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Asymmetric Volatility and Risk-return Relationship in the Indian Stock Market

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  • Madhusudan Karmakar

    (Madhusudan Karmakar is Associate Professor (Finance & Accounting), Indian Institute of Management, Lucknow. Email: madhu@iiml.ac.in.)

Abstract

This article investigates the heteroscedastic behaviour of the Indian stock market using different GARCH models. First, the standard GARCH approach is used to investigate whether stock return volatility changes over time and if so, whether it is predictable. Then, the EGARCH models are applied to investigate whether there is asymmetric volatility. Finally, (E) GARCH in the mean extension has been tried to examine the relation between market risk and expected return. The investigation has been made on market index S&P CNX Nifty for a period of 14 and a half years from July 1990 to December 2004. The study reports an evidence of time varying volatility which exhibits clustering, high persistence and predictability. It is found that the volatility is an asymmetric function of past innovation, rising proportionately more during market decline. It is also evidenced that return is not significantly related to risk. The findings are useful to policy makers and to all market participants for pricing derivatives and designing dynamic trading strategies.

Suggested Citation

  • Madhusudan Karmakar, 2007. "Asymmetric Volatility and Risk-return Relationship in the Indian Stock Market," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 8(1), pages 99-116, January.
    • Handle: RePEc:sae:soueco:v:8:y:2007:i:1:p:99-116
    DOI: 10.1177/139156140600800106
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    References listed on IDEAS

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    More about this item

    Keywords

    JEL: G19; Volatility clustering; Asymmetric volatility; GARCH; EGARCH; EGARCH-M;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other

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