FII Flow and Volatility Expectations in Indian Equity Markets

--Suddhasanta De and Tanupa Chakrabarty

The paper attempts to explain the association between Foreign Institutional Investor (FII) flows to Indian equity markets and option implied Volatility Index (VIX). Prior studies involving the relationship between FII flows and realized volatility provide contradictory findings and are largely inconclusive. Little empirical work is found to explain the relationship between FII flow and expected volatility as measured by the option implied VIX. We find evidence that India VIX does not have any influence on FII flows to Indian equity markets. Instead, there is evidence of significant reverse causality. The results indicate that the collective perception in the minds of investors about future volatility is fueled by FII flows.

© 2016 IUP. All Rights Reserved.

The Market Microstructure Linkages of Emerging Options Market and Stock Market

--A Vinay Kumar

The theory of options pricing portends that option prices are derived from the underlying asset prices and their price can only be discovered after the price of the underlying asset is known in the frictionless market. The frictions like information asymmetry would mean that the informed could either trade their information in options market or in stock markets. In such a situation, the options market would send cues for the stock market. The major theoretical contention is, therefore, do the underlying asset prices have information for the price discovery of options? On the contrary, do options prices have information for the underlying asset? These questions are previously researched and apparently compelling evidence is found on both sides of the divide. Besides, the lead-lag relationships between both markets are of immense significance given the participants’ ability to garner private information and find suitable avenues for investing. Therefore, it is only germane to research this question. The present paper attempts to explore the microstructural linkages in terms of information links, inventory-based links and hedging-based links between options markets and stock markets by putting all the arguments in perspective with an emerging market context. The results of the present study suggest that the options markets in India have information for stock market, while stock market has little information for options market. The present study finds evidence that support hedging-based links between the options and stock market, while the results are weak for inventory control.

© 2016 IUP. All Rights Reserved.

Empirical Relationship Between Commodity, Stock and Bond Prices in India: A DCC Model Analysis

--Pratap Kumar Jena and Phanindra Goyari

The paper examines the relationship between stock, bond and commodity prices in India using the Dynamic Conditional Correlation (DCC) model. The results show that both commodity and stock prices are positively correlated but commodity and bond prices are negatively correlated. There is higher return with less volatility in commodity price, which implies that it is more efficient in asset allocation compared to a traditional asset like bond. When there is an increase in the market risk with stock market volatility, the conditional relation between commodity and stock price declines. It is good news for the investor to make asset allocation to commodity market and vice versa. Similarly, the conditional correlation between commodity price and bond is positive and rising. When bond price rises, it is good for investors to take long position in commodity market than bond.

© 2016 IUP. All Rights Reserved.

The Pre-Open Call Auction Trading Mechanism and Its Efficiency: A Study on BSE Sensex Stocks

--T Mallikarjunappa and S N Harish

This empirical study examines the impact of opening Call Auction (CA) on price discovery of BSE Sensex stocks. CA was introduced on BSE Sensex stocks on October 18, 2010. The objectives of CA are to increase the price efficiency in the opening session, minimize the volatility and to make prices reflect the overnight information. To investigate efficient price discovery, the study adopted Cohen et al.’s (1983a) methodology. The data of one year before and one year after the introduction of CA was considered as the event window period. The study hypothesized that CA facilitates the price discovery. Following Pagano and Schwartz (2003), adjusted R2 was used as the parameter to measure the price discovery. Cohen et al. (1983b) have suggested a methodology using the first and second pass beta estimators to examine the intervalling effect of the securities and market friction. Applying this methodology to the data, the study found that opening CA mechanism does not improve the price discovery. This study contributes to the existing literature on market microstructure and also helps the regulators and exchanges to know the effectiveness of CA and the level of market friction.

© 2016 IUP. All Rights Reserved.

Islamic Banks’ Resilience During the 2008 Financial Crisis: Modeling Long-Memory Volatilities with Leverage Effect

--Mohamed Fakhfekh and Nejib Hachicha

This paper determines whether volatility shocks are more prevalent among conventional banks than Islamic banks. It further tests the effect of leverage on both the banking systems. The paper uses the Fractionally-Integrated Exponential (FIEGARCH) model in modeling volatility. This allows considering a direct shock-persistence as well as shocks’ asymmetric effect. The paper applied the approach on daily returns of 12 Islamic and 12 conventional banks for the period June 15, 2006 to May 15, 2013 and the results indicate that the impact of shocks is more spread among conventional banks’ volatility compared to Islamic banks, where the volatility effect is rather transitory. Moreover, the paper finds that leverage effect is quasi-absent within Islamic banks compared to the conventional banks. Finally, the results highlight the resilience of Islamic banks with reference to the conventional banks in this regard.

© 2016 IUP. All Rights Reserved.

Determinants of Growth Rate in Gross Tax Revenue of Government of India: An Assessment

--Kiranjit Sett

The gross tax revenue of the central government comprises direct taxes (income tax, wealth tax and gift tax) and indirect taxes (like excise duty, central sales tax, customs duty, etc.). Tax revenue is likely to be affected by many factors like the rates of taxes/duties, corporate profit/incomes, incomes of persons other than companies, deductions from profit/incomes, exemptions of incomes, inequality in the distribution of incomes, value of production, value of foreign trade (export plus import), number of potential taxpayers, tendency of the people to evade tax, effectiveness of the tax administration in collecting tax and in enforcing the law. The rate of growth in tax revenue depends on the growth/ changes in these factors. This study aims at identifying the determinants of the rate of growth of gross tax revenue of government of India. The findings reveal that the growth rate of the manufacturing sector and change in the rates of taxes have been found to be important determinants of growth rate of gross tax revenue of government of India. The importance of the growth rate of the service sector has increased since 2000-01 as a determinant of growth rate of gross tax revenue.

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