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Do `speculative traders' increase Stock Price Volatility? Empirical evidence from the Bombay Stock Exchange

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  • Venkat Eleswarapu
  • Chandrasekar Krishnamurti

Abstract

In India there existed, until recently, a form of highly leveraged margin trading called the Badla system, for certain stocks categorized as group A stocks. In March of 1994, the Securities and Exchange Board of India (SEBI) has effectively banned the facility blaming it for causing "excessive speculation". We study the effect of badla trading on stock return volatility by comparing the daily data from 1992 for group A and a matched sample of group B stocks. After controlling for other factors such as trading frequency, the average price level and the market capitalization of the firms, we find that the residual variance is actually lower for the group A stocks. Also, variance ratio tests indicate, that after accounting for other factors, no differences in the magnitude of price reversals (serial correlation) for both groups of stocks. Hence, SEBI's decision does not seem justified on economic grounds.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9507006.

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Length: 23 pages
Date of creation: 12 Jul 1995
Date of revision:
Handle: RePEc:wpa:wuwpfi:9507006

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  1. Detemple, Jerome & Jorion, Philippe, 1990. "Option listing and stock returns : An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 781-801, October.
  2. Gikas A. Hardouvelis, 1988. "Margin requirements, volatility, and the transitory component of stock prices," Research Paper 8818, Federal Reserve Bank of New York.
  3. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June.
  4. Hsieh, David A & Miller, Merton H, 1990. " Margin Regulation and Stock Market Volatility," Journal of Finance, American Finance Association, vol. 45(1), pages 3-29, March.
  5. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  6. Venkat Eleswarapu & Chandrasekar Krishnamurti, 1995. "Liquidity, stock returns and ownership structure: an empirical study of the BSE," Finance 9507005, EconWPA.
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Cited by:
  1. Jamshed Y. Uppal & Inayat U. Mangla, 2006. "Regulatory Response to Market Volatility and Manipulation: A Case Study of Mumbai and Karachi Stock Exchanges," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 11(2), pages 79-105, Jul-Dec.
  2. Jamshed Y. Uppal & Inayat U. Mangla, 2006. "Market Volatility, Manipulation, and Regulatory Response: A Comparative Study of Bombay and Karachi Stock Markets," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 1071-1083.
  3. Iqbal, Javed, 2008. "Stock Market in Pakistan: An Overview," MPRA Paper 11868, University Library of Munich, Germany.

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