Ajay Pandey

Towards Reform of Land Acquisition Framework in India

We bring out the fundamental and more important problems with the current framework of land acquisition in India, regulations on land and the functioning of land markets. We argue that reform is overdue and the current framework would be unsustainable in a democracy that is India. Current land prices are highly distorted owing largely to regulatory constraints and the process of takings. Land acquisition more than any other factor is the most important constraint on development and especially in infrastructure development. We bring out the core elements of the reform – the need to define “public purpose” ex-ante for compulsory acquisition of land, the measures that would allow the market price of land to play its correct role, and the approach to valuation. We also argue for an independent valuer when compulsory taking is involved and methods of valuation to ensure that the land owner including the farmer gets the correct value for this land in both compulsory acquisition and in voluntary sale. We also argue the need for a parallel non-compulsory framework for acquisition and develop the key elements of the same. We also bring out alternatives to physical acquisition of land especially in the context of infrastructure development in central places.

Market efficiency in Indian commodity futures markets

Purpose – In this paper, the authors aim to investigate the short‐run as well as long‐run market efficiency of Indian commodity futures markets using different asset pricing models. Four agricultural (soybean, corn, castor seed and guar seed) and seven non‐agricultural (gold, silver, aluminium, copper, zinc, crude oil and natural gas) commodities have been tested for market efficiency and unbiasedness.Design/methodology/approach – The long‐run market efficiency and unbiasedness is tested using Johansen cointegration procedure while allowing for constant risk premium. Short‐run price dynamics is investigated with constant and time varying risk premium. Short‐run price dynamics with constant risk premium is modeled with ECM model and short‐run price dynamics with time varying risk premium is modeled using ECM‐GARCH in‐Mean framework.Findings – As far as long‐run efficiency is concerned, the authors find that near month futures prices of most of the commodities are cointegrated with the spot prices. The coin...

Price and Volatility Spillovers Across North American, European and Asian Stock Markets: With Special Focus on Indian Stock Market

This paper investigates interdependence of fifteen world indices including an Indian market index in terms of return and volatility spillover effect. Interdependence of Indian stock market with other fourteen world markets in terms of long run integration, short run dependence (return spillover) and volatility spillover are investigated. These markets are that of are Canada, China, France, Germany, Hong-Kong, Indonesia, Japan, Korea, Malaysia, Pakistan, Singapore, Taiwan, United Kingdom and United States. Long run and short run integration is examined through Johansen cointegration techniques and Granger causality test respectively. Vector autoregressive model (VAR 15) is used to estimate the conditional return spillover among these indices in which all fifteen indices are considered together. The effect of same day return in explaining the return spillover is also modeled using univariate models. Volatility spillover is estimated through AR-GARCH in which residuals from the index return is used as explanatory variable in GARCH equation. Return and volatility spillover between Indian and other markets are modeled through bivariate VAR and multivariate GARCH (BEKK) model respectively. It is found that there is greater regional influence among Asian markets in return and volatility than with European and US. Japanese market, which is first to open, is affected by US and European markets only and affects most of the Asian Markets. Also, high degree of correlation among European indices namely FTSE, CAC and DAX is observed. US market is influenced by both Asian and European markets. Specific to Indian context, it is found that Indian market is not cointegrated with rest of the world except Indonesia. This may provide diversification benefits for potential investors. However, strong short run interdependence is found between Indian markets and most of the other markets. Indian and other markets like US, Japan, Korea, and Canada positively affect each others conditional returns significantly. Indian market also has significant effect on Malaysia, Pakistan, and Singapore return. This study found that there is significant positive volatility spillover from other markets to Indian market, mainly from Hong Kong, Korea, Japan, and Singapore and US market. Indian market affects negatively the volatility of US and Pakistan. It is interesting to note that Chinese and Pakistan markets are less integrated with other Asian, European and US markets.

Price Volatility, Trading Volume and Open Interest: Evidence from Indian Commodity Futures Markets

This paper empirically investigates the relationship between volatility and trading activity including trading volume and open interest, for agricultural, metals, precious metals and energy commodities in Indian commodity derivatives market. Trading volume and open interest are included in this paper to distinguish between speculators/day traders and hedgers. The relationship between volatility and trading activity is more important in emerging market context where derivatives markets are generally criticized for speculative activity and destabilizing effect on spot market. This study uses three different measures of volatility: (1) daily volatility measured by close-to-close returns, (2) non-trading volatility measured by close-to-open returns and (3) trading volatility measured by open-to-close returns. The contemporaneous as well as dynamic relationship between volatility and trading activity are investigated. Following Bessembinder and Senguin (1993), volume and open interest are divided into expected and unexpected components. The contemporaneous relationship between volatility and trading activity is investigated by augmented GARCH model where expected and unexpected components of trading activity (volume and open interest) are used as explanatory variables. This is also an empirical test of the Mixture of distribution hypothesis (MDH) in Indian commodity derivatives markets. The dynamic relationship across conditional volatility from GARCH (1,1), unexpected trading volume and unexpected open interest is examined by Granger Causality test in which trivariate VAR model is used. To obtain additional insights about the interaction between volatility, trading volume and open interest, variance decomposition and impulse response function are employed. We find positive and significant correlation between volatility and trading volume for all commodities under consideration. It is found that although volume parameters are significant, volatility is mainly explained through its own lagged values. For most of the commodities we find insignificant relationship between volatility and open interest. In Indian commodity futures market trading activity does not proxy for information. The results of dynamic relationship between volatility and trading activity show that only overnight volatility drives the trading volume but not open interest. This result is more prominent in non-agricultural commodities. We also find asymmetric relationship between trading volume and open interest. The lagged open interest affects volume positively but lagged volume affects open interest negatively. This result is also more prominent in case of non-agricultural metals.

The Dynamic Relationship between Price and Trading Volume: Evidence from Indian Stock Market

This study investigates the nature of relationship between price and trading volume for 50 Indian stocks. Firstly the contemporaneous and asymmetric relation between price and volume are examined. Then we examine the dynamic relation between returns and volume using VAR, Granger causality, variance decomposition (VD) and impulse response function (IRF). Mixture of Distributions Hypothesis (MDH), which tests the GARCH vs. Volume effect, is also studied between the conditional volatility and volume. The results show that there is positive and asymmetric relation between volume and price changes. Further the results of VAR and Granger causality show that there is a bi-directional relation between volume and returns. However, the results of VD imply weak dynamic relation between returns and volume which becomes more evident from the plots of IRF. On MDH, our results are mixed, neither entirely rejecting the MDH nor giving it an unconditional support.

Impact of the Introduction of Call Auction on Price Discovery: Evidence from the Indian Stock Market Using High-Frequency Data

Call markets are claimed to aggregate information and facilitate price discovery where continuous markets may fail. The impact of the introduction of call auction has not been found uniformly beneficial, possibly due to poor design or due to ‘thick market externalities’. This paper examines the reintroduction of opening call auction at the National Stock Exchange of India in 2010. The results suggest that the auctions attract very little volume, the intraday pattern of volume and volatility in the continuous market remains unchanged and a large fraction of price discovery, measured by the Weighted Price Contribution, still takes place in the first 15min of continuous market. However, the market synchronicity has improved after the introduction of the auction. Our findings suggest that the ability to attract volume in the call auction for effective price discovery depends on the institutional settings and the characteristics of liquidity supply in the market.

Efficient Subsidisation of Lpg: A Study of Possible Options in India Today (Based on a Report Commissioned by the Petroleum Federation of India)

The budget contained an announcement that the central government would actively explore the option of using an appropriate form of the ‘food stamps’ or an alternative scheme to improve the efficacy and reduce the cost of the current system of administration of food subsidies. The announcement provides an opportunity to discuss the issues of subsidy on account of LPG and device a system of subsidisation based on ‘LPG Stamps’ or some other scheme to improve the efficacy of subsidisation and remove the large distortions created by the current system. LPG subsidy has grown historically and has become quite high because of aggressive growth in connections and increase in per connection consumption in addition to rising input costs. Given that there is evidence that LPG subsidy has been ineffective in increasing penetration in rural and poorer households, there is a case for capping and targeting LPG subsidy. Otherwise it can explode over time unless new connection growth is curbed, which is indefensible. The best option to curtail LPG subsidy would be to eliminate it straight away. However, there are at least two factors which are likely to make it difficult. Firstly, the input costs are high (from a historical point of view). Secondly, the high input prices coupled with lack of preparatory ground work may result in political mobilization against the move. The next best option which sharply focuses on the deserving segment is direct subsidy to below poverty line families. These households may be given up to 8 coupons every year. Each coupon can be used for subsidy for a cylinder. A separation of the identification and issuance of coupon is critical to the success of this scheme. As clarified elsewhere in the study, by coupon we mean any technology which allows the target group to get a well-defined and secured entitlement. It could be paper coupons with security features or smart cards, using IT for identification and entitlements. Direct subsidy to BPL family through coupon would allow them to pay cash equal to retail price less the subsidy per coupon. This amount and a coupon would entitle them to get a cylinder. The coupon surrendered to the dealer would be in turn be surrendered by him to the Oil companies, who would pay equivalent cash to the dealer. In fact, dealer may get an additional compensation for the cost of accounting and administration. The BPL coupon holders may be allowed to trade the coupons as this would convert the LPG subsidy to income subsidy. Even if the transfer or trade is not allowed, it is bound to take place and the net effect of that would be sharing of subsidy between intended beneficiary and some intermediary. Targeting LPG subsidy to BPL consumers may encounter problems in improper identification about which Oil companies need to work closely with district/ local administration so as to proactively eliminate inappropriately classified consumers. Targeting BPL consumers for LPG subsidy also leaves open the possibility of non-BPL consumers taking connections in the name of BPL consumer and that of BPL consumers opting for multiple connections. Both problems are to some extent self limiting (due to conflict and due to connection charges) but warrant closer examination of new connections under BPL category. Coupon based direct subsidies require efficient administrative support associated with coupon distribution, appropriate documentation, coupon accounting, collection and cash reconciliation. Coupons have to be difficult to copy and print to prevent frauds etc. This can be ensured by printing of coupons at a security press, or by suitable IT enabled mechanisms. Irrespective of any method of LPG subsidy reduction, there is a need to examine the taxes built in currently estimated gross subsidy. The net subsidy to the consumers should be the basis of elimination otherwise the target is self-defeating (by being higher) and not justifiable (elimination of gross subsidy means moving from net subsidy to net tax regime). Even if the state governments continue to collect sales tax, the central government which also collects taxes and simultaneously bears subsidy should neutralize the subsidy estimate from central taxes. The state governments need to be persuaded to retain the current amount of sales tax (but at a lower rate) otherwise states get higher revenue and the price target goes up. In case the state governments were to pay truant on this issue, there is a need to explore whether differential issue prices can be used as a deterrent. Another issue which warrants closer examination is the impact of volatility of input costs on retail prices. Had the industry been competitive, this would not have been a major issue. Clearly, some oversight or regulation is required so that prices are changed at appropriate intervals and are still neither excessive nor too low. It would be appropriate to set up a regulator to review periodically review the input costs and allow changes. He may allow prices on the basis of average cost with a lag or may prescribe a band linked to input costs and may monitor the prices to prevent any abuse. The rationalisation of prices and of tax reform in this sector is long overdue. These need to be simultaneously pursued. It is possible for the entire sector to move towards a revenue neutral cenvat based tax regime. That in itself and the direct subsidization of kerosene and LPG through coupons is necessary to remove all the distortions. The ill effects of the distortions that result in misuse, diversion, revenue loss, and added environmental and governance problems can only be feasibility addressed by the movement away from price based subsidies to direct subsidies. Similarly kerosene subsidises if correctly targeted and administered can have large spillovers in the management of subsidies in LPG.

Whether Cross-Listing, Stock-Specific and Market-Wide Calendar Events Impact Intraday Volatility Dynamics? Evidence from the Indian Stock Market Using High-Frequency Data

Using high-frequency stock price data, we investigate the effect of various stock-specific and market-wide events on intraday volatility dynamics in the Indian market. Modeling intraday volatility dynamics using FFF regressions, we examine the effect of – (a) cross-listing, (b) weekends and holidays, (c) scheduled temporary trading halts, and (d) derivatives’ expiry day, on intraday volatility dynamics. We find that Indian stock market exhibits “reverse J” shaped intraday volatility with much higher intraday variation than what has been reported in other markets. The intraday variation is more in the case of large cap stocks relative to small cap stocks. Higher volatility is also observed in the first one-hour of trade after weekends, in the first half-an-hour after the holidays, in the last one-hour of trade before the weekends. Temporary scheduled trading halts cause the volatility to rise when the market re-opens. The stocks, cross-listed elsewhere, exhibit higher volatility in the first 45 minutes of trade relative to other stocks. Volatility of the stocks with derivative contracts increases in the last half-an-hour trade on the expiry day, the time period relevant for estimation of the settlement price of the derivative contracts, but not in other time intervals. While our results are mostly along the lines of previous findings, the use of high-frequency data allows us to locate precisely the time-intervals which are affected by the investigated calendar events.

Estimation of Bid-Ask Spread and Its Components in Indian Stock Market Using Trade Prices

In the absence of order-book data and limited information on quoted bid-ask spreads in the Indian stock market, this paper attempts to analyze the bid-ask spread in Indian market by estimating bid-ask spreads and its components from trade prices. The sample consists of tick-by-tick data for the time period January 2002 through to October 2008 of 160 stocks traded on the National Stock Exchange of India. We estimate implied bid-ask spreads and its components (adverse selection costs; combined inventory and order processing costs) using theoretical models. We find that all the models used in the study produce consistent estimates of bid-ask spreads and its components. In the Indian Stock Market, we find that the adverse selection cost and the combined order-processing and inventory-holding cost each account for approximately 50 percent of the bid-ask spread. We also find that the estimated bid-ask spreads are approximately 80 percent of the quoted bid-ask spreads. In our sample period, we find that the relative bid-ask spreads have decreased over the years.