Volatility is an inherent part of any stock market. An increase in the volatility causes the risk involved in the investment to rise and consequently the investors shift their funds to other less risky financial assets.
Post 2008 crisis, while there was a recovery in the equities market in 2009-10, 2011 again has been a disappointment. In 2011, Stock Markets across the world have been under pressure due to global factors such as downgrading of the U.S. economy, fears of recession in the developed countries and the Euro zone Sovereign Debt Crisis. Apart from the global factors, the “SENSEX” - leading stock market indicator of the Indian Economy, has been under pressure due to domestic factors such as Scams (2G and Mining), sharp rise in the prices of commodities(gold and silver), high rate of inflation and the tight monetary policy of RBI.
Last month there was a report saying that India has been the most disappointing country among the BRIC nations. This has motivated me to do a study on the stock market of these countries and to find out which has been the most volatile.
A comparative study between the SENSEX (Bombay Stock Exchange), the SSE Composite Index (Shanghai Stock Exchange), the BOVESPA Index (Brazil) and the RTS Index (Russia) in terms of return and volatility over the time period 2006-2011 has been done. The ‘return’ was measured using logarithm method while ‘volatility’ was measured using standard deviation and Inter-day volatility was measured using ‘Parkinson Model (1980)’.
The Daily Average Return was calculated by taking the one year average of the logarithm returns for everyday in that year.
It is clear that the SENSEX has given lower returns than any other Index in the year 2011.
The results of year wise volatility are given in the table below:
The above table shows that RTSI had the highest volatility than any in the study period (except in 2007). Overall, though the performance of SENSEX in terms of return has been poor in the year 2011, it is quite clear that RTSI has been the most volatile of all of them. This clearly justifies a further study of these countries by taking other economic indicators into consideration, and give a clearer picture on which country has been the worst performing in terms of both return and risk – the two golden words of finance.
A research article by Mehul Bardia, PGP 2011-2013, IIM Raipur.
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