsence.Itake
thisopportunitytoacknowledgethecontinuedsourceofinspirationandsupportof
my father, Sharayanayya Swamy and mother Shakuntala. I thank my sisters,
Channamma and Nagaveni, whose very existence is a gift of life, for showering
their unconditional love and affection on me and thanks to Vinayak Hiremath,
Yuvaraj,andShreyaforcheeringmealways.Toendwith,IthankJyotiKumarifor
her patience.
Gourishankar S. Hiremath