Risk-Return Trade-Off in Indian Capital Market During Last Two Decades with Special Emphasis on Crisis Period
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.
Volume (Year): 5 (2011)
Issue (Month): 1 (December)
|Contact details of provider:|| Postal: Elisabeta Queen no. 4-12, Bucharest|
Web page: http://www.faa.ro
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
- Backus, David K & Gregory, Allan W, 1993.
"Theoretical Relations between Risk Premiums and Conditional Variances,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 11(2), pages 177-85, April.
- David K. Backus & Allan W. Gregory, 1992. "Theoretical Relations Between Risk Premiums and Conditional Variances," Working Papers 92-18a, New York University, Leonard N. Stern School of Business, Department of Economics.
- 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.
- Lubos Pástor & Meenakshi Sinha & Bhaskaran Swaminathan, 2008. "Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital," Journal of Finance, American Finance Association, vol. 63(6), pages 2859-2897, December.
- Pástor, Luboš & Sinha, Meenakshi & Swaminathan, Bhaskaran, 2006. "Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital," CEPR Discussion Papers 5462, C.E.P.R. Discussion Papers.
- 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.
- Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993.
"On the relation between the expected value and the volatility of the nominal excess return on stocks,"
157, Federal Reserve Bank of Minneapolis.
- 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.
- 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.
- Hui Guo & Robert F. Whitelaw, 2003. "Uncovering the Risk-Return Relation in the Stock Market," NBER Working Papers 9927, National Bureau of Economic Research, Inc.
- Hui Guo & Robert Whitelaw, 2005. "Uncovering the risk-return relation in the stock market," Working Papers 2001-001, Federal Reserve Bank of St. Louis.
- 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.
- 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.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:but:anneas:v:5:y:2011:i:1:p:77-98. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Cosmin Catalin Olteanu)
If references are entirely missing, you can add them using this form.