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Testing Predictability and Nonlinear Dependence in the Indian Stock Market

Author

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  • NITYANDA SARKAR
  • DEBABRATA MUKHOPADHYAY

Abstract

This paper suggests a systematic approach to studying predictability and nonlinear dependence in the context of the Indian stock market, one of the most important emerging stock markets in the world. The proposed approach considers nonlinear dependence in returns and envisages appropriate specification of both the conditional first- and second-order moments, so that final conclusions are free from any probable statistical consequences of misspecification. To this end, a number of rigorous tests are applied on the returns, based on four major daily indices of the Indian stock market. It is found that the Indian stock market is predictable, and this observed lack of efficiency is due to serial correlation, nonlinear dependence, day-of-the week effects, parameter instability, conditional heteroskedasticity (GARCH), daily-level seasonality in volatility, the short-term interest rate (in some subperiods of some indices), and some dynamics in the higher-order moments.

Suggested Citation

  • Nityanda Sarkar & Debabrata Mukhopadhyay, 2005. "Testing Predictability and Nonlinear Dependence in the Indian Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 41(6), pages 7-44, November.
    • Handle: RePEc:mes:emfitr:v:41:y:2005:i:6:p:7-44
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    Citations

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    Cited by:

    1. Debabrata Mukhopadhyay & Nityananda Sarkar, 2021. "A Starting Note: Do Green Indices Outperform BSESENSEX and Energy Indices in India? Some Evidence on Investors’ Commitment Towards Green Investing," International Econometric Review (IER), Econometric Research Association, vol. 13(2), pages 41-58, June.
    2. Ehsan Ahmed & J. Barkley Rosser Jr. & Jamshed Y. Uppal, 2010. "Emerging Markets and Stock Market Bubbles: Nonlinear Speculation?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(4), pages 23-40, January.
    3. Sanjay Rajagopal & Patrick Hays, 2012. "Return Persistence in the Indian Real Estate Market," International Real Estate Review, Global Social Science Institute, vol. 15(3), pages 283-305.
    4. Sumon Kumar Bhaumik & Saul Estrin & Tomasz Mickiewicz, 2017. "Ownership identity, strategy and performance: Business group affiliates versus independent firms in India," Asia Pacific Journal of Management, Springer, vol. 34(2), pages 281-311, June.
    5. Debabrata Mukhopadhyay & Nityananda Sarkar, 2013. "Stock Returns Under Alternative Volatility and Distributional Assumptions: The Case for India," International Econometric Review (IER), Econometric Research Association, vol. 5(1), pages 1-19, April.
    6. S. Bhaumik & M. Karanasos & A. Kartsaklas, 2008. "Derivatives Trading and the Volume-Volatility Link in the Indian Stock Market," William Davidson Institute Working Papers Series wp935, William Davidson Institute at the University of Michigan.
    7. Naimat U Khan & Sajjad Khan, 2016. "Weak Form of Efficient Market Hypothesis: Evidence from Pakistan," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 8(SE), pages 1-18, March.
    8. Bhaumik, S. & Karanasos, M. & Kartsaklas, A., 2016. "The informative role of trading volume in an expanding spot and futures market," Journal of Multinational Financial Management, Elsevier, vol. 35(C), pages 24-40.

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