The IUP Journal of Bank Management
Bank Nifty: Empirical Modeling of Returns vis-a-vis Leverage and Volatility

Article Details
Pub. Date : Feb, 2020
Product Name : The IUP Journal of Bank Management
Product Type : Article
Product Code : IJIT30220
Author Name : Neelam Tandon, Deepak Tandon, Navneet Saxena
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 14



The Indian banking industry has been changing at a fast pace along with the change in the macro fundamentals of the country. The banking stockholding investors would always be interested in knowing the rate of return and its variance over the holding period. Domestic market returns contain the predictive information on bank Nifty returns. To analyze the return on banking stock, the authors have used the logarithm change in the bank Nifty index series consisting of the daily closing prices of the index over the period of January 2, 2012 to September 6, 2017. The series depicts the period from January 2, 2012 to February 2, 2014 with lower volatility, followed by higher volatility from February 3, 2014 to September 6, 2017. As asset prices tend to behave as random walks, the objective is to accurately capture the behavior of the conditional volatility. To nullify the impact of structural break in the variance series that can create the appearance of a highly persistent conditional volatility, the authors have conducted Bai-Perron test of sequentially determined breaks. Based on the Akaike Information Criterion (AIC) and Schwarz Information Criterion (SIC) values, the EGARCH model has been selected as the best fitted model. The authors have concluded that the EGARCH model better captures the leverage effect as bad news has greater impact than good news on bank Nifty stock returns. Investors are prone to shift their investments in case of high volatility, which can be adduced to bad events such as NPA ballooning effect, restructuring and waiver, and inflationary effect.


An investor's concern is focused on returns. The magnitude of fluctuations in returns of assets is depicted as volatility. The return on risky assets has uncertain outcomes. Volatility in the markets can only be studied by models as it is not directly observable. The mean and variance may not adequately explain an investment's distribution of returns. One cannot find the probability of positive or negative deviations. Hence, the degree of symmetry in return distribution is an important aspect for the investor's asset holding. A positive skewed non-symmetrical return distribution has a long tail on its right side, and an investor would be interested in positive skewed return series because the mean return will fall above the median. The investors' investment decisions in Indian banking stock is based on bank Nifty returns with an objective to maximize returns by mitigating risk. In bank Nifty index, based on their market capitalization, 12 banks are listed. The fluctuations in banking stock returns are considered as volatility in bank Nifty index. In this paper, we explore the bank Nifty closing price time series to explain the past and to predict the future of a return series and try to capture the volatility and leverage effect in bank Nifty returns over the study period.


Upload Articles
Click here to upload your Articles



Articles of the Month
ISBN: 978-81-314-2793-4
Price: ₹250
Payment by D.D. favouring
"ICFAI A/c IUP", Hyderabad

Reach us at
Tel: +91 8498843633