Published Online:October 2024
Product Name:The IUP Journal of Applied Economics
Product Type:Article
Product Code:IJAE021024
Author Name:Ruparnab Sengupta, Kaushik Bhattacharjee and Debanjana Deb Biswas
Availability:YES
Subject/Domain:Economics
Download Format:PDF
Pages:17
Extreme events such as a market crash, an economic downturn, a geopolitical war, or a situation emanating from a health crisis have proved to inflict far-reaching adverse impacts on an economy, depending on the country’s market microstructure. This becomes more important due to the increasing interconnectedness across global financial markets and subsequent financial contagion. As such, it becomes imperative to quantify the relevant risk (i.e., tail risk) arising out of such events. This study examines the phenomenon of tail risk in the Indian stock market from sectoral returns, using extreme value theory (EVT). The study uses returns of 11 sectoral indices of Nifty from 2006 to 2023, and estimates the tail risk measure each quarter using a peak-over threshold approach following prior literature (Hill, 1975). It also investigates the impact of estimated tail risk on expected future returns of the respective sectoral indices. The results revealed the tail risk estimates (at 5% threshold of cross-sectional sectoral returns) to be significant. Further, tail risk positively impacts the expected Nifty sectoral returns, and the impact is robust even after controlling for macroeconomic factors like inflation, short-term interest rate, and long-term interest rate. The results of the study would help investors adopt better risk management practices and help regulators conduct stress tests to understand potential risk scenarios.
In the last few decades, the financial world has witnessed a series of extreme events ranging from stock market crashes, economic downturns and geopolitical wars, throwing the global supply chain into disarray, as well as situations arising from a health crisis that created havoc all over the world.