Stock Market Volatility Around Market Shock 2005-09

Stock Market Volatility Around Market Shock 2005-09 Stock Market Volatility around market shocks event analysis during 2005-2009 ACKNOWLEDGEMENT The 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 helped 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. DECLARATION I 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 STUDY To find out the stock market volatility. To analyze the volatility measure To understand the stock market and its importance To find out the reasons behind the downfall. EXECUTIVE SUMMARY A common problem plaguing the low and slow growth of small developing economies is the swallow financial 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 market Volatility 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 trading 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 un certainty. 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, 2002:1). 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 Stock 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 va riance 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 INDIAN ECONOMY India 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 ruli ng 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 associated with FIIs and vice versa.   ABOUT STOCK MARKET AND STOCK EXCHANGES A 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 definition 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. RESEARCH METHODOLOGY The 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 companies: Fundamental analysis. Future growth and earnings analysis. Statistical analysis. Technical analysis. ROLE OF STOCK EXCHANGES IN THE ECONOMY The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. Mobilising Savings for Investment When 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 Wealth By 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 Governance By 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 Investors As 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 Projects The 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 Economy At 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 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 SCENAREO In 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 closed 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 INVOLVEMENT Following entities / funds are eligible to get registered as FII: Pension Funds Mutual Funds Insurance Companies Investment Trusts Banks University Funds Endowments Foundations Charitable Trusts / Charitable Societies Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders The parameters on which SEBI decides FII applicants eligibility. Applicants track record, professional competence, financial soundness, experience, general reputation of fairness 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 with SEBI Whether 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 investment Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; Units of mutual funds; Dated Government Securities; Derivatives traded on a recognized stock exchange; Commercial papers. MACROECONOMIC FACTORS Economic growth and GDP: The 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 the relative 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 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 consumption: Economic 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 of 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 5.3 Income is taken as GDP at market prices. Consumption is PFCE. Per capita is obtained by dividing these by population. MARKET EFFICIENCY However, 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 stock pricebecause no one has access to information not already available to everyone else. (To read more on behavioral finance. The Effect of Efficiency: Non-Predictability The 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 Efficiency In 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 EMH:the January effectis a patternthat shows higher returns tend to be earned 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 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 Response The 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 Stock Market Volatility Around Market Shock 2005-09 Stock Market Volatility Around Market Shock 2005-09 Stock Market Volatility around market shocks event analysis during 2005-2009 ACKNOWLEDGEMENT The 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 helped 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. DECLARATION I 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 STUDY To find out the stock market volatility. To analyze the volatility measure To understand the stock market and its importance To find out the reasons behind the downfall. EXECUTIVE SUMMARY A common problem plaguing the low and slow growth of small developing economies is the swallow financial 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 market Volatility 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 trading 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 un certainty. 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, 2002:1). 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 Stock 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 va riance 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 INDIAN ECONOMY India 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 ruli ng 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 associated with FIIs and vice versa.   ABOUT STOCK MARKET AND STOCK EXCHANGES A 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 definition 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. RESEARCH METHODOLOGY The 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 companies: Fundamental analysis. Future growth and earnings analysis. Statistical analysis. Technical analysis. ROLE OF STOCK EXCHANGES IN THE ECONOMY The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. Mobilising Savings for Investment When 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 Wealth By 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 Governance By 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 Investors As 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 Projects The 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 Economy At 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 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 SCENAREO In 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 closed 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 INVOLVEMENT Following entities / funds are eligible to get registered as FII: Pension Funds Mutual Funds Insurance Companies Investment Trusts Banks University Funds Endowments Foundations Charitable Trusts / Charitable Societies Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders The parameters on which SEBI decides FII applicants eligibility. Applicants track record, professional competence, financial soundness, experience, general reputation of fairness 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 with SEBI Whether 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 investment Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; Units of mutual funds; Dated Government Securities; Derivatives traded on a recognized stock exchange; Commercial papers. MACROECONOMIC FACTORS Economic growth and GDP: The 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 the relative 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 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 consumption: Economic 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 of 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 5.3 Income is taken as GDP at market prices. Consumption is PFCE. Per capita is obtained by dividing these by population. MARKET EFFICIENCY However, 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 stock pricebecause no one has access to information not already available to everyone else. (To read more on behavioral finance. The Effect of Efficiency: Non-Predictability The 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 Efficiency In 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 EMH:the January effectis a patternthat shows higher returns tend to be earned 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 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 Response The 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