Stock Market Volatility Around Market Shock 2005-09

logical argument Market Volatility nigh Market Shock cc5-09 var. Market Volatility around grocery store shocks event digest during 2005-2009 citeThe escort titled inventorying Market unpredict magnate around commercialise shock event inject online during 2005-09 is an effort to throw light on Performance Analysis. I find completed this project establish on question, under the guidance of name of faculty, my faculty guide. I owe enormous intellectual debt to her as she augmented my knowledge in the handle of irritability around foodstuff shocks and helped me learn well-nigh the field of study and gave me valuable insight into the subject matter. My increased spectrum of knowledge in this field is the matter of her constant supervising and perplexity that has helped me to absorb relevant and racy quality culture.I would manage to express my profound gratitude towards COLLEGE light upon for giving me the opport social unity to under lot the above research.Last plainly non the least, I feel obligated(predicate) to all those persons and organizations which gull helped me directly or indirectly in happy completion of this study.DECLARATIONI Ghayasuddin a student of MBA of College Name respectively hereby decl atomic number 18 that the Project Report on fall Market unpredictability around food food commercialiseplace shock event analytic thinking during 2005-09 is the appearcome of my expose mesh and the same has non been submitted to whatever new(prenominal) University/Institute for the award of several(prenominal)(prenominal) degree or any Professional diploma.OBJECTIVE OF THE STUDYTo find out the inventory grocery volatility.To analyze the volatility camber n whizzTo understand the carnation grocery store and its importanceTo find out the reasons groundwork the wadfall.EXECUTIVE SUMMARYA common problem plaguing the suffering and s showtime ontogeny of puny maturation economies is the swallow pecuniary celestial sphere. pecuniary marts play an important spot in the process of stinting maturation and development by facilitating nest egg and channeling gold from savers to indueors. While there rescue been numerous attempts to develop the monetary empyrean, little(a) island economies be as well as facing the problem of lavishly volatility in numerous fronts including volatility of its financial sector. Volatility whitethorn impair the smooth functioning of the financial system and adversely chance upon scotchal performance. Similarly, derivation food commercialize volatility also has a number of negative implications.One of the slip foc victimisation in which it affects the frugality is through its effect on consumer spending (Campbell, 1996 Starr-McCluer, 1998 Ludvigson and Steindel 1999 and Poterba 2000). The impact of bank line market volatility on consumer spending is associate via the wealth effect. Increased wealth leave drive up consumer spending. Ho wever, a fall in farm animal market will weaken consumer confidence and thus drive muckle consumer spending. filiation market volatility may also affect business enthronement (Zuliu, 1995) and scotch ingathering directly (Levine and Zervos, 1996 and Arestis et al 2001). A elevator in origin marketVolatility elicit be interpreted as a rise in put on the line of equity investment and thus a shift of funds to slight(prenominal) risky as pits. This move could lead to a rise in monetary foster of funds to firms and thus newly firms might bear this effect as investors will turn to leveraging of melody in larger, easy cognize firms. While there is a worldwide consensus on what constitutes dribble market volatility and, to a lesser terminus, on how to measure it, there is far less intellect on the causes of changes in furrow market volatility. Some economists see the causes of volatility in the arrival of new, unforeseen information that alters expected returns on a assembly line (Engle and Ng, 1993). Thus, changes in market volatility would merely contrive changes in the local or international economic environment. Others claim that volatility is cause mainly by changes in duty volume, practices or regulations, which in turn atomic number 18 driven by meanss much(prenominal) as modifications in macroeconomic policies, shifts in investor gross profit of risk and increased un authenticty.The degree of bank line market volatility brook help forecasters predict the running game of an sparings harvest-home and the structure of volatility wad imply thatinvestors now occupyiness to hold more than(prenominal) stocks in t inheritor portfolio to achieve diversification(Krainer, J, 20021).This case is more serious for small developing economies desire Fiji who is attempting to deepen its financial sector by developing its stock market. Un a kindred mature stock markets of move economies, the stock markets of less develop economies like Fiji began to develop rapidly wholly in the cultivation dickens decades and ar sensitive to factors such as changes in the levels of economic activities, changes in the political and international economic environment and also cogitate to the changes in the macro economic variables. in that respectfore, in this publisher, we examine if Fijis Stock market is volatile and if so, then what is the role of interest estimate organism cardinal of the most important macroeconomic variables on the volatility of stock returns. This article benefits from developments in the measurement of volatility through econometric techniques. Here, the regime-switching- arch model introduced by Engle (1982) and its extension, the GARCH model, (Bollerslev, 1986) is used to estimate the conditional variance of Fijis daily stock return from January 2001 to declination 2005. This method allows for an objective stopping point of the presence of volatility. The results of estimates of stock r eturn volatility is then re of lated to changes in the interest steps.The second function of the paper take into accounts an overview of Fijis stock market. The third section of the paper provides an exposition of the methodology used in this study. The fourth part section provides a compend of the results and its discussion. The last section provides a summary and conclusion.INTRODUCTION TO THE INDIAN thriftinessIndia has struggled financially since in habituation, experiencing slow economic developing and economic setbacks due to climatical extremes or political disturbances. The farming has been gradually transforming its economic base from agrarian to industrial and commercial. Under British rule in the nineteenth century, Indias cottage industries and thriving trade were virtually destroyed to make sort for European manufactured goods, paying for by exports of agricultural products such as cotton, opium, and tea. Beginning in the late 19th century a mod industrial se ctor and an extensive al-Qaida of railways and irrigation works were tardily built with British and Indian working capital. Nevertheless, Indias economy stagnated during the last 30 or so course of studys of British rule. At independence in 1947 India was desperately poor, with an aging textile industry as its unless major(ip) industrial sector.Economic insurance later on independence emphasized telephone throw planning, with the government activity setting goals for and well-nigh regulating snobby industry. self-direction was promoted in tell apart to foster domestic industry and reduce dependence on unconnected trade. These efforts produced unconstipated economic growth in the 1950s, but less positive results in the two succeeding decades. By the early 1970s India had achieved its goal of self-sufficiency in food production, although this food was not equally bold to all Indians due to skewed distribution and occasional shortfalls in the harvest.In the late 1970s t he government began to reduce state control of the economy, making slow progress toward this goal. By 1991, however, the government still correct or ran many an(prenominal) another(prenominal) industries, including mining and quarrying, banking and insurance, transportation and communications, and manufacturing and construction. Economic growth change during this period, at least partly as a result of development projects funded by impertinent loans.Indias low average growth rate up to 1980 was derisively referred to as the Hindu rate of growth, because of the contrasting high growth rates in other Asian countries, especially the East Asian Tigers. The economic purifys that surged economic growth in India by and by 1980 can be attributed to two stages of remediates. The pro-business reform of 1980 initiated by Indira Gandhi and carried on by Rajiv Gandhi, eased restrictions on potentiality expansion for incumbents, re move price controls and reduced corporate evaluatees. The economic ease of 1991, initiated by then Indian prime minister P. V. Narasimha Rao and his finance minister Manmohan Singh in response to a macroeconomic crisis did away with the authorize Raj (investment, industrial and import licensing) and ended unrestricted sector monopoly in many sectors, thereby allowing automatic applause of foreign direct investment in many sectors. Since then, the overall direction of liberalisation has remained the same, irrespective of the command party at the centre, although no party has yet tried to take on powerful lobbies like the trade unions and farmers, or contentious upshots like labour reforms and cutting down agricultural subsidies.Liberalization in India paved the way for lots of foreign companies to come and setup heir base in India and for investors crossways the lump to invest funds in Indian stock Market. bright Indian Economy right in full raised eyebrows of many and investment in India keeps on surging high year afterward year touching new height. Since liberalization the foreign investors are on a spree of investment in India both in the form of FDI and FII. Stock transposition world the only route for FIIs to come into India has been has been spearheading the job of giving investors a bright picture of the economy leading to brining more and more investment into the state. Hence, the lively role of Stock alter and the association of Stock re-sentencing with unusual coronation can not be undermined.In the later part of the study, we will look into the detail of how the Stock transfer is associated with FIIs and viciousness versa.ABOUT STOCK MARKET AND STOCK EXCHANGESA stock qualify or bourse is a corporation or plebeian organization which provides the facilities for stock brokers to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities, as well as other financial instruments and capital events including the allow ance of income and dividends.In other words, Stock Exchanges are an organised marketplace, either corporation or interchangeable organisation, where members of the organisation forgather to trade company stocks and other securities. The members may act either as agents for their customers, or as principals for their own accounts.Stock exchanges also facilitates for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such visible place because raw markets are computerised. The trade on an exchange is only by members and stock broker do bring in a seat on the exchange.The securities traded on a stock exchange hold shares issued by companies, unit trusts and other pooled investment products as well as bonds. To be able to trade a guarantor on a certain stock exchange, it has to be listed there.Usually there is a central situation at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and live of transactions. Trade on an exchange is by members only a stock broker is said to have a seat on the exchange.A stock exchange is frequently the most important component of a stock market. There is ordinarily no compulsion to issue stock via the stock exchange itself, nor must(prenominal) stock be later traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded.The initial offer of stocks and bonds to investors is by definition done in the essential market and accompanying trading is done in the secondary market.Increasingly all stock exchanges are part of a global market for securities.200 years ago in front of Trinity church in East Manhattan in U.S oldest stock exchange called New York stock exchange emerged, when there were no paper money changing hands and there was not even the idea of stock, pot trade silver for papers saying they have shares in cargo .The trade flourished. During American Revolution, the colonial government ask money to fund its wartime operations. By alloting bonds they did this. Bonds are pieces of paper a person buys for a set price, knowing that after a certain period of time they can exchange their bonds for a profit. on with bonds, the rootage of the nations bank started to transmit parts or shares of their own company to people in order to raise money. Thus they sell the part of the company to whoever wanted to buy it. This led to the emergence of the modern day stock market.The thought of stock markets came to India in 1875, when Bombay Stock Exchange (BSE) was established as The immanent Share and Stockbrokers Association, a involuntary non-profit making association. BSE is the oldest in Asia. Presently India has about 10,000 listed companies, the largest number of listed companies in the man. Stock exchanges in India can be categorized as 1) Voluntary Associations such as Bombay, Indore and Ahmedabad, 2) overt limited companies such as Calcutta and Delhi, and 3) Guarantee companies such as Hyderabad, Madras and Bangalore. Besides BSE, Indias other major stock exchange is National Stock Exchange (NSE) that was promoted by leading financial institutions and was established in April 1993. straight off, these global stock exchanges have fuck off premier institutions and are highly efficient, computerized organizations that have fostered the growth of an open, global securities market. instantly India boasts 23 regional Stock Exchanges along with BSE and NSE.RESEARCH METHODOLOGYThe research has been done by selecting the companies which are the representative of a particular sector on the basis of overall market capitalization, stocks having the highest fluidity and turnover both on the NSE and BSE. A caution was thus taken and by thorough approach shot the best companie s were selected so as to portray a genuine picture of the sector. With the help of SPSS Package and using the quantitative techniques, the statistical compend has been done.The following analysis has been done for all the 8 companiesFundamental analysis. future growth and earnings analysis.statistical analysis.Technical analysis.ROLE OF STOCK EXCHANGES IN THE ECONOMYThe Stock Exchange provides companies with the facility to raise capital for expansion through marketing shares to the investiture public.Mobilising Savings for InvestmentWhen people draw their rescues and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in unused deposits with banks, are mobilised and redirected to promote commerce and industry.Redistribution of WealthBy giving a wide spectrum of people a chance to buy shares and therefore acquire part-owners of profitable enterprises, the stock market helps to reduce large income inequali ties because many people get a chance to share in the gelt of business that were set up by other people.Improving Corporate GovernanceBy having a wide and varied desktop of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders. It is apparent that generally, public companies tend to have better management records than private companies.Creates Investment Opportunities for Small InvestorsAs contrasted to other businesses that require huge capital outlay, investing in shares is open to both the large and small investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides an extra source of income to small savers. governance Raises Capital for Development ProjectsThe Government and even local regime like municipalities may see to borrow money in order to finance huge infrastructure projects such as sewerage and water treatment works or housing es tates by selling another category of shares known as Bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them. When the Government or Municipal Council gets this alternative source of funds, it no longer has the need to overtax the people in order to finance development.Barometer of the EconomyAt the Stock Exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general repoint signs of stability. Therefore the movement of share prices can be an index finger of the general trend in the economy. With countries travel away from socialistic approach and towards globalization of their economies, the role and importance of Stock Exchanges has gone up considerably. Today Stock Exchanges depict the financial position of the economy of a country.INVESTMENST SCENAREOIn closed economies only the Govt. has the touch on responsibility and discretion of in vestment in miscellaneous projects in the country. No private parties were allowed to invest in any venture. However, countries where mixed economy exist are liberal to the extent of giving permission to nigh private parties for investment in nearly selected sectors. However, countries which adopted globalization make their policies liberal enough to give private players permission to invest and run in any sector of their wish.Globalization has made the world boundary less where free flow of labour, capital exists among member countries. mutualness among countries has inclined the drive a real momentum.Seeing the robust growth that some of the Asian countries registered sincerely stunned the other nations which had closed economy. These nations which adopted globalization being the first runners were called as Asian Tigers. umteen followed the suit. Few countries followed the path of economic reforms with an anticipation of the prospective growth while the others due to some economic compulsions. A few countries like India were in real soup with acute financial crisis and were not in a position of running the socialistic approach anymore. A balance of payments crisis at the time undecided the way for an International fiscal Fund (IMF) program that led to the adoption of a major reform package. It went ahead with globalization and reform process in a step by step approach.Countries realizing that only domestic investments and resources can not be relied upon for rapid growth in industrialization and economy, red carpeting treatment was precondition to foreign investors.Opening up of economies unseals the doors to the investors from other countries to invest in each others countries. These investments come in two forms, i.e, FDI ( unknown curb Investment) and FII (Foreign Institutional Investment.FII (Foreign Institutional Investor) is an investor or investment fundthatis from or registered in a country outside of the one in which it is rate of flow lyinvesting. Institutional investorsinclude hedge funds, insurance companies, pension funds and mutual funds. They invest in various companies through Stock Exchange. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. Sub-account includes those foreign corporates, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII.Where as FDI (Foreign Direct Investment) is a component of a countrys national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investmen t into the stock markets. Foreign direct investment is thought to be more effective to a country than investments in the equity of its companies because equity investments are potentially hot money which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.Foreign Investors always pick FII route than FDI route since, the route of investing in stocks is easy and more liquid with less risk knobbed. Investors can take away their money as and when they need by making short term bucks. If we see from govts perspective, FII means incoming of a lot of foreign exchange into the country which boosts the Forex reserve. Where as Govt. is disposed(p) to get more FDI than FII as FDI helps setting up manufacturing or function industry thereby speech foreign exchange, employing people, business by ancillary industries and tax to govt treasury.Countries across the globe are formulating policies to attract more FDI and FII.Countries like India have modified its investment policies to make it conducive for foreign investment.REGULATORY MECHANISM FOR FII contactFollowing entities / funds are eligible to get registered as FII support financesMutual FundsInsurance CompaniesInvestment Trusts pious platitudesUniversity FundsEndowmentsFoundationsCharitable Trusts / Charitable SocietiesFurther, following entities proposing to invest on behalf of unsubtle base funds, are also eligible to be registered as FIIsAsset perplexity CompaniesInstitutional Portfolio ManagersTrusteesPower of attorney HoldersThe parameters on which SEBI decides FII applicators eligibility.Applicants track record, professional competence, financial soundness, experience, general reputation of rightfulness and integrity. (The applicant should have been in existence for at least one year)whether the applicant is registered with and regulated by an appropriate Foreign regulatory Authority in the same capacity in which the application is filed wi th SEBIWhether the applicant is a fit worthy person.As the FIIs take the route of investing in Stocks etc through stock exchange, they have to be carry by the SEBI guidelines. SEBI generally takes seven working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI.In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI.Which financial Instruments are easy for FII investmentSecurities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in IndiaUnits of mutual fundsDated Government SecuritiesDerivatives traded on a recognized stock exchangeCommercial papers.macroeconomic FACTORSEconomic growth and gross domestic productThe countrys gross domestic product at current market prices is intercommunicate at Rs. 46, 93,602 crore in 2007-08 by the Central Statistical Organization (CSO). Thus, in the current fiscal year, the size of the Indian economy at market exchange rate will cross US$ 1 one million million. At the nominal exchange rate (average of April-December 2007) GDP is projected to be US$ 1.16 trillion in 2007-08. Per capita income at nominal exchange rate is estimated at US$ 1,021. According to the World Bank system of classification of countries as low income, middle income and high income, India is still in the category of low income countries.The (per capita) GDP at acquire power parity is conceptually a better indicator of the telling size of the economy than the (per capita)GDP at market exchange rates. There are, however, practical difficulties in deriving GDP at PPP, and we now have two different estimates of the PPP conversion factor for 2005. Indias GDP at PPP is estimated at US$ 5.16 trillion or US$ 3.19 trillion depending on whether the old or new conversion factor is used. In the former case, India is the third largest economy in the world after the United States and China, while in the latter it is the fifth largest (behind Japan and Germany).GDP at factor cost at constant 1999-2000 prices is projected by the CSO to grow at 8.5 per cent in 2008-09. This represents a retardant from the unexpectedly high growth of 9.4 per cent, 9.6 per cent and 8.7 per cent respectively, in the previous three years. With the economy modernizing, globalizing and exploitation rapidly, some degree of cyclic fluctuation is to be expected.Per capita income and consumptionEconomic growth, and in particular the growth in per capita income, is a broad quantitative indicator of the progress made in improving public welfare. Per capita consumptionis another quantitative indicator that is useful for judging welfare improvement.The p ace of economic improvement has moved up considerably during the last fiver years (including 2007-08). Since 2003, there has been a sharp acceleration in the growth of per capita income, almost image to an average of 7.2 per cent per annum (2003-04 to 2007-08).This means that average income would now double in a decade, well indoors one generation, instead of after a generation (two decades). The growth rate of per capita income in 2007-08 is projected to be 7.2 per cent, the same as the average of the five years to the current year.Per capita private final consumption use of goods and services has increased in line with per capita income. The growth rate has almost dual to 5.1 per cent per year from 2003-04 to 2007-08, with the current years growth expected to be 5.3 per cent, marginally higher than the five year average. The average growth of consumption is slower than the average growth of income, primarily because of rising saving rates, though rising tax collection rates c an also widen the gap (during some periods). Year to year changes in consumption also suggest that the rise in consumption is a more gradual and cool it process, as any sharp changes in income tend to get adjust in the saving rate.Per capita income and consumption (in 1999-2000 prices)Year Income utilization 2007-08 Rs. Growth (%) Rs. Growth (%) 29,786 7.2 17,145 5.3Income is taken as GDP at market prices.Consumption is PFCE.Per capita is obtained by dividing these by population.MARKET EFFICIENCYHowever, market efficiency -championed in the efficient market assumption (EMH) formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all on tap(predicate) information on a particular stock and/or market. Thus, accord to the EMH, no investor has an advantage in predicting a return on a stock pricebecause no one has access to information not already available to everyone else. (To read more on behavioral finance.Th e inwardness of readiness Non-PredictabilityThe nature of information does not have to be limited to financial news and research alone indeed, information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. According to EMH,as prices respond only to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to out-profit anyone else.In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful.This random walk of prices, commonly speak aboutin the EMH school of thought, results in the affliction of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his or her money into an index fund.Anomalies The Challenge to EfficiencyIn the real world of investment, however, there are obvious arguments against the EMH. There are investors who have beaten(a) the market Warren Buffett, whose investment strategy focuses onundervalued stocks, made millions and set an example for numerous followers. There are portfolio managerswho have better track records than others, and there are investment houses with more renowned research analysis than others. So how can performance be random when people are clearly profiting from and beating the market? Counter arguments to the EMH state that consistent patterns are present. Here are some examples of some of the predictable anomalies thrown in the face of the EMHthe January effectis a patternthat shows higher returns tend to be get in the first month of the year blue Monday on Wall Street isasaying that discourages buying on Friday afternoon and Monday morning because of the we ekend effect, the tendency for prices to be higher on the day before and after the weekend than during the rest of the week.Studies in behavioral finance, which look into the effects of investor psychology on stock prices, also reveal that there are some predictable patterns in the stock market. Investors tend to buy undervalued stocks and sell overvalued stocks and, in a market of many participants, the result can be anything but efficient.Paul Krugman, MIT economics professor, suggests that because of the mass mentality of the trendy, short-run shareholder, investors pull in and out of the latest and hottest stocks. This results in stock prices being distorted and the market being inefficient. Soprices no longer reflect all available information in the market. Prices areinstead beingmanipulated by profit seekers.The EMH receiptThe EMH does not dismiss the possibility of anomalies in the market that result in the generation of superior loot. In fact, market efficiency does not require prices to be equal tofair value all of the time. Prices may be over- or undervalued only in random occurrences, so they eventually pass back to their mean values. As such, because the deviations from a stocks fair price are in themselves random, investment strategies that result in beating the market cannot be consistent phenomena.Furthermore, the hypothesis argues that an investor who masters the market does so not out of skill but out of luck. EMH followers say this is due to the laws of probability at any given time in a market with a large number of investors, some will outperform while other will remain average.How Doesa Market Become Efficient?In order for a market to become efficient, investors must perceive that a market is inefficient and possible to beat. Ironically, investment strategies think to take advantage of inefficiencies are actually the fuel that keeps a market efficient. A market has to be large and liquid. Information has to be widely available in te rms of accessibility and cost and released to investors at more or less the same time. Transaction costs have to be cheaper than the expected profits of an investment strategy. Investorsmust also have enough funds to take advaStock Market Volatility Around Market Shock 2005-09Stock Market Volatility Around Market Shock 2005-09Stock Market Volatility around market shocks event analysis during 2005-2009ACKNOWLEDGEMENTThe Project titled Stock Market volatility around market shock event analysis during 2005-09 is an effort to throw light on Performance Analysis. I have completed this project based on research, under the guidance of name of faculty, my faculty guide. I owe enormous intellectual debt to her as she augmented my knowledge in the field of volatility around market shocks and helped me learn about the topic and gave me valuable insight into the subject matter. My increased spectrum of knowledge in this field is the result of her constant supervision and direction that has he lped me to absorb relevant and high quality information.I would like to express my profound gratitude towards COLLEGE NAME for giving me the opportunity to undertake the above research.Last but not the least, I feel indebted to all those persons and organizations which have helped me directly or indirectly in successful completion of this study.DECLARATIONI Ghayasuddin a student of MBA of College Name respectively hereby declare that the Project Report on Stock Market volatility around market shock event analysis during 2005-09 is the outcome of my own work and the same has not been submitted to any other University/Institute for the award of any degree or any Professional diploma.OBJECTIVE OF THE STUDYTo find out the stock market volatility.To analyze the volatility measureTo understand the stock market and its importanceTo find out the reasons behind the downfall.EXECUTIVE SUMMARYA common problem plaguing the low and slow growth of small developing economies is the swallow financ ial sector. Financial markets play an important role in the process of economic growth and development by facilitating savings and channeling funds from savers to investors. While there have been numerous attempts to develop the financial sector, small island economies are also facing the problem of high volatility in numerous fronts including volatility of its financial sector. Volatility may impair the smooth functioning of the financial system and adversely affect economic performance. Similarly, stock market volatility also has a number of negative implications.One of the ways in which it affects the economy is through its effect on consumer spending (Campbell, 1996 Starr-McCluer, 1998 Ludvigson and Steindel 1999 and Poterba 2000). The impact of stock market volatility on consumer spending is related via the wealth effect. Increased wealth will drive up consumer spending. However, a fall in stock market will weaken consumer confidence and thus drive down consumer spending. Stock market volatility may also affect business investment (Zuliu, 1995) and economic growth directly (Levine and Zervos, 1996 and Arestis et al 2001). A rise in stock marketVolatility can be interpreted as a rise in risk of equity investment and thus a shift of funds to less risky assets. This move could lead to a rise in cost of funds to firms and thus new firms might bear this effect as investors will turn to purchase of stock in larger, well known firms. While there is a general consensus on what constitutes stock market volatility and, to a lesser extent, on how to measure it, there is far less agreement on the causes of changes in stock market volatility. Some economists see the causes of volatility in the arrival of new, unanticipated information that alters expected returns on a stock (Engle and Ng, 1993). Thus, changes in market volatility would merely reflect changes in the local or global economic environment. Others claim that volatility is caused mainly by changes in tradin g volume, practices or patterns, which in turn are driven by factors such as modifications in macroeconomic policies, shifts in investor tolerance of risk and increased uncertainty.The degree of stock market volatility can help forecasters predict the path of an economys growth and the structure of volatility can imply thatinvestors now need to hold more stocks in their portfolio to achieve diversification(Krainer, J, 20021).This case is more serious for small developing economies like Fiji who is attempting to deepen its financial sector by developing its stock market. Unlike mature stock markets of advanced economies, the stock markets of less developed economies like Fiji began to develop rapidly only in the last two decades and are sensitive to factors such as changes in the levels of economic activities, changes in the political and international economic environment and also related to the changes in the macro economic variables. Therefore, in this paper, we examine if Fijis S tock market is volatile and if so, then what is the role of interest rate being one of the most important macroeconomic variables on the volatility of stock returns. This article benefits from developments in the measurement of volatility through econometric techniques. Here, the regime-switching- ARCH model introduced by Engle (1982) and its extension, the GARCH model, (Bollerslev, 1986) is used to estimate the conditional variance of Fijis daily stock return from January 2001 to December 2005. This method allows for an objective determination of the presence of volatility. The results of estimates of stock return volatility is then related to changes in the interest rates.The second section of the paper provides an overview of Fijis stock market. The third section of the paper provides an exposition of the methodology used in this study. The fourth section provides a summary of the results and its discussion. The last section provides a summary and conclusion.INTRODUCTION TO THE I NDIAN ECONOMYIndia has struggled financially since independence, experiencing slow economic growth and economic setbacks due to climatic extremes or political disturbances. The country has been gradually transforming its economic base from agrarian to industrial and commercial. Under British rule in the 19th century, Indias cottage industries and thriving trade were virtually destroyed to make way for European manufactured goods, paid for by exports of agricultural products such as cotton, opium, and tea. Beginning in the late 19th century a modern industrial sector and an extensive infrastructure of railways and irrigation works were slowly built with British and Indian capital. Nevertheless, Indias economy stagnated during the last 30 or so years of British rule. At independence in 1947 India was desperately poor, with an aging textile industry as its only major industrial sector.Economic policy after independence emphasized central planning, with the government setting goals for and closely regulating private industry. Self-sufficiency was promoted in order to foster domestic industry and reduce dependence on foreign trade. These efforts produced steady economic growth in the 1950s, but less positive results in the two succeeding decades. By the early 1970s India had achieved its goal of self-sufficiency in food production, although this food was not equally available to all Indians due to skewed distribution and occasional shortfalls in the harvest.In the late 1970s the government began to reduce state control of the economy, making slow progress toward this goal. By 1991, however, the government still regulated or ran many industries, including mining and quarrying, banking and insurance, transportation and communications, and manufacturing and construction. Economic growth improved during this period, at least partially as a result of development projects funded by foreign loans.Indias low average growth rate up to 1980 was derisively referred to as the Hindu rate of growth, because of the contrasting high growth rates in other Asian countries, especially the East Asian Tigers. The economic reforms that surged economic growth in India after 1980 can be attributed to two stages of reforms. The pro-business reform of 1980 initiated by Indira Gandhi and carried on by Rajiv Gandhi, eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. The economic liberalisation of 1991, initiated by then Indian prime minister P. V. Narasimha Rao and his finance minister Manmohan Singh in response to a macroeconomic crisis did away with the Licence Raj (investment, industrial and import licensing) and ended public sector monopoly in many sectors, thereby allowing automatic approval of foreign direct investment in many sectors. Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party at the centre, although no party has yet tried to take on powerful lobbies like the trade unions and farmers, or contentious issues like labour reforms and cutting down agricultural subsidies.Liberalization in India paved the way for lots of foreign companies to come and setup heir base in India and for investors across the globe to invest money in Indian stock Market. Buoyant Indian Economy really raised eyebrows of many and investment in India keeps on surging high year after year touching new height. Since liberalization the foreign investors are on a spree of investment in India both in the form of FDI and FII. Stock Exchange being the only route for FIIs to come into India has been has been spearheading the task of giving investors a bright picture of the economy leading to brining more and more investment into the state. Hence, the vital role of Stock Exchange and the association of Stock Exchange with Foreign Investment can not be undermined.In the later part of the study, we will look into the details of how the Stock Exchange is associate d with FIIs and vice versa.ABOUT STOCK MARKET AND STOCK EXCHANGESA stock exchange or bourse is a corporation or mutual organization which provides the facilities for stock brokers to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities, as well as other financial instruments and capital events including the payment of income and dividends.In other words, Stock Exchanges are an organised marketplace, either corporation or mutual organisation, where members of the organisation gather to trade company stocks and other securities. The members may act either as agents for their customers, or as principals for their own accounts.Stock exchanges also facilitates for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerised. The trade on an exchange is only by members and stock broker do have a seat on the exchange.The securities traded on a stock exchange include shares issued by companies, unit trusts and other pooled investment products as well as bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only a stock broker is said to have a seat on the exchange.A stock exchange is often the most important component of a stock market. There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded.The initial offering of stocks and bonds to investors is by def inition done in the primary market and subsequent trading is done in the secondary market.Increasingly all stock exchanges are part of a global market for securities.200 years ago in front of Trinity church in East Manhattan in U.S oldest stock exchange called New York stock exchange emerged, when there were no paper money changing hands and there was not even the idea of stock, people trade silver for papers saying they owned shares in cargo .The trade flourished. During American Revolution, the colonial government needed money to fund its wartime operations. By selling bonds they did this. Bonds are pieces of paper a person buys for a set price, knowing that after a certain period of time they can exchange their bonds for a profit. Along with bonds, the first of the nations bank started to sell parts or shares of their own company to people in order to raise money. Thus they sell the part of the company to whoever wanted to buy it. This led to the emergence of the modern day stock market.The concept of stock markets came to India in 1875, when Bombay Stock Exchange (BSE) was established as The Native Share and Stockbrokers Association, a voluntary non-profit making association. BSE is the oldest in Asia. Presently India has about 10,000 listed companies, the largest number of listed companies in the world. Stock exchanges in India can be categorized as 1) Voluntary Associations such as Bombay, Indore and Ahmedabad, 2) Public limited companies such as Calcutta and Delhi, and 3) Guarantee companies such as Hyderabad, Madras and Bangalore. Besides BSE, Indias other major stock exchange is National Stock Exchange (NSE) that was promoted by leading financial institutions and was established in April 1993. Today, these global stock exchanges have become premier institutions and are highly efficient, computerized organizations that have fostered the growth of an open, global securities market.Today India boasts 23 regional Stock Exchanges along with BSE and NSE.RES EARCH METHODOLOGYThe research has been done by selecting the companies which are the representative of a particular sector on the basis of overall market capitalization, stocks having the highest liquidity and turnover both on the NSE and BSE. A caution was thus taken and by thorough approach the best companies were selected so as to portray a genuine picture of the sector. With the help of SPSS Package and using the quantitative techniques, the statistical analysis has been done.The following analysis has been done for all the 8 companiesFundamental analysis.Future growth and earnings analysis.Statistical analysis.Technical analysis.ROLE OF STOCK EXCHANGES IN THE ECONOMYThe Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.Mobilising Savings for InvestmentWhen people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed , or kept in idle deposits with banks, are mobilised and redirected to promote commerce and industry.Redistribution of WealthBy giving a wide spectrum of people a chance to buy shares and therefore become part-owners of profitable enterprises, the stock market helps to reduce large income inequalities because many people get a chance to share in the profits of business that were set up by other people.Improving Corporate GovernanceBy having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders. It is evident that generally, public companies tend to have better management records than private companies.Creates Investment Opportunities for Small InvestorsAs opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides an extra source of income to small savers.Government Raises Capital for Development ProjectsThe Government and even local authorities like municipalities may decide to borrow money in order to finance huge infrastructure projects such as sewerage and water treatment works or housing estates by selling another category of shares known as Bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them. When the Government or Municipal Council gets this alternative source of funds, it no longer has the need to overtax the people in order to finance development.Barometer of the EconomyAt the Stock Exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability. Therefore the movement of share prices can be an indicator of the general trend in the economy. With countries moving away from socialistic approach and towards global ization of their economies, the role and importance of Stock Exchanges has gone up considerably. Today Stock Exchanges depict the financial position of the economy of a country.INVESTMENST SCENAREOIn closed economies only the Govt. has the sole responsibility and discretion of investment in various projects in the country. No private parties were allowed to invest in any venture. However, countries where mixed economy exist are liberal to the extent of giving permission to some private parties for investment in some selected sectors. However, countries which adopted globalization made their policies liberal enough to give private players permission to invest and run in any sector of their wish.Globalization has made the world boundary less where free flow of labour, capital exists among member countries. Interdependence among countries has given the drive a real momentum.Seeing the robust growth that some of the Asian countries registered really stunned the other nations which had c losed economy. These nations which adopted globalization being the first runners were termed as Asian Tigers. Many followed the suit. Few countries followed the path of economic reforms with an anticipation of the prospective growth while the others due to some economic compulsions. A few countries like India were in real soup with acute financial crisis and were not in a position of running the socialistic approach anymore. A balance of payments crisis at the time opened the way for an International Monetary Fund (IMF) program that led to the adoption of a major reform package. It went ahead with globalization and reform process in a step by step approach.Countries realizing that only domestic investments and resources can not be relied upon for rapid growth in industrialization and economy, red carpet treatment was given to foreign investors.Opening up of economies unseals the doors to the investors from other countries to invest in each others countries. These investments come in two forms, i.e, FDI (Foreign Direct Investment) and FII (Foreign Institutional Investment.FII (Foreign Institutional Investor) is an investor or investment fundthatis from or registered in a country outside of the one in which it is currentlyinvesting. Institutional investorsinclude hedge funds, insurance companies, pension funds and mutual funds. They invest in various companies through Stock Exchange. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. Sub-account includes those foreign corporates, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII.Where as FDI (Foreign Direct Investment) is a component of a countrys national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially hot money which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.Foreign Investors always prefer FII route than FDI route since, the route of investing in stocks is easy and more liquid with less risk involved. Investors can take away their money as and when they need by making short term bucks. If we see from govts perspective, FII means incoming of a lot of foreign exchange into the country which boosts the Forex reserve. Where as Govt. is inclined to get more FDI than FII as FDI helps setting up manufacturing or service industry thereby bringing foreign exchange, employing people, business by ancillary industries and tax to govt treasury.Countries across the globe are formulating policies to attract more FDI and FII.Countries like India have modified its investment policies to make it conducive for foreign investment.REGULATORY MECHANISM FOR FII INVOLVEMENTFollowing entities / funds are eligible to get registered as FIIPension FundsMutual FundsInsurance CompaniesInvestment TrustsBanksUniversity FundsEndowmentsFoundationsCharitable Trusts / Charitable SocietiesFurther, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIsAsset Management CompaniesInstitutional Portfolio ManagersTrusteesPower of Attorney HoldersThe parameters on which SEBI decides FII applicants eligibility.Applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant s hould have been in existence for at least one year)whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBIWhether the applicant is a fit proper person.As the FIIs take the route of investing in Stocks etc through stock exchange, they have to be abide by the SEBI guidelines. SEBI generally takes seven working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI.In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI.Which financial Instruments are available for FII investmentSecurities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in IndiaUnits of mutual fundsDated Government SecuritiesDerivatives traded on a recognized stock exchangeCommercial papers.MACROECONOMIC FACTORSEconomic growth and GDPThe countrys GDP at current market prices is projected at Rs. 46, 93,602 crore in 2007-08 by the Central Statistical Organization (CSO). Thus, in the current fiscal year, the size of the Indian economy at market exchange rate will cross US$ 1 trillion. At the nominal exchange rate (average of April-December 2007) GDP is projected to be US$ 1.16 trillion in 2007-08. Per capita income at nominal exchange rate is estimated at US$ 1,021. According to the World Bank system of classification of countries as low income, middle income and high income, India is still in the category of low income countries.The (per capita) GDP at purchasing power parity is conceptually a better indicator of therelative size of the economy than the (per capita)GDP at mar ket exchange rates. There are, however, practical difficulties in deriving GDP at PPP, and we now have two different estimates of the PPP conversion factor for 2005. Indias GDP at PPP is estimated at US$ 5.16 trillion or US$ 3.19 trillion depending on whether the old or new conversion factor is used. In the former case, India is the third largest economy in the world after the United States and China, while in the latter it is the fifth largest (behind Japan and Germany).GDP at factor cost at constant 1999-2000 prices is projected by the CSO to grow at 8.5 per cent in 2008-09. This represents a deceleration from the unexpectedly high growth of 9.4 per cent, 9.6 per cent and 8.7 per cent respectively, in the previous three years. With the economy modernizing, globalizing and growing rapidly, some degree of cyclical fluctuation is to be expected.Per capita income and consumptionEconomic growth, and in particular the growth in per capita income, is a broad quantitative indicator of the progress made in improving public welfare. Per capita consumptionis another quantitative indicator that is useful for judging welfare improvement.The pace of economic improvement has moved up considerably during the last five years (including 2007-08). Since 2003, there has been a sharp acceleration in the growth of per capita income, almost doubling to an average of 7.2 per cent per annum (2003-04 to 2007-08).This means that average income would now double in a decade, well within one generation, instead of after a generation (two decades). The growth rate of per capita income in 2007-08 is projected to be 7.2 per cent, the same as the average of the five years to the current year.Per capita private final consumption expenditure has increased in line with per capita income. The growth rate has almost doubled to 5.1 per cent per year from 2003-04 to 2007-08, with the current years growth expected to be 5.3 per cent, marginally higher than the five year average. The average growth o f consumption is slower than the average growth of income, primarily because of rising saving rates, though rising tax collection rates can also widen the gap (during some periods). Year to year changes in consumption also suggest that the rise in consumption is a more gradual and steady process, as any sharp changes in income tend to get adjusted in the saving rate.Per capita income and consumption (in 1999-2000 prices)Year Income Consumption 2007-08 Rs. Growth (%) Rs. Growth (%) 29,786 7.2 17,145 5.3Income is taken as GDP at market prices.Consumption is PFCE.Per capita is obtained by dividing these by population.MARKET EFFICIENCYHowever, market efficiency -championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a sto ck pricebecause no one has access to information not already available to everyone else. (To read more on behavioral finance.The Effect of Efficiency Non-PredictabilityThe nature of information does not have to be limited to financial news and research alone indeed, information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. According to EMH,as prices respond only to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to out-profit anyone else.In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful.This random walk of prices, commonly spoken aboutin the EMH school of thought, results in the failure of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his or her money into an index fund.Anomalies The Challenge to EfficiencyIn the real world of investment, however, there are obvious arguments against the EMH. There are investors who have beaten the market Warren Buffett, whose investment strategy focuses onundervalued stocks, made millions and set an example for numerous followers. There are portfolio managerswho have better track records than others, and there are investment houses with more renowned research analysis than others. So how can performance be random when people are clearly profiting from and beating the market? Counter arguments to the EMH state that consistent patterns are present. Here are some examples of some of the predictable anomalies thrown in the face of the EMHthe January effectis a patternthat shows higher returns tend to be earned in the first month of the year blu e Monday on Wall Street isasaying that discourages buying on Friday afternoon and Monday morning because of the weekend effect, the tendency for prices to be higher on the day before and after the weekend than during the rest of the week.Studies in behavioral finance, which look into the effects of investor psychology on stock prices, also reveal that there are some predictable patterns in the stock market. Investors tend to buy undervalued stocks and sell overvalued stocks and, in a market of many participants, the result can be anything but efficient.Paul Krugman, MIT economics professor, suggests that because of the mass mentality of the trendy, short-term shareholder, investors pull in and out of the latest and hottest stocks. This results in stock prices being distorted and the market being inefficient. Soprices no longer reflect all available information in the market. Prices areinstead beingmanipulated by profit seekers.The EMH ResponseThe EMH does not dismiss the possibility of anomalies in the market that result in the generation of superior profits. In fact, market efficiency does not require prices to be equal tofair value all of the time. Prices may be over- or undervalued only in random occurrences, so they eventually revert back to their mean values. As such, because the deviations from a stocks fair price are in themselves random, investment strategies that result in beating the market cannot be consistent phenomena.Furthermore, the hypothesis argues that an investor who outperforms the market does so not out of skill but out of luck. EMH followers say this is due to the laws of probability at any given time in a market with a large number of investors, some will outperform while other will remain average.How Doesa Market Become Efficient?In order for a market to become efficient, investors must perceive that a market is inefficient and possible to beat. Ironically, investment strategies intended to take advantage of inefficiencies are actually the fuel that keeps a market efficient. A market has to be large and liquid. Information has to be widely available in terms of accessibility and cost and released to investors at more or less the same time. Transaction costs have to be cheaper than the expected profits of an investment strategy. Investorsmust also have enough funds to take adva