Impact of Oil Price on Stock Market Returns: Evidence from South Asian Markets

-- Mohan Nandha and Robert Faff

This paper examines the short run oil price sensitivity of stock market returns in three major South Asian countries, namely, India, Pakistan and Sri Lanka. By using a standard market model augmented with an oil price factor, the article analyzes 29 Indian, 17 Pakistani and 11 Sri Lankan industries. The authors use weekly DataStream industry/sector indices data over the sample period from January 1990 to June 2004 for India and Sri Lanka, but for Pakistan, data begins from July 1992 and ends on June 2004. Four Indian industries, namely, Electricity, Integrated Oil, Resources (Oil and Gas), and Utilities are found to have a statistically significant sensitivity to the oil price factor. For Pakistan and Sri Lanka, Banks is the only industry where the stock price returns appear to have statistically significant sensitivity to the oil price returns. However, none of these results appear to be consistent with the existing international evidence. Further, the study fails to find any support for the full sample results when the second half of the data is considered. Assigning more importance to relatively recent data (that is, ignoring the distant half of the sample period), the study concludes that oil price changes do not appear to have a significant short run influence on the stock market returns in the Indian, Pakistani and Sri Lankan stock markets. In fact, considering the regulated fuel pricing environment in all the three countries, this appears to be a most likely scenario. However, the results of the study are not conclusive so there is a need for further studies.

© 2005 IUP. All Rights Reserved.

An Empirical Investigation of FIIs' Role in the Indian Equity Market: A Firm Level Analysis

-- Khan Masood Ahmad, Shahid Ashraf and Shahid Ahmed

This study examines the relationship of FII flows with firm level stock returns in the Indian equity market. The globalization process and the recent reforms in the Indian financial sector have given the FIIs a strategy for international diversification of portfolios, and for hedging risk. At the aggregate level, FII investments and NSE Nifty seem to have a strong unidirectional causality with some weak evidence of bi-directional causality. The authors conducted a Granger causality test to check the direction of causality at the firm level, and Garch(1,1) for volatility and spillover effect. The study has been conducted on 36 listed firms during the period from August 2002 to August 2004. The results show the existence of bi-directional causality between stock returns and FII flows and vice-versa in 13 firms, and uni-directional causality running from stock returns to FII flows in 21 firms. The role of FIIs becomes important in influencing equity returns at the firm level, especially in the government-owned companies. It seems that FIIs are value investing in anticipation of further reforms that is driving up the equity returns. There is volatility clustering in individual series but no transmission from one to another, except for one key company. Therefore, there is very little destabilizing effect of FII flows on individual equity returns of the firms during the period of study.

© 2005 IUP. All Rights Reserved.

Econometric Modeling and Forecasting of Gold Futures Prices in India

-- Prabina Rajib and Suraj Bhuwania

Trading of gold futures in India has been growing by leaps and bounds since its debut at national commodity exchanges in 2002-03. This paper analyzes gold futures prices at National Commodities and Derivatives Exchange of India (NCDEX) from March 2004 to September 2004. Various AutoRegressive Integrated Moving Average (ARIMA) models are fitted into the price series using a Box-Jenkins framework to find out the best model. The validity of the best-fitted model was also checked. The best-fitted model is then used for short-term forecasting which gives superior forecasting result compared to other models.

© 2005 IUP. All Rights Reserved.

Markowitz Revisited in Indian Context

-- Sushil Kumar Mehta

The research paper attempts to analyze ex ante performance of the portfolios constructed using Markowitz's Mean-Variance Model in the Indian Security Market. Weekly data on market prices of shares and the BSE Sensex was collected for a period of seven years ranging from April 1995 to March 2002. Fifty-four portfolios were constructed with three samples of securities, six holding periods and three levels of expected return. Constructed portfolios were evaluated using well-established risk-adjusted performance measures of Sharpe, Treynor, Jenson and Fama, during one year immediately following their formation. The results of the study indicated that in case of 53.70% of the portfolios, the performance is superior than the market. But the performance of portfolios is not significantly different from market proxy i.e., Sensex even at 10% level of significance.

© 2005 IUP. All Rights Reserved.

The Effects of Exchange Rate Volatility on India's Imports: An Empirical Investigation

-- Aruna Kumar Dash and V Narasimhan

Using a Vector Autoregressions (VAR) approach, this article investigates the impact of nominal exchange rate volatility on India's bilateral import from USA during March 1992 to April 2002. The major findings of the study are (i) exchange rate volatility affects the volume of imports negatively during the period. (ii) However, volatility of nominal effective exchange rates loses its explanatory power in explaining the changes in import volume in the presence of relevant macroeconomic variables such as GDP, exchange rate and terms of trade. (iii) It is also seen that GDP affects import more than volatility of nominal effective exchange rate, exchange rate and terms of trade.

© 2005 IUP. All Rights Reserved.