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How Effective are Stock Market Reforms in Emerging Market Economies? Evidence from a Panel VAR Model of the Indian Stock Market

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  • Bhaumik, Sumon Kumar
  • Chakrabarty, Manisha
  • Kutan, Ali M.
  • Selarka, Ekta

Abstract

The paper uses a panel VAR framework to estimate the impact of a series of reforms aimed at reducing transactions cost and information cost in India’s secondary market for equity, on trading cost and trading volume. In particular, we focus on the reforms that were introduced after the creation of the National Stock Exchange (NSE) and screen-based trading that have been much discussed in the literature. Our results suggest that only the creation of the clearing corporation that reduced or eliminated counterparty risk had an economically meaningful/significant impact on trading cost and volume. We also find that the impact was much greater for mid-cap firms than for large-cap and small-cap firms. In the same vein, while trading costs and trading volumes Granger cause each other for mid-cap firms, there is only one-way causality for large-cap firms – trading cost Granger causes volume but the reverse is not true, and for small-cap firms there is no causal relationship between the two. Further, the impact of a shock to the trading cost on volume dissipates within 5 periods (months), as does the impact of a shock to the volume on trading costs. The implications of these findings are discussed in the paper.

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  • Bhaumik, Sumon Kumar & Chakrabarty, Manisha & Kutan, Ali M. & Selarka, Ekta, 2018. "How Effective are Stock Market Reforms in Emerging Market Economies? Evidence from a Panel VAR Model of the Indian Stock Market," GLO Discussion Paper Series 290, Global Labor Organization (GLO).
  • Handle: RePEc:zbw:glodps:290
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    More about this item

    Keywords

    Stock market reforms; Trading cost; Trading volume; Panel VAR; Emerging market;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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