A STUDY ON VOLATILITY IN INDIAN STOCK MARKET


Venkataramanaiah. M

ABSTRACT

To many among the general public, the term volatility is simply synonymous with risk
associating with any financial asset. Volatility plays a vital role in the secondary market which
influences a lot on the investment decision. The main objective of this study is to examine the
aforesaid two aspects of the volatility to curb the excess volatility in the market. In this paper an
earnest attempt is made to know the tendency of inter and intra-day-volatility in Indian stock
market with reference to BSE Sensex.

Section-I

1. Introduction

In the recent past, there have been perceptions that volatility in the market has gone up
and inter and intra-day volatility witnessed the same. News items and some clinical research
papers also provided figures to evidence this argument. The Securities and Exchange Board of
India has deeply and comprehensively analyzed the volatility. Many studies show that the
volatility has not gone up much in the recent past as it has been perceived. Indian stock market
provides a very high rate of return and comparatively moderate volatility1.

Volatility may impair the smooth functioning of the financial system and adversely affect
economic performance. This has an affect on consumer spending this in turn effects the economy
.The impact of stock market volatility on consumer spending is related via wealth effect.
Increased wealth enhances consumer spending. However, a fall in stock market will weaken
consumer confidence and thus drive down consumer spending. Stock market volatility may also
affect business investment2 and economic growth directly3. A rise in stock market volatility can
be interpreted as a rise in risk of equity investment the shift of funds to less risky assets. This


Associate Professor, Department of Accounting and Finance, College of Business and Economics, University of
Gondar, Ethiopia.
1
M.T.Raju and Anirban Ghosh, Stock Market Analysis- An International Comparison, Securities and Exchange
Board of India (SEBI), Working Paper No.8 April 2004, p(i)
2
Hu, Zuliu,”Stock Market Volatility and Corporate Investment”, IMF Working Paper, Vol XIX, 1995 pp. 1-26
3
Levine et al, “Stock Markets, Banks and Economic Growth”, American Economic Review, Vol 88, 1998, pp 537-
558

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leads to a rise in the cost of funds to firms. As a result, new firms might bear this effect as
investors turn to purchase of stocks of well known firms in larger quantity. While there is a
general consensus on what constitutes stock market volatility and, to a lesser extent, on how to
measure it, there is far less agreement on the causes for changes in stock market volatility. Some
economists attribute causes for volatility to new and unanticipated information that alters
expected returns on a stock4. Thus, changes in market volatility would merely reflect changes in
the local or global economic environment. Others claim that volatility is caused mainly by
changes in trading volume, practices or patterns, which in turn are driven by factors like
modifications in macroeconomic policies, shifts in investor tolerance of risk and increased
uncertainty.
1.1 Present study
Volatility, for understanding easily, can be examined in two ways, viz. inter-day-
volatility and intra-day-volatility. The former comprises of close to close volatility whereas the
later comprises of open to close, high to low and open to open volatility. The present study
covers the aforementioned aspects of volatility during the study period on BSE Sensex.
1.2 Objectives of the study
The specific objectives of the present study are: to
(i) Examine the growth of Bombay Stock Exchange from its inception to present;
(ii) Study the movement of inter and intra-day volatility in BSE Sensex; and
(iii) Suggest some measures to policy makers, government and investors to curb the
excess volatility.
1.3 Sources of data
The present study is purely based on secondary data. The data is collected from the
official website of BSE. Further, economic magazines, books and journals, etc., are considered.
The daily indices of Sensex for a period of 10 years from 1998 to 2008 have taken for the study.
1.4 Tools for analysis
In this study, I have examined inter-day and intra- day returns of sensex. Stock prices are
usually observed at fixed intervals of time (daily, weekly or monthly) and we then have a time

4
Engle et al, “Time-Varying Volatility and the Dynamic Behavior of the Term Structure”, Journal of Money, Credit
and Banking, Blackwell Publishing, vol. 25(3), August 1993 pp 336-49

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series of data. I have adopted the following methodology to measure volatility in this study. The
log of relative returns is mathematically defined by the equation (1).

------------------------ -------------- (1)

Where St is the stock price at the end of the i –th interval and ln ( ) is the natural logarithmic
function. We also assume that there are n stock prices in our sample. The historical volatility
is the volatility of a series of stock prices where we look back over the historical price path of
the particular stock. We previously mentioned that the most common measure of volatility is
the standard deviation. The historical volatility estimate is thus given by ui was defined in
Equation (1).

----------------------------------------------- (2)
Where is the mean defined by

Equation (2) gives the estimated volatility per interval. To enable us to compare
volatilities for different interval lengths we usually express volatility in annual terms. To do
this we scale this estimate with an annualization factor (normalizing constant) h which is the
number of intervals per annum such that

--------------------------------------------------------------- (3)

If daily data is used the interval is one trading day and we use h = 252, if the interval is a
week, h = 52 and h = 12 for monthly data. Equation (2) is just the standard deviation of the
sampled series uj.
1.5 Presentation of study
Entire study has divided into four sections. The first section deals with the introduction of
the study, objectives and methodology of the study whereas the growth of Bombay Stock

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Exchange is covered under second section. The third section is to analyze the empirical results of
the study and the last section concludes with some suggestions and recommendations.

Section-II
2. The Growth of Bombay Stock Exchange
The origin of the Bombay (Mumbai) Stock Exchange dates back to 1875. It was
organised under the name of “The Native Stock and Share Brokers Association” as voluntary and
non-profit making association. It was recognised on a permanent basis in 1957. In its 135 years
history, the Bombay Stock Exchange (BSE) has seen several changes. It has moved, in terms of
geography, from a shaded nook under a banyan tree in what is now Horniman Circle, to its
present home, the 28-storeyed P.Jeejeeyabhoy Towers on Dalala Street. To day, a visitor to the
19000- square-foot trading ring in the rotunda, located in an annexed to the main building, is
likely to find the place as quiet a library. It has been that since April 1995 when the BSE put an
online trading system in place allowing brokers to trade from their offices, located on the street,
or elsewhere. Numbers paint a fairly decent picture of the changes the exchange has seen: the
number of companies listed in BSE has grown from 1992-93 in 2861 to 4930 by the end of April
2008 and the average daily volumes were Rs. 5227 crore.
Table: 1 Securities and Capital issue in BSE by the end of April 2009

Settlement Cycle T+2

Number of Listed Companies 4930
Number of Listed Scrips 7771
Ratio of Traded Scrips/Listed Scrips 34.9%
Share of top 5 Scrips to Total Turnover 15.3%
Share of top 10 Scrips to Total Turnover 23.9%
Delivery Turnover Ratio 31.1%
Capital Issue 33,508
P/E Ratios (Monthly Averages) 15.23 %
Dividend Yield ( Monthly Average) 1.68 %
Source: Various editions of SEBI annual Bulletin

According to BSE statistics, total membership at the exchange stood at 1008 on April 30,
2009 where corporate membership stood at 810 and individuals at 175. Corporatisation of BSE
will make expansion outside the city easy. And, at the same time boost the image of the exchange
and will definitely add to volumes at the exchange. The BSE’s B1 and B2 scrip’s collectively

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account for 55 per cent of the average daily traded volume on the BSE. This rose 15 per cent a
year back.

By the end of financial year 2008-2009, total number of listed companies in BSE was
4930 and total number of listed Scrips was 7771. The ratio between traded scrips and listed
scrips is 34.9 per cent during the period. As per the turnover, share of top 5 scrips and of 10
scrips to total turnover are 15.3 per cent and 23.9 per cent respectively. Its shows, the dominance
of blue-chip companies on the row of stock market activities from all dimensions. Table 2
portrayed the clear picture of foregoing description of BSE.

Table 2: Trading Patterns in Bombay Stock Exchange

Year No. of No. of No of Average Average Market

Companies Trading Scrips Daily Annual Capitalisation (
Listed Days Traded Turnover Turnover ( Rs. Crore)
(Rs. Rs. Crore)
Crore)

1998-99 5849 243 4457 1279 310750 619532

1999-00 5815 251 4330 2735 686428 912842

2000-01 5869 251 3927 3984 1000032 571553

2001-02 5782 247 5347 1244 307292 612224

2002-03 5650 251 2679 1251 314073 572197

2003-04 5528 254 2610 1981 503053 1201206

2004-05 4731 253 2382 2050 518715 1698428

2005-06 4781 251 2548 3251 816074 3022190

2006-07 4821 249 2641 3840 956185 3545041

2007-08 4887 251 1709 6290 1578857 5138014

2008-09 4930 243 1698 4761 88942 2154533

Source: Hand Book of Statistics on the Indian Securities Market 2008

Table 2 reveals the trading patterns in BSE from varies aspects like number of companies
listed, market capitalisation etc. Number of companies listed in BSE was 5849 where it is
declined to 4930 by March 2009. And 2000-01 witnessed to the highest registered companies

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with 5869. The average of number of trading days in year is 250.10. There is downtrend in
number of scrips traded against to number of listed companies during the period. There is
immense decline in number of scrips traded in BSE. During 1998-2008, 2001-02 eyewitness for
the highest number of scrips traded with 5347 where as the lowest is 1698 by the end of March
2009. The growth in average daily turnover has the uptrend except in the length of 3 years.
During 1998-99, the average daily turnover was 1279 crore where it reached to 4761 by the end
of March 2009. On the subject of average annual turnover, 2001-02 indexed the lowest of the
period with Rs. 3, 07,292 crore where 2007-08 has made the highest of Rs. 15, 78,857 crore. By
and large, there is an uptrend in this stare except three years of time. In relation to market
capitalisation in BSE, the lowest is Rs. 5, 71,553 crore in 2000-01, while the highest is RS. 51,
38,014 crore which is almost all 9 times grater than, that of the lowest figure by the end of March
2009. To bring to a close, there is an uptrend in trading pattern in BSE in the length of 7 years
out of 10 years of time.

Table 3: The Journey of Sensex

BSE-Sensex Year of Achievement Time taken( Days) P/E Ratio

1000 25th July, 1990 - -
2000 15th January, 1992 267 25.9
3000 29th February, 1992 28 38.4
4000 30th March, 1992 12 52
5000 8th October, 1999 1727 21.8
6000 2nd January 2004 1060 19.9
7000 20th June, 2005 370 15.6
8000 8th September, 2005 54 16.7
9000 28th November, 2005 63 17.9
10,000 7th February, 2006 21 18.6
11,000 27th March, 2006 32 20.5
12,000 20th April, 2006 15 21.8
13,000 30th October 2006 135 21.5
14,000 3rd January 2007 45 23.1
15,000 9th July 2007 126 21.9
16,000 19th September 2007 51 22
17,000 27th September 2007 6 23.2
18,000 9th October 2007 7 24.9
19,000 15th October 2007 4 26.1
20,000 29th October 2007 10 27.5
Source: http://www.indianexpress.com/news/journey-of-sensex/233899/

Table 3 explains the journey of BSE sensex from 1990 to 2007 with every 1000 points,
time taken to reach and P/E ratio. After introduction of sensex as an index in BSE, it reached the

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 first 1000 points on 25th July, 1990. To reach further 1000 points it took 267 days whereas it has
taken only 40 days to touch 4000 points with 52 per cent of P/E ratio. This P/E ration is the ever
highest ratio in the history of sensex. This period has witnessed biggest scam in Indian stock
market. The bonanza during the period might be due to the price rigging of Harshad Mehatha. To
reach further 1000 points from it previous 4000 pints nearly 7 years span of time has taken.
There is was another long journey of sensex to reach from 5000 points to 6000 points. To reach
this mark it takes nearly 3 years of time. The mark of 7000 points reached on 21 st June 2005
which took 370 days of time with 15.6 per cent of P/E ratio. Within one year span of time sensex
jumped from 8000 points to 13000 points whereas it took one more year to reach 20,000 points
which is all time highest during 2006-2007. By observing the trend of sensex, one can easily
recognize that the spark in sensex and low P/E ratio comparatively earlier period of study.

Section-III

3. Empirical Results
Inter-day volatility (Close to close)

The daily average return and average volatility are useful to the policy makers,
regulators, market participants and even investors. Volatility figures are also important for
derivative traders. Investigating the volatility pattern using inter-day volatility is very common
over in the parlance of stock market.

Table 1: Inter Day (Close to Close) Volatility on Senses during 1998-2008

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mean returns -0.09 0.21 0.19 -0.06 -0.01 0.17 0.00 0.11 0.16 0.17 0.32
Stnd. Dev 1.90 1.75 2.01 1.61 1.05 1.12 1.37 1.05 1.42 1.43 2.67
Volatility 30.19 27.81 31.98 25.52 16.61 17.79 21.77 16.63 22.57 22.70 42.33
Minimum -45.87 -42.43 -65.22 -49.88 -30.80 -31.61 -46.66 -33.18 -43.28 -45.64 -81.63
Maximum 55.08 64.30 55.68 49.33 34.54 36.47 4.58 32.42 41.71 48.16 75.90

Table 1 provides details of mean returns, standard deviation, average and minimum and
maximum volatility of BSE sensex over 10 years period from 1998 to 2008. Daily mean returns
standard deviation and volatility are calculated for each month of each year as per the

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methodology adopted. There were high fluctuations in the mean returns of sensex throughout the
study period. In 1998, there were negative returns of 0.09 per cent which rose to 0.21 per cent
and 0.19 per cent in 1999 and 2000 respectively. Consequent years of 2001 and 2002 registered
again negative returns with 0.06 per cent and 0.01 per cent respectively. From 2003 to 2007 there
were positive results on the indices whereas 2004 registered nearly zero per cent returns. In
2008, the mean returns were negative which is highest over the study period. Both mean returns
and standard deviation exhibit high variations over a period with respect to all years. The year
2002 and 2008 were having the highest standard deviations of 2.01 and 2.67 respectively while
1998, 1999 and 2001 were following next with 1.61, 1.75 and 1.90 respectively. The second five
years of the study was more stable comparatively during the first five years of the study. It means
where were moderate fluctuations in returns from 2002 to 2007 except 2008 where as there were
a high ups and downs from 1998-2001.

With concern to volatility of BSE sensex, there was a high volatility in the beginning of
the study and the end of the study period where as there was a moderate volatility during 2002-
2005. The minimum average volatility during the period was 16.61 per cent and 16.63 per cent in
2002 and 2005 respectively whereas the maximum average volatility was 42.33 per cent and
31.98 per cent in 2008 and 2000 respectively. The maximum volatility over the study period was
75.90 per cent in 2008 and 64.30 per cent in 1999 while the minimum volatility registered in
2008 with – 81.63 per cent. Inter-day volatility in BSE sensex over the period of study shows
that there was high volatility on the first five years of the study whereas the second part of the
study shows moderate volatility except 2008. One interesting observation is that BSE sensex
witnessed almost zero returns in a few years and high volatility.

Intra-day volatility

For many fund managers, investors, regulators and policy makers, in recent times, intra-
day volatility has assumed considerable significance because of its influence on the decision of
the market participants and its impact on other instruments such as derivatives.

Open-close volatility

Open to close to volatility provides information on change of the prices during the day.
The analysis of open-close returns on BSE sensex is exhibited in Table.2.

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 Table 2 Intra-day (Open to Close) Volatility on Sensex during 1998-2008

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mean returns 0.62 -0.24 -0.26 -0.08 -0.13 0.00 -0.11 0.01 -0.04 -0.04 -0.31
Stnd. Dev 1.30 1.64 2.01 1.51 1.01 1.07 1.35 0.98 1.35 1.27 2.32
Volatility 20.60 26.05 31.83 23.99 16.05 16.96 21.38 15.63 21.44 20.08 36.78
Minimum -47.93 -54.90 -64.33 -50.11 -31.08 -33.92 -48.44 -32.64 -44.73 -41.41 -75.07
Maximum 38.13 49.63 56.01 46.58 32.17 29.59 41.32 28.99 35.22 38.82 64.57

Mean returns of the sensex of open-close almost negative throughout study period except in 1998
and 2005. There was irregularity in the movement of returns of sensex in this aspect. It may be
result of extending of trading hours. Standard deviation during the period is moderate
comparatively close to close which is almost below 2 per cent except in 2008. The average
volatility of open to close returns has shown that there was high open- close average volatility
during the first four years of the study whereas there was a moderate average volatility from
2002-2007. As usual, 2008 registered ever high volatility during the study period. The same
trend can be identified in close to close volatility.

High-Low volatility

High-low volatility conveys extreme movements and dispersion during the trade time. Very high-
low volatility is likely to scare investors and lead sometimes to panic conditions in the market.
The movement of high-low volatility exhibits in Table 3.

Table 3 : Intra-day (High to Low) Volatility on Sensex during 1998-2008

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mean returns 5.58 2.24 2.76 2.16 1.46 1.52 2.19 1.50 1.92 1.80 3.21
Stnd. Dev 0.68 1.03 1.17 0.94 0.62 0.61 0.84 0.55 0.92 0.78 1.36
Volatility 10.74 16.40 18.55 14.90 9.91 9.67 13.34 8.76 14.65 12.35 21.55
Minimum 16.15 16.25 18.74 14.63 10.07 10.83 14.36 11.42 12.11 12.58 21.17
Maximum 64.25 82.23 89.75 72.73 46.46 46.49 54.60 46.25 67.36 58.18 102.54

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 Open- Open volatility

Open to open volatility is very important for several of participants. High open to open
volatility reveals informational asymmetry and also overflows of information. Any positive or
negative information that comes after the close of the market and before the start of the next days
trading is expected to get reflected in the opening prices of shares and on the index. Significant
economic and socio-political developments induce price movements and the extent of price
movement dependent on severity of information.

Table 4: Intra-day (Open to Open Volatility on Sensex during 1998-2008

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mean returns -0.08 0.17 -0.18 -0.14 0.00 0.19 0.07 0.11 0.15 0.13 -0.37
Stnd. Dev 1.75 2.08 2.92 1.78 1.09 1.14 1.27 1.01 1.45 1.64 3.04
Volatility 27.82 33.05 46.32 28.30 17.34 18.12 20.31 16.06 22.96 25.99 48.27
Minimum -51.39 -63.05 -90.02 -60.95 -28.34 -34.34 -43.57 -30.83 -44.67 -51.49 -99.39
Maximum 55.71 70.07 83.26 53.25 37.40 34.71 45.74 31.09 40.20 47.82 76.50

Table 4 explains how open to open volatility being moved over the period of study. Mean
returns of first four years except second year suffered with negative returns which is opposite to
the trend of other parameters of the study such as close to close, open to close and high to low.
Year 2002 registered zero returns whereas from 2003 to 2005, investors got positive returns on
this segment. As usual, in 2008, standard deviation of open to open prices of indices was more
vulnerable. There was, low volatility from 1998 to 2001, moderate volatility from 2002 to 2005,
and all time high volatility from 2007 to 2008.

A close examination of table 1, 2, 3 and 4 of close to close, open to close, high to low and
open to open, reveal that the perceptions are not altogether true. In fact, although the parameters
registered their peak in 1998 and 2008, they fell down further in between 1998 and 2008with
inconsistent trend. However, the volatility as per these two parameters in 2008 is higher than that
of 1998, but compared to the rest of period this much lower and it is about 50 per cent of what it
was in past. It is evident that there is a close relationship between these two parameters of the

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study i.e., inter-day and intra-day volatility, in terms of returns and volatility. Close to close and
open to open volatility was moved in tandem with little divergence. This was evident from 2001
to 2004. The volatility levels are almost identical over the period of study in respect to inter and
intra-day volatility with a little difference as mentioned earlier.

Section-IV

4. Summery and conclusions

Understanding stock market, risk and return behavior is important for all countries but it
is of more important to developing countries, particularly, where the market consists of risk-
averse investors as the opportunities to invest and diversify the investment is not much. During
the last decade it is evident that there is high growth in the Indian stock market in terms
capitalisation, trading, turnover, number of investors, etc. during this period Indian stock market
has gone through rapid changes in all the aspects. It has seen all time ups and downs.

In this study, it is evident that daily average returns and daily average volatility across the
index was varying over time and space. This divergence is highly demonstrable. Some times
provide as high as 0.04 per cent retune while some times it was negative. In the sample period,
investors got as high as 40 per cent returns with a moderate volatility of 1.89 per cent. All the
banks with big equities business have moaned that the low volatility of stock prices over the past
few months has been making a little difficult. Further, it is evident that from 2007, a few stocks
registered profits whereas most of stocks suffered huge losses. Particularly, in 2008, the average
volatility and mean returns were more inflexible comparatively in rest of the period. Regarding
to the intra-day volatility, 2002 witnessed low volatility whereas 2003 and 2005 follow next.
1998, 2000 and 2003 were very for investors with very low or negative returns with high
volatility. And the rest of the period had moderate volatility.

It is found that there were two phases in study period namely bull phase and bear phase.
The first four years of the study (1998-2001) can be considered as bull phase. This phase is
characterized by low returns and high volatility. The bear phase started from 2002 and continued
more or less upto 2005. During this period, market witnessed normal returns with moderate
volatility. Again, bull phase started from 2006 and continued by end of January 2008. This phase
span was very short but Indian stock market had touched it ever marking highs. This phase gave

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high returns to investors. Again 2008 is witnessed a dark year for the investors in the history of
Indian stock market. It is evident that there is high volatility and variance in mean returns during
bull phase whereas low volatility in the bear phase. One can observed that during the study
period, first bull phase did not reap good returns to investors with high volatility while the
second bull phase gave good returns with high moderate volatility.

Suggestions

Government should take appropriate steps to curb excess volatility in stock market. There
should be tight vigilance on the corporate bodies who are acting as intermediaries in the market.
These corporate entities should feel accountability and responsibility in concern to public money.
Corporate malpractices should be minimized. For this, strict accounting practices are to be
implanted and appropriate mechanism should monitor regularly. Political uncertainty is another
cause for high volatility. During the period of political uncertainty in the country, the bounce of
volatility rate is very high. This could be overcome by creating awareness among the various
parties in the market. Monsoon failures, rumors about epidemic deceases also caused to
irregularity of prices in the market. The strong regulatory authority should be developed to
eliminate the irregularities in the stock market so as to enhance the confidence of small and
medium investors. The investor education and awareness programmes should be conducted on
the regular basis. Investors should be encouraged to participate in equity markets through Mutual
fund companies so that they can utilize the expertise of fund managers. Derivative markets
should be developed and encouraged so that the risk can be hedged effectively. The primary
market and the debt market should also be developed to give continues movements to the
secondary market.

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