Exploring Movements of Stock Price Volatility in India

Analysis of stock market for the evaluation of risk has received a lot of attention both from policymakers and researchers. The quality of risk measures depends to a great extent on how well the econometric model captures the behavior of underlying asset. The main purpose of this study is to examine the nature of the volatility in the Indian stock market, namely, the BSE. Various volatility estimators and diagnostic tests suggest certain stylized facts about volatility such as volatility clustering and mean reverting. This study uses 16 years of daily data (July 1990-October 2006) on Sensex to capture these facts. Box-Jenkins methodology is used to identify Autoregressive Moving Average (ARMA) structure for error generating process. Lagrange Multiplier test indicates the presence of ARCH effect in the stock market. The study employs ARCH and GARCH models to study the behavior of volatility and concludes that GARCH (1, 1) model satisfactorily explains volatility clustering and its high persistence.