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Acknowledgement
I take this opportunity to pay my gratitude to all those people who have
helped me carry out this project. This project could not have been complete
without the contribution and support of few individuals. They helped me a
lot in giving us a foresight of how to start, carry on and complete this
project.
I am grateful to my project guide Prof. Tamal Dutta Chaudhary for
the guidance, inspiration and constructive suggestions that helped me in
the preparation of this project.
I am thankful to all our teaching and non-teaching staff of IBS for
their constructive suggestions.
Last but not the least, I also thank all my friends and seniors who have
helped me in all possible ways and made this work a heavenly toil.
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Executive Summery
This project mainly aims at the analyzing the current stock market
volatility. The Indian stock market benchmark index BSE Sensex has
witnessed some of the landmark events in the recent past. Sensex
reached its highest point ever around the same time last year and this
year the picture is just reversed. The current economic recession has
affected the Indian Stock Market or not has been analyzed in this
report.
The volatility for two time phases has been measured in the report
and some conclusions have been drawn. On the basis of results
obtained by the use of some statistical methods like calculation of
variance and standard deviation, we came to know that the volatility
has increased in the second time phase.
Also in this report, it has been tried to obtain the relationship
between the Sensex values and the prices of Crude Oil. Again with the
use of regression analysis we came to know that there is not a very
significant relationship between Sensex and Crude Oil prices. Thus
this report gives a statistical outlook to both the macro-economic
phenomenon.
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Table of Content
Executive Summary 3
1. Introduction 5
2. Motivation 6
3. Hypothesis 7
4. Methodology 8-12
6. Conclusion 17
7. References 18
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1. Introduction
6
2. Motivation:
7
3. Hypothesis:
These are the basic hypotheses which have been taken to carryon this
report. This hypothesis will be tested with a number of statistical tools
and conclusion will be drawn on the basis of the result obtained.
1. While preparing this report it has been assumed that the period of
recession has started from 1st of January 2007 and is still not over.
2. The period of economic upswing is assumed to have started from 1stof
January 2005 and has continued till December 2006.
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3. It has been assumed that the volatility is market only market driven
without the effect of any extraneous factor working behind it.
4. METHODOLOGY:
Volatility refers to the deviation from a normal mean. Volatility is
critical for risk measurement. Generally volatility refers to standard
deviation. From the mean. If the volatility is high then there is a higher
risk of value of a index moving up or down.
We often predict future volatility calculating the historical volatility.
This is very much important for future forecasting. For the purpose of
calculating the volatility of an index we need to take two steps
1. Compute a series of periodic returns for eg. Daily returns.
2. Choose a weighting scheme. This includes the decision on the length
or the size of the historical sample. In this report I have taken a
period of four years, which is from 2005 to 2008. This time period
has been divided into two phases
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The periodic returns could be calculated by the formula given below
Ui = ln (Vi / Vi-1 )
Where
a. Ui = Return from sensex in period ‘I’
b. Vi = Value of Sensex in period ‘I’
c. Vi-1 = Value of Sensex in period prior to ‘I’
Where
a. σ2n = variance rate per period
b. m = number of observations
c. ū = the mean of periodic returns
Volatility = (σ2)½
Valid N 496
(listwise)
Looking at the descriptive statistic of both the Phases first thing we can
see that the range in Phase II has increased by 4553.03 points. Along
with that the standard deviation has also increased in the second Phase.
These are very clear indicators about the increased volatility of Sensex in
the second Phase.
a. Calculation of Volatility:
Using the above mentioned method for calculation the volatility and
taking the two different time frames as mentioned above we can get the
two different volatilities.
Phase I Phase II
Variance 0.00019 0.000527
Standard 0.013779 0.022962
Deviation
Volatility 0.013779 0.022962
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b. Analysis: Looking at the above mentioned volatility of both the
Phases we can clearly see that the Volatility of Sensex has increased
in Phase II. This concludes that the null hypothesis which we have
taken is false and we have to reject the null hypothesis and accept the
alternate hypothesis that is “The volatility of Sensex has
increased in the period of recession.”
Here from both the graphs we can see that the movement of the
Sensex has increased a lot in the second phase. We can clearly see
that in the first Phase the movement of Sensex has majorly been
upward moving. On the other hand the movement of Sensex has been
quite dynamic in the Phase II and it has moved both upward and
downward. This shows the volatility of Sensex has increased in the
Phase II.
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5. Reasons for high volatility in Phase II:
As we clearly saw that the volatility of Sensex has increased in the phase
II, we should look about the possible reasons for increase in volatility of
Sensex. For this purpose we again need to carry out some statistical
tests depending upon the results of which we could give any conclusion
about the increase in volatility of Sensex.
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1. Hypothesis: For finding out the reasons for high volatility of
Sensex, let us take Sensex values and crude oil prices as two
variables. We assume the value of Sensex as the dependent variable
and the crude oil prices as the independent variable. We now try to
find out that is there a relationship between the two variables by
taking two hypothesis.
2. Null Hypothesis: There is no relationship between the value of
Sensex and the crude oil prices and the increase in volatility of
Sensex is caused by some extraneous variable.
3. Alternate Hypothesis: There is some relationship between the
value of Sensex and crude oil prices and the increase in volatility of
Sensex is caused by the increase in volatility of crude oil prices.
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Descriptive Statistics
Mean Std. N
Deviation
SENSEX 14965.1025 2992.70006 24
From the above given figures we can see the mean and standard
deviation of both the variables.
Correlations
SENSEX CRUDEOIL
CRUDEOIL .013 .
N SENSEX 24 24
CRUDEOIL 24 24
From the fig. given above we can see that the correlation between the
sensex values and the crude oil prices is o.456 This is though
correlated is not significant enough for concluding anything about
the relationship between the sensex volatility and crude oil prices.
Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
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From the values given above we get the value of adjusted R Square. R
Square value identifies the proportion of variance in Sensex values
which is accounted by variance in Crude oil prices. We can clearly see
that the Adjusted R Square value is 0.172. This indicates that the
variance of sensex values is very less to do with the variance in the
Crude oil price. Thus we can say that only 17.2% of the variance in the
value of sensex is explained by the values of Crude Oil Prices.
ANOVA
Model Sum of df Mean F Sig.
Squares Square
1 Regression 42864321.9 1 42864321.9 5.781 .025
35 35
Residual 163129511. 22 7414977.81
916 4
Total 205993833. 23
851
a Predictors: (Constant), CRUDEOIL
b Dependent Variable: SENSEX
From the figures above we can see that though the F statistic is 5.781 but
still the Sig F is also high (2.5 %) thus the value of F statistic is possible
by chance. Thus we can conclude that the value of volatility of Sensex
could be related to the Crude oil price movement by chance. Thus we
can say that the Volatility of Sensex has increased in the period of
recession but the reason for the increase in volatility could not be
attributed to the Crude Oil price movement only. There could be some
extraneous variables which are working behind this phenomenon.
5. Result:
Thus from the help of above statistical calculation we can see that the
there is a significant difference between the correlation of Sensex values
and the Crude Oil Prices. Thus we accept the null hypothesis that is
“There is no relationship between the value of Sensex and the
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crude oil prices and the increase in volatility of Sensex is
caused by some extraneous variable”
6. Conclusion:
From the above shown analysis of the results obtained from statistical
tools we can conclude that the Volatility of Sensex has increased in the
period of recession. Indian Stock Markets have also suffered the impact
of the global meltdown and the risk has increased for the savers who
allocate their savings in the Stock Markets.
The other conclusion we can draw from this project report is that the
reason for the increased volatility could not be solely attributed to the
Volatility in the prices of Crude Oil. There are some extraneous variables
operating in the market which might have higher impact on the stock
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markets. These could be attributed to various macroeconomic indicators
like expected growth rate (GDP growth), unstable inflation rates, and
lastly one of the most important reasons for Volatility of Sensex could be
the fluctuating movement of Foreign Institutional Investors (FII’s)
7. References:
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