The article attempts to fit a model to forecast the liquidity positions of the two premier stock exchanges of India, the BSE and the NSE.

While asset managers struggle to adjust their portfolios to cope with the expectations and investors adjust their holdings against ups and downs of the markets, it is an adventure to try forecasting liquidity positions of markets like BSE and NSE which are historically volatile and sensitive to the fluctuations in the global markets. In this article, a modest attempt has been made to forecast the liquidity positions of BSE and NSE at an aggregate level. The attempt is purely empirical and normative in nature.

There may be many measures of stock market liquidity. In this article two very widely used measures have been used. Turnover Ratio in the following form has been used as the measurement of market liquidity. Amihud et al. (1991), have used the reciprocal of this ratio in their ratio. ARIMA model has been used to forecast the liquidity positions of both the exchanges in terms of the above mentioned ratios. Since ARIMA model is an iterative process and some sort of trial and error is inevitable, rigorous mathematical computation is necessary. Hence, the popular econometrics software “Eviews 3” has been used for the computation purpose.

Data relating to turnover and market capitalization have been collected from RBI website and various issues of RBI bulletin. There are a total of 132 monthly observations for each variable for both the exchanges that is BSE and NSE. The data belongs to the study period from January 1995 to December 2005.

Portfolio Organizer Magazine, Forecasting Liquidity, Bombay Stock Exchange, BSE, National stock Exchange, NSE, Liquidity Management,Autoregressive Integrated Moving Average, ARIMA, Statistical Analysis, Liquidity Ratio, Turnover Ratio.