Volatility Contagion Between India and Selected Stock Markets

--Karam Pal Narwal, Ved Pal Sheera and Ruhee Mittal

The present study is an attempt to investigate the linkage between the financial markets of developing and developed economies. For the purpose, the interdependence between Indian implied volatility index and six international indices (VIX, VCAC, VDAX-NEW, VSMI, VXJ and VSTOXX) is investigated in the framework of the volatility transmission and spillover mechanism. The bivariate [VAR(p)] system and BEKK-GARCH model are employed to quantify the given phenomenon of interdependence. The results indicate that there is a significant relationship between IVIX and VIX, as IVIX responds strongly to a shock in VIX index and this effect continues for about six days, post which it tapers off and vice versa. Granger causality test confirms bidirectional causality between the two volatility indices. At individual level, it is found that there are bidirectional cross-shock spillover effects between India-America, India-Germany, India-Switzerland and India-Eurozone markets and bidirectional volatility linkages between IVIX and other indices, namely, VIX, VCAC and VSTOXX. The importance and implication of the study lies in the usefulness of the measurement of second moment and its behaviors which has been an important input in financial decision making. For instance, it can provide valuable input for developing better portfolio diversification strategies.

© 2017 IUP. All Rights Reserved.

Covered Interest Rate Parity and Efficiency of Foreign Exchange Market in India: An Econometric Investigation

--Suman Sikdar and C K Mukhopadhyay

The study is devoted to examining the ‘efficiency’ of Indian foreign exchange (rupee/dollar) market and the relevance of Covered Interest Rate Arbitrage Parity (CIRAP) doctrine therein over the period January 3, 2011 through November 2, 2015. ARIMA (4, 1, 0) stochastic structure of monthly spot rate (st) has been used to generate one-period ahead forecast (set+1) series. These forecasts are Minimum Mean Square Error (MMSE) forecasts and ‘rational’ by nature. Forward rates (tFt+1) served as the ‘unbiased predictor’ of the spot rate (st+1) implying that CIRAP did hold well in the market. Again absence of ‘risk premium’ testifies to the efficiency of the Indian foreign exchange (rupee/dollar) market over the period of study.

© 2017 IUP. All Rights Reserved.

Applicability of Black-Scholes and Black’s Option Pricing Models in Indian Derivatives Market

--Felcy R Coelho and Y V Reddy

Options are the most used financial derivative products. Option pricing is very important in the options market. Black-Scholes (BS) model is one of the most preferred and used models nowadays. In this paper, an attempt is made to study the relevance of BS model and Black’s model in Indian derivative market with specific reference to the banking stock options from the Nifty bank index. The results of the paired sample t-test revealed that there is significant difference between the model prices and market prices calculated through BS model, while there is no significant difference between the calculated model prices and market prices of options under Black’s model. It is observed that the Black’s formula produces better alternatives than the BS formula for pricing the banking stock call options. In most of the cases, it is seen that both the models have underestimated bank stock call options premium.

© 2017 IUP. All Rights Reserved.

Carbon Risk and Impact Assessment from the Perspective of an Institutional Investor

--Tirthank Shah

Escalating carbon emission and climate change tension has attracted much-needed attention and action. Portfolio Decarbonization Coalition (PDC) initiative by United Nations Environment Program (UNEP) and United Nations Environment Program Financial Initiative (UNEP FI) to work with the institutional investors towards measuring and disclosing carbon footprint of the portfolio and taking action to reduce the investment from high carbon-intensive companies, has brought the focus on the investment community. A review of literature suggests that the emergence of carbon risk from an investment perspective is real now. In the light of the PDC initiative and changing investment regulatory framework, the present paper tries to address the need for constructing the carbon risk concept by identifying the carbon risk factors and its impact assessment at a company or asset level and at an institutional investor level. The paper majorly focuses on how identified key non-physical carbon risk factors impact the financial performance drivers of the firm, which in turn affect the valuation of the firm for investment decision-making process. Eventually, the endeavor is to contribute by building the platform upon which the theoretical framework for the same can be constructed.

© 2017 IUP. All Rights Reserved.