January' 21

The IUP Journal of Applied Economics

Focus

In the second paper, "Stock Market Returns, Data Frequency, Time Horizon, Return Distribution Density and GARCH Models", the author, Rama Krishna Yelamanchili, attempts to analyze the importance of data frequency, time horizon, and assumption of distribution density in modeling symmetric and asymmetric Generalized Auto Regressive Conditional Heteroskedasticity (GARCH) models using high frequency (daily) and low frequency (monthly) return series of two Indian stock market indices, i.e., Sensex and Nifty, spread over long horizon. The results of the study indicate that the monthly return series are highly volatile than daily return series. The study also reveals that the daily return series are serially correlated, whereas monthly return series are uncorrelated. The study highlights that ARMA-APARCH model with t-distribution is the best fit model for high frequency and log horizon daily return series; ARMA-EGARCH model with t-distribution is the best fit model for high frequency medium horizon daily return series; and GARCH model with normal distribution is the appropriate model for low frequency with smaller number of observations.

In the third paper, "The Role of Fairness in Tax Compliance: A Game-Theoretical Evidence Using Stackelberg Model", the author, Debashree Das, attempts to explore and discuss the normative aspects of the public economic theory on tax competition and compliance between the agents using the game theory model through the structure of Stackelberg sequential move game. The results of the study indicate that the objective of utility and profit maximization can be achieved through the valuation of the fairness norms by both the agents. The author opines that if the economic agents deviate from the Nash equilibrium strategy by valuing distributional fairness-wherein the taxpayers, as the leader, comply with the tax rules and voluntarily contribute their fair share, and following that, the government participates in fair redistribution of the resources for the welfare of the society and provision of the public good-then it maximizes the joint-profit of both the agents involved in this transaction. The study highlights the need to harmonize the tax coordination rules and the imposition of tax such that it minimizes the behavioral irrationalities.

In the last paper, "The Impact of Monetary Policy on Foreign Trade and Investment: A Bayesian VAR Approach", the authors, Vijaykumar Dhannur and Ashwin R John, investigate the impact of monetary policy stance on trade and foreign investment in the pharmaceutical sector in India using Bayesian Vector Autoregression (BVAR) approach for the period June 2005-August 2018. The study reveals that inflation and interest rate as variables do influence both FDI inflows and the exports as inferred from the impulse response analysis. The study also reveals that the impact of inflationary pressure is more pronounced presumably because interest rate changes are in response to inflation and lag behind inflationary impact. The authors opine that in order to balance this impact of inflation and interest rate changes, the policy rates would need to be changed in advance, anticipating the variation in inflation. The study further reveals that GDP growth does not seem to substantially impact both FDI inflows and exports.

The current issue also features an interview with Prof. U Sankar, Honorary Professor at Madras School of Economics, an eminent environmental economist and policy maker. The candid expression of his thoughts on the research trends across the globe will certainly inspire the research community at large.

- T Koti Reddy
Consulting Editor

CheckOut
Article   Price (₹) Buy
Modeling the Barriers of Algorithmic Trading in India Using ISM and MICMAC Analysis
50
Stock Market Returns, Data Frequency, Time Horizon, Return Distribution Density and GARCH Models
50
The Role of Fairness in Tax Compliance: A Game-Theoretical Evidence Using Stackelberg Model
50
The Impact of Monetary Policy on Foreign Trade and Investment: A Bayesian VAR Approach
50
An Interview With professor U Sankar
50
       
Contents : (Jan'21)

Modeling the Barriers of Algorithmic Trading in India Using ISM and MICMAC Analysis
Jyotiranjan Hota, Chandrabhanu Das and Manoj Kumar Jena

Algorithmic trading has made a paradigm shift in Indian stock market. Popularity of algorithmic trading is gaining momentum among Indian traders and investors due to technological advancement. The objective of this paper is to apply Interpretive Structural Modeling (ISM) to develop a hierarchical structure among the key barriers of algorithmic trading in India. 11 barriers have been identified through the literature review which are then validated for significance, using a structured questionnaire, from the experts. ISM approach has been utilized to rank the barriers and analyze their mutual interactions. Subsequently, MICMAC analysis was conducted to reveal dependence and driving power of these barriers. MICMAC analysis also elicits the relative importance and interdependence between these barriers from the Indian context. A list of relevant barriers significantly helps the practitioners to take right decision while adopting algorithmic trading. The study has importance in the Indian context due to scarcity of research in this area.


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Stock Market Returns, Data Frequency, Time Horizon, Return Distribution Density and GARCH Models
Rama Krishna Yelamanchili

This paper analyzes the importance of data frequency, time horizon, and assumption of distribution density in modeling symmetric and asymmetric Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models. The paper uses high frequency (daily) and low frequency (monthly) return series of two Indian stock market indices (Sensex and Nifty) spread over long horizon. It analyzes 7,020 daily observations and 347 monthly observations of Sensex spread over 29 years, and 5,971 daily observations and 287 monthly observations of Nifty spread over 24 years. It estimates several symmetric and asymmetric GARCH models on each return series with normal, student's t, and Generalized Error Distribution (GED). The paper further checks model adequacy with Portmanteau test and model efficiency with information criterion. The results are mixed. First, student's t-distribution is appropriate distribution density for daily return series, whereas normal distribution is appropriate distribution density for monthly return series. Next, leverage effect is visible in daily return series, but not in monthly return series of both indexes. For daily return series, ARMA-GARCH models are adequate models, whereas for monthly return series, basic GARCH specifications suffice. ARMA-APARCH(1,1) model is the best fit model for Sensex daily return series and ARMA-EGARCH(1,1) model is the best fit model for Nifty. These two models capture all the stylized facts of return series. For monthly return series, GARCH(1,1) model is sufficient to capture stylized facts. Depending on the results, it is concluded that data frequency, time horizon, and assumptions of distribution density determine GARCH model specifications.


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The Role of Fairness in Tax Compliance: A Game-Theoretical Evidence Using Stackelberg Model
Debashree Das

This study addresses the issue of tax evasion from the perspective of the fairness concern by the agents, as these normative considerations make the entire tax policy framework more complex. We model the tax compliance behavior using the structure of Stackelberg game between the fiscal authority (government) and the taxpayer, assuming the taxpayer to be the leader, wherein it may choose to act fairly by complying with the tax code or choose not to comply; while the government as the follower in this computational design can respond by demonstrating fair governance with equal redistribution of the resource or project unfair inefficient governance. Through this method, four scenarios are developed based on the fairness parameter, and the payoffs associated with both the agents are computed and the Nash equilibrium solution of the game is established that favors fair strategy by the government and unfair strategy by the taxpayers. The paper concludes by stating that if the economic agents deviate from the Nash equilibrium strategy by valuing distributional fairness, wherein the taxpayers as the leader comply with the tax rules and voluntarily contribute their fair share, followed by the government participating in fair redistribution of the resources for the welfare of the society and provision of the public good, then it can potentially maximize the joint-profit of both the agents involved in this transaction. Thus, through the Stackelberg model, the paper emphasizes the need for harmonizing the tax coordination rules and imposing tax fairness norms such that it minimizes the behavioral irrationalities.


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The Impact of Monetary Policy on Foreign Trade and Investment: A Bayesian VAR Approach
Vijaykumar Dhannur and Ashwin R John

This paper investigates the impact of monetary policy stance on trade and foreign investment in the pharmaceutical sector in India. It employs the Bayesian Vector Autoregression (BVAR) approach to construct a model and then studies the said impact by the Impulse Response Function (IRF) analysis. In a Bayesian procedure, the parameters are treated as random variables and their posterior distribution is estimated via the imposition of prior beliefs on their distribution, which makes the analysis more robust when combined with Vector Autoregression (VAR). It has been found that both FDI inflows and exports are impacted by inflation and interest rate changes; however, inflationary pressure has a pronounced impact. On the other hand, GDP growth does not seem to substantially impact both FDI inflows and exports as deduced from the Bayesian VAR with Stochastic Volatility and Time Varying Parameters (BVARSV-TVP) model. These findings have been deduced alongside a benchmark VAR model.


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An Interview With professor U Sankar
GRK Murty

Right from the school days, Ulaganathan Sankaranarayanan, a giant of environmental economics, cultivated resilience to capitalize on the available opportunities. He went to a school located five km away from home by a bullock cart and instead of clamoring for what is not available, he mastered whatever is offered by the local institutions. He obtained MA in Economics from Annamalai University in 1957. After working for a brief period at Annamalai University as a lecturer and as a research associate at the Gandhian Institute of studies at Varanasi, he went to the University of Wisconsin, Madison, USA in 1963 for doing his PhD.

This descriptive economist, who had no formal education in mathematics/econometrics, once joined Arnold Zellner, a noted statistician and economist at the University of Wisconsin, so metamorphosed himself into such an econometrician that he could analyze production functions in the Indian manufacturing sector and their implications for economic development using Bayesian methods for PhD thesis and also presented a paper, "On Errors in the Variables" at the Econometric Conference at Berkeley in 1966 jointly with Zellner. After obtaining PhD in 1967, he joined the University of Wisconsin, Milwaukee as Assistant Professor, and within nine years, became a tenured Professor in 1976, besides becoming Chairman of its Graduate Studies Committee.

In 1977, he returned to India to join Madras University as a Professor in Economics Department. In the year 1978, he established the Department of Econometrics. He himself taught a wide array of subjects. He was known as a great teacher "not only imparting wisdom and knowledge to students but also kindling enthusiasm in them for the subject". In the words of Dr G Mythili, his former student and presently Professor at IGIDR, Mumbai, Prof. Sankar's "dedication for teaching is unparalleled". He guided 14 scholars for PhD. According to Professor Mythili, "His style of mentoring [research scholars] was very unique. It went beyond simply passing on intellectual ideas. He would show the direction and give space for students to think independently which builds tremendous confidence in them to take on challenges at the next level". She indeed feels very proud to have been taught and guided by Prof. Sankar. This professor of "noble principles", simultaneously worked on two important projects funded by the Government of India and UGC: one on groundnut production, productivity and farm level decision making under uncertainty, and the second one about pricing policies in multiproduct public sector enterprises. Dr. Sankar's critical studies in the field of pricing of public utilities and services were well received both nationally and internationally and made him an authority in the field. He thus nurtured the econometrics department of Madras University into a formidable breeding ground of econometricians who proved themselves later both nationally and internationally.

Unlike many other professionals, who, nearing retirement age, tend to ease up on their research pursuits, Dr. Sankar, teaming up with Dr. Raja Chelliah, established the Madras School of Economics (MSE) in 1995. It is from here that he actively pioneered the promotion of Environmental Economics as a discipline in India. In 1997, he was appointed as the National Program Coordinator for the Environmental Economics of the World Bank's Environmental Capacity Building Program in India. He trained many economists and administrators in environmental economics besides developing curriculum for teaching environmental economics. His contributions to environmental economics that range from designing economic instruments for addressing pollution problems in specific industries, analyzing trade and environment linkages, identifying appropriate eco-taxes on polluting inputs and outputs, to prioritizing low-carbon strategies for fostering green economic growth in India, and leadership played a key role in the establishment of a Center of Excellence in Environmental Economics at MSE by the Ministry of Environment and Forests.


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