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Risk-Return Trade-Off in Indian Capital Market During Last Two Decades with Special Emphasis on Crisis Period

Sunita Narang () and V. K. Bhalla ()
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Sunita Narang: University of Delhi, India, Department of Computer Science, Acharya Narendra Dev College
V. K. Bhalla: University of Delhi, India, , Faculty of Management, North Campus

Annals - Economic and Administrative Series -, 2011, vol. 5, issue 1, 77-98

Abstract: This paper examines the risk-return relationship in Indian stock market using symmetric and asymmetric GARCH-in-mean (GARCH-M) models. First the standard GARCH-M model is used, next since variance is proxy for risk, we ascertain if there is any significant relation between asymmetric variance and return using TGARCH-M, EGARCH-M and Power GARCH models. The study uses daily data on popular index S&P CNX Nifty of National Stock Exchange, India, during a period of two decades from July, 1990 to November, 2010. Further the period of Asian crisis is covered during the pre-derivative period of a decade and sub-prime crisis is covered during the post-derivative period of a decade to see the behaviour of volatility and risk-return relationship. The results show that both the TGARCH-M and PGARCH-M models are good for Indian market conditions. The asymmetric models find strong evidence of time-varying, highly persistent and predictable volatility in Indian market. It establishes that return is positively related to risk in Indian market during all periods. The risk-return relationship is positive and significant only at higher lags that too in the presence of dummyfut (variable which takes value 1 after derivatives and 0 before it). Further during sub-period analysis we find that risk-return parameter is higher in magnitude in pre-derivative period compared to post-derivative period. In both periods both the crisis had negative effect on return and positive effect on volatility. The rise in volatility during Sub-prime crisis is sharper compared to during Asian crisis. The findings are useful for financial decision making.

Keywords: Conditional Volatility; Leverage effect; GARCH-in-mean; Risk-return relationship; Asian crisis; Sub-prime crisis (search for similar items in EconPapers)
Date: 2011
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