EconPapers    
Economics at your fingertips  
 

The impact of speculation upon volatility and market efficiency: The badla experience on the BSE

Ajay Shah ()

Finance from University Library of Munich, Germany

Abstract: On 12 March 1994, SEBI imposed new norms on trading in the Bombay Stock Exchange, and the effective consequence of this has been an elimination of {\em badla}, a form of forward trading. Without badla, the role of speculative traders on the BSE is diminished. This paper sets out to measure the impact of this elimination of speculative trading upon volatility on the BSE. We explore, and criticise, a variety of different methods of arriving at a conclusion on this question, and present an estimation strategy which exploits the unique opportunity to view this episode as a natural experiment. Our examination of daily unsystematic risk, which takes the value of 3\% in our sample on average, reveals that badla diminishes it by roughly 0.25 percentage points. The statistical significance of this estimate is weak, especially in the light of a qualitative argument suggesting that this estimate is biased upwards. Working with weekly returns data, badla seems to have no impact upon unsystematic risk. On the subject of market efficiency, we find that badla is slightly beneficial for short--horizon market efficiency: the non-forecastability of daily returns of A companies has worsened in the year following 12 March 1994. This effect is concentrated in the short horizon; the degree of forecastability of weekly returns has actually diminished slightly in the year after 12 March 1994.

JEL-codes: G (search for similar items in EconPapers)
Date: 1995-07-11
Note: Postscript. Also available as
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/9507/9507002.pdf (application/pdf)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/9507/9507002.ps.gz (application/postscript)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:9507002

Access Statistics for this paper

More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().

 
Page updated 2018-12-17
Handle: RePEc:wpa:wuwpfi:9507002