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Risk-Return Trade-Off in Indian Capital Market During Last Two Decades with Special Emphasis on Crisis Period

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  • SUNITA NARANG

    ()
    (University of Delhi, India, Department of Computer Science, Acharya Narendra Dev College)

  • V. K. BHALLA

    ()
    (University of Delhi, India, , Faculty of Management, North Campus)

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    Abstract

    This paper examines the risk-return relationship in Indian stock market using symmetric and asymmetric GARCH-in-mean (GARCH-M) models. First the standard GARCH-M model is used, next since variance is proxy for risk, we ascertain if there is any significant relation between asymmetric variance and return using TGARCH-M, EGARCH-M and Power GARCH models. The study uses daily data on popular index S&P CNX Nifty of National Stock Exchange, India, during a period of two decades from July, 1990 to November, 2010. Further the period of Asian crisis is covered during the pre-derivative period of a decade and sub-prime crisis is covered during the post-derivative period of a decade to see the behaviour of volatility and risk-return relationship. The results show that both the TGARCH-M and PGARCH-M models are good for Indian market conditions. The asymmetric models find strong evidence of time-varying, highly persistent and predictable volatility in Indian market. It establishes that return is positively related to risk in Indian market during all periods. The risk-return relationship is positive and significant only at higher lags that too in the presence of dummyfut (variable which takes value 1 after derivatives and 0 before it). Further during sub-period analysis we find that risk-return parameter is higher in magnitude in pre-derivative period compared to post-derivative period. In both periods both the crisis had negative effect on return and positive effect on volatility. The rise in volatility during Sub-prime crisis is sharper compared to during Asian crisis. The findings are useful for financial decision making.

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    Bibliographic Info

    Article provided by Faculty of Business and Administration, University of Bucharest in its journal Annals EAS.

    Volume (Year): 5 (2011)
    Issue (Month): 1 (December)
    Pages: 77-98

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    Handle: RePEc:but:anneas:v:5:y:2011:i:1:p:77-98

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    Related research

    Keywords: Conditional Volatility; Leverage effect; GARCH-in-mean; Risk-return relationship; Asian crisis; Sub-prime crisis;

    References

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    1. Sudheer Chava & Amiyatosh Purnanandam, 2010. "Is Default Risk Negatively Related to Stock Returns?," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2523-2559, June.
    2. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
    3. Bollerslev, Tim & Zhou, Hao, 2006. "Volatility puzzles: a simple framework for gauging return-volatility regressions," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 123-150.
    4. Hui Guo & Robert F. Whitelaw, 2006. "Uncovering the Risk-Return Relation in the Stock Market," Journal of Finance, American Finance Association, vol. 61(3), pages 1433-1463, 06.
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    6. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
    7. Lin Peng & Turan G. Bali, 2006. "Is there a risk-return trade-off? Evidence from high-frequency data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1169-1198.
    8. Lubos Pastor & Meenakshi Sinha & Bhaskaran Swaminathan, 2006. "Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital," NBER Working Papers 11941, National Bureau of Economic Research, Inc.
    9. Scruggs, John T. & Glabadanidis, Paskalis, 2003. "Risk Premia and the Dynamic Covariance between Stock and Bond Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(02), pages 295-316, June.
    10. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    11. Lundblad, Christian, 2007. "The risk return tradeoff in the long run: 1836-2003," Journal of Financial Economics, Elsevier, vol. 85(1), pages 123-150, July.
    12. Whitelaw, Robert F, 2000. "Stock Market Risk and Return: An Equilibrium Approach," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 521-47.
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    Cited by:
    1. Mohanty, Roshni & P, Srinivasan, 2014. "The Time-Varying Risk and Return Trade Off in Indian Stock Markets," MPRA Paper 55660, University Library of Munich, Germany.

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