Mar'19
The IUP Journal of Financial Risk Management
Focus
The current issue has six papers focusing on the Indian and US markets. The issue is
a combination of empirical as well as review-based studies. The first paper, “Risk
Parity Approach: Empirical Evidence from US and Indian Equity Index”, by Tirthank Shah and Abhishek Parikh, applies the risk parity approach to India as well as US equity index. Risk and return are the two basic constructs of portfolio management. In a portfolio approach, when one holds the basket of assets, the basic objective is to eliminate the unsystematic risk and be compensated for the systematic risk taken. Risk parity approach is an innovative technique to study the performance of portfolio with regard to unsystematic risk diversification. The results reveal that risk parity approach has superior performance as compared to the existing approaches in terms of unsystematic risk diversification of portfolio in developing as well as developed countries.
The second paper, “Is Gold a Better Hedge or a Safer Asset Than Shares? – Evidence from India”, by Kiranjit Sett, endeavors to empirically examine the impact of domestic gold price on stock price of BSE Sensex in India for the period from January 3, 2000 to December 31, 2017. Using secondary data from the World Gold Council (WGC) database and Bombay Stock Exchange website, it is found that gold is a strong, safe asset vis-à-vis shares in India, but it is not a hedge against shares in India.
The third paper, “The Relationship Between Demographic Variables of Investors and Apprehension About Investment: An Empirical Analysis”, by Yasmeen Ansari, focuses on the relationship between demographic variables and the apprehension of investors about investment. There are individuals who are interested in investing their money, but take a step back due to lack of knowledge, experience and education in the particular field. They hesitate to invest due to the fear of losing money or making errors in judgment. The authors opine that past studies on the investor apprehension failed to take account of the demographic variables of investors. So, a study was conducted on a very large scale to investigate this relationship. The findings reveal that factors like age, education and income of investors have a significant impact on investors’ apprehension about investment.
The fourth paper, “Evaluating the Tracking Performance of Index Mutual Funds and Exchange Traded Funds in India”, by Pinkesh Dhabolkar and Y V Reddy, examines the ability of Exchange Traded Funds (ETFs) and index mutual funds in India to track their chosen market index. In both the cases, it is the fund manager who mimics the returns of the chosen market index. The findings reveal that though ETFs have shown slightly better performance over index mutual funds, both the investment vehicles have shown superior portfolio replication ability in India.
The next paper, “Causality Relationship Between Spot and Futures Markets: Evidence from India”, by Karamjeet Kaur, attempts to find out the causal relationship between spot and futures markets of BSE, using secondary data for a period of five years from January 2011 to December 2015. The results reveal the existence of cointegration between spot and futures market and the price movements of spot and futures are similar. A unidirectional causality from spot market to futures market of BSE is also observed, which implies that spot market leads the futures market.
The last paper, “Economic Exposure Management: A Review”, by Khushboo Bhasin and Syeedun Nisa, postulates that economic exposure has gained attention among the academicians and practitioners as they have realized the role of the concept for maximizing the long-term economic value of the firm. This paper tries to collate significant literature of the same and does an extensive review of the concept of ‘economic exposure management’ and available models for the measurement of economic exposure.
Consulting Editor
Risk Parity Approach: Empirical Evidence from US and Indian Equity Index
Risk parity approach being one of the risk-based approaches has emerged, especially after the 2008 crisis, as a promising alternative to asset allocation in order to achieve better risk diversification of the portfolio. Literature review suggests that emerging market indices have remained out of the focus in terms of empirical testing of risk parity portfolio. This paper attempts to bridge the gap by conducting empirical testing of risk parity approach on Indian equity index along with US equity index. The study presents a comparative snapshot of empirical evidence of risk parity portfolio with other risk-based approaches like minimum variance portfolio, equal weight portfolio and most diversified portfolio. The results of empirical testing for Indian market index show superior Sharpe ratio and Treynor ratio for risk parity portfolio vis-à-vis some other approaches, but for US equity market index, minimum variance portfolio and most diversified portfolio show superior Sharpe ratios. In terms of diversification of unsystematic risk of portfolio, risk parity portfolio has generated better diversification vis-à-vis other approaches in both Indian and US equity market. The findings of this paper demonstrate the superiority of risk parity portfolio in terms of unsystematic risk diversification of portfolio in developed as well as emerging equity market.
Is Gold a Better Hedge or a Safer Asset Than Shares? – Evidence from India
On the basis of daily price per 10 g of gold and Bombay Stock Exchange (BSE) Sensex for the period January 3, 2000 to December 31, 2017, a fall in return on BSE Sensex was found to have resulted in an increase in return on gold when investment in BSE Sensex generated negative returns with different magnitude, contemporaneously as well as successively in some cases. So, gold has been found to be a strong, safe asset vis-à-vis shares in India, but gold has not been found to be a hedge against shares in India.
The Relationship Between Demographic Variables of Investors and Apprehension About Investment: An Empirical Analysis
People want to earn out of their saved money by investing in different avenues, but sometimes due to lack of knowledge, experience, education in the field and other factors they are afraid of investing. Particularly, they are apprehensive of investing because of losing money, making a mistake, or fear of failure. Various studies have been conducted to find out the relationship between the various factors and the apprehension of investing in different areas, but no study till date seems to have been done to find out the relationship between demographic variables of investors and their apprehension about investment. The present study is conducted on a very large scale to find out this relationship. Mixed type of results are obtained. Relationship between gender, occupation and apprehension about investment was found insignificant, while age, education and income are found to be significantly related to apprehension about investment.
Evaluating the Tracking Performance of Index Mutual Funds and Exchange Traded Funds in India
Though a difference exists in the way Exchange Traded Funds (ETFs) and index mutual funds are formed, both the funds follow the passive style of investing, wherein the fund manager tries to mimic the returns of the chosen market index. Using a sample of 16 index mutual funds and 14 ETFs, from inception of the funds to March 31, 2017, this paper investigates the ability of the index mutual funds and ETFs in India to track their chosen market index. The study reveals that index mutual funds exhibit significantly higher tracking error than its counterpart. The results of regression analysis further reveal that ETF fund managers have been able to construct a portfolio that is more commensurate with the chosen index than its counterpart.
Causality Relationship Between Spot and Futures Markets: Evidence from India
This paper makes an attempt to find out the causal relationship between spot and futures markets of Bombay Stock Exchange (BSE) of India. The study is based on secondary data. Unit root test, Johansen cointegration test and Granger causality test have been used for data analysis. The tests have been carried out based on the daily closing prices of BSE Sensex with its near futures index contracts for the period of five years from January 2011 to December 2015. The findings of the study indicate existence of cointegration between spot and futures market and the price movements of spot and futures are similar. Further, the study identifies unidirectional causality from spot market to futures market of BSE, which implies that spot market leads the futures market.
Economic Exposure Management: A Review
The literature on economic exposure management has expanded to a great extent during the last decade. Corporate managers and practitioners have shown interest in examining economic exposure as they have realized the consistency of the concept, with the objective of maximizing the long-term economic value of the firm. In the present paper, a normative view of economic exposure is considered. The paper primarily reviews the identification and assessment of economic exposure and discusses the available models for the measurement of economic exposure. The paper also identifies the gaps in the existing literature and suggests directions for future research.