CONTENTS

Page No.

List of Figures ............................................................................................................... i

List of Tables ............................................................................................................... iii

Chapter 1: Indian Financial Sector .................................................................1

1.1 Introduction ...........................................................................................................1
1.2 Motivation .............................................................................................................1
1.3 Objectives .............................................................................................................6
1.4 Scheme ..................................................................................................................9
1.5 The Indian Financial System ..............................................................................11
1.5.1 Money Markets .......................................................................................12
1.5.2 Capital Markets .......................................................................................15
1.5.3 Government Securities Market ...............................................................16
1.5.4 Foreign Exchange Markets .....................................................................16
1.6 Financial Sector Reforms in India ......................................................................16
1.7 Conclusion ..........................................................................................................25

Chapter 2: Financial Crisis and Efficient Markets Hypothesis ..................27

2.1 Introduction .........................................................................................................27
2.2 Market and Non-market Failure..........................................................................28
2.2.1 Market Failures .......................................................................................28
2.2.2 Government Intervention as Remedy for Market Failures .....................32
2.2.3 Non-market Failures ...............................................................................33
2.2.4 Market versus Non-market Failure: Which one to Choose? ...................35
2.3 The Financial Crisis of 2008 ...............................................................................36
2.3.1 Events that Led to the Crisis ...................................................................36
2.3.2 Global Response to the Crisis .................................................................42
2.3.3 India and the Financial Crisis .................................................................45
2.4 Efficient Markets Hypothesis .............................................................................47
2.4.1 Evolution and Implications .....................................................................47
2.4.2 Validity of the Efficient Markets Hypothesis .........................................50
2.4.3 Efficient Markets Hypothesis and the Financial Crisis...........................55
2.5 Conclusion ..........................................................................................................57
Chapter 3: Chaos in the Indian Equity Markets ..........................................59
3.1 Introduction .........................................................................................................59
3.2 Literature Review................................................................................................59
3.3 Data and Descriptive Analysis ............................................................................62
3.3.1 Data .........................................................................................................62
3.3.2 Descriptive Statistics ...............................................................................63
3.3.3 Autocorrelation and Serial Dependence .................................................67
3.3.4 Stationarity ..............................................................................................70
3.4 Random Matrix Technique .................................................................................72
3.4.1 Methodology ...........................................................................................72
3.4.2 Results .....................................................................................................73
3.5. Conclusion ............................................................................................................80

Chapter 4: Relationship between Stock Market Volatility and

Macroeconomic Volatility ...........................................................82
4.1 Introduction .........................................................................................................82
4.2 Review of Literature ...........................................................................................83
4.3 Data and Descriptive Analysis ............................................................................86
4.3.1 Data .........................................................................................................86
4.3.2 Descriptive Statistics ...............................................................................89
4.3.3 Serial Dependence ..................................................................................91
4.3.4 Stationarity ..............................................................................................93
4.4 Methodology .......................................................................................................94
4.4.1 Conditional Heteroscedasticity Models ..................................................94
4.4.2 Cross Correlation Functions ...................................................................96
4.4.3 Vector Autoregression Models (VAR) ...................................................96
4.5 Results .................................................................................................................97
4.6 Conclusion ........................................................................................................108

Chapter 5: Relationship between Financial Sector Development

and Economic Development ......................................................109
5.1 Introduction .......................................................................................................109
5.2 Review of Literature .........................................................................................111
5.2.1 Relationship between Financial Development and Economic
Growth ..................................................................................................111
 5.2.2 Relationship between Financial development, Poverty and
Inequality ..............................................................................................112
5.3 Data and Descriptive Analysis ..........................................................................115
5.3.1 Data .......................................................................................................115
5.3.2 Poverty and Inequality Situation in India .............................................117
5.3.3 State of Financial Development in India ..............................................122
5.4 Methodology: Instrumental Variables Regression............................................123
5.5 Impact of Financial Development on Poverty and Inequality ..........................125
5.5.1 Impact of Financial Development on Poverty Head Count ..................125
5.5.2 Impact of Financial Development on Poverty Gap...............................128
5.5.3 Impact of Financial Development on Squared Poverty Gap ................130
5.5.4 Impact of Financial Development on Inequality ..................................133
5.5.5 A Comparison of Results ......................................................................135
5.6 Conclusion ........................................................................................................137

Chapter 6: Summary, Conclusion and Policy Recommendations ............139

6.1 Indian Economy and the Financial Crisis .........................................................139
6.2 Issues .................................................................................................................142
6.2.1 Financial Crisis: A Case of Market or Government Failure? ...............143
6.2.2 Crisis and Efficient Markets .................................................................146
6.2.3 Volatility in Indian Capital Markets .....................................................148
6.2.4 Impact of Macroeconomic Policies on the Volatility in
Financial markets ..................................................................................154
6.2.5 Financial Sector Development, Poverty and Inequality .......................161
6.3 Recommendations and Policy Implications ......................................................169

Bibliography ...........................................................................................................172