Chitrakalpa Sen

Anatomy of Global Stock Market Crashes

This book evaluates the successes, failures, and factors that influence the competition for public bus transport services. Using Germany as a case study, the author explains the dichotomous system of a market with licenses for commercial services, where operators are granted exclusivity, and licenses for non-commercial services, where supplementary direct subsidies are tendered out by public transport authorities. The empirical analysis is based on primary data usually not publicly available, and supplemented by numerous expert interviews.

Volatility, Long Memory, and Chaos: A Discussion on some “Stylized Facts” in Financial Markets with a Focus on High Frequency Data

Starting from the “Tulip Mania’ in the seventeenth century, financial sector crises have come in waves and in many different guises. While some of these remained confined to the regional boundaries, some acquired global dimension with the ultimate devastating impact on the real economy. The fact that the global economy has collapsed many a time following a financial panic has instigated the researchers, particularly after the recent global financial melt down, to explore the dynamics of global financial markets: the old issue of ‘finance-growth nexus’ is resurrected once again. The traditional school of the literature, however, is bifurcated on the issue. While one school perceives finance to be a ‘side show’ of growth, others believe in the considerable control that financial markets exercise on the real sector. The true nature and direction of the causality, however, is yet to be exposed. More recently, a parallel school of thought has developed that concentrate on the endogenous factors that generate dynamics within the stock market independent of the real sector. This growing body of the literature conjectures the global financial markets to be mostly deterministic, and in some cases, chaotic in nature. The markets are characterized by nonperiodic cycles and trends where volatility and fluctuations generate endogenously. The global markets, thus, are supposed to be inherently instable, or at best, stable on knife edge. Cycles and crashes are manifestations of this inherent instability. There is no determinate equilibrium in the market and no external shocks would be required to gear financial crises at regular interval. The implications of these are tremendous. A chaotic financial market puts efficient market hypothesis on trial, renders traditional asset pricing models useless, and makes long-term forecasting less reliable. The most devastating implication of the fact that the financial markets implode from within is perhaps for the developing markets as it makes government intervention ineffective. Hence, an introspection of financial market dynamics following this rather offbeat line of thought could be a researcher’s delight. The results obtained might lead to a reframing of old ideas and beliefs regarding financial market dynamics, boom and bust cycle, and predictability of financial crashes.

Indian Stock Market Volatility in Recent Years: Transmission from Global and Regional Contagion and Traditional Domestic Sectors

This study investigates volatility in Indian stock markets. Specifically, it looks for the possible volatility transmission channel for Indian stock market from the Indian sectoral developments as well as developments in the global market. SENSEX is used as the Indian market index and its response to overseas market indices like Dow Jones, FTSE, BVSP, MerVal, JKSE; further the relationship between SENSEX and domestic sectoral indices have also been examined. As it has been found, the volatility in the developed market indices Granger causes SENSEX volatility, showing a strong existence of a global contagion. SENSEX volatility is also related to some extent to the volatility of Jakarta Stock index, hinting towards some kind of regional contagion. Moreover, as the impulse response function shows, a shock in Dow Jones, Jakarta stock index and BVSP has profound effect on the SENSEX, (Dow Jones having the most important one). As for sources from its domestic sectors, capital goods and consumer durables are the most prominent contributors to the volatility of the SENSEX.

Greens—The Obvious Choice Over the Grays?

This chapter delves into an individual decision-making problem that bears significant social implications. While tagging along less-carbon investment path through increased investment in “green” projects is socially desirable in the modern era, its implementation is not so easy. The policy-makers, however, would sit comfortably if the imperative choice of the new “green” financial products turns out to be, in fact, obvious. This study explores specifically this issue in the context of an emerging market through examining whether given a choice between green and non-green projects, greens become the optimal choice of a rational investor. As is revealed by the study, the green (either completely or partially) portfolios dominate the available alternative gray portfolios. The green portfolios turn out to be the global minimum variance portfolio, and they dominate the gray in terms of the own-risk as well as the market risk. Even the probabilities of surviving crises are higher, and hence, hazard ratios are lower for the green portfolios. Thus, green is preferred to gray and more green is better than less green. Hence, following less-carbon investment path is the most rational and obvious choice for the investors in the Indian market.

Profits Are Forever: A Green Momentum Strategy Perspective

This chapter attempts to examine the possibility of receiving consistently above-average returns for two “pure” (100 % green, 100 % gray) and three “hybrid” (25 % green, 50 % green, and 75 % green) portfolios. A popular tool of investment decision making has been momentum trading strategies. This chapter makes use of suitable momentum trading strategy to examine the investment-worthiness of the green, part green, and gray portfolios. The empirical analysis starts with an examination of long-term memory in the portfolio returns. Both graphical as well as statistical results suggest that only 100 % green and 100 % gray portfolios exhibit significant long-term memory. The study delves deeper and investigates the presence of any possible trading strategy in the portfolio returns. As the result suggests, only 100 % green and 100 % gray portfolio returns are characterized by a long run moving average-based trading strategy. Most importantly, the 100 % green portfolio leads to a higher return than the 100 % gray portfolio, reinforcing the investment-worthiness of green assets.

Possible Investment Strategies in Indian Stock Market

This chapter explores the presence of possible and profitable investment strategies in the Indian stock market. The exploratory factor analysis used in Chap. 2 explored the presence of a distinct latent structure in the Indian stock market. Given the latent structures in the BSE and NSE, it is indeed possible for investors to design profitable investment strategies. Both risk-averse and risk-loving investors might find portfolios suitable for them based on different indicators such as return, risk-adjusted return, systematic, and unsystematic risk. The nature of such portfolios, however, has changed over time. The financial crisis of 2007–2008 has affected some sectors adversely, while some have been able to avoid the impact of the crisis. Some defensive sectors have emerged out of the crisis with an aggressive tenor. Portfolios in BSE and NSE moreover have some characteristics in common. Such discernable patterns in portfolio choice, however, will put Efficient Market Hypothesis on trial.

Trends in Indian Stock Market: Scope for Designing Profitable Trading Rule?

This chapter explores the latent structure in the Indian stock market, along with its sectors, around the financial crisis. To understand the market structure, the study makes use of exploratory factor analysis. It also tracks the factor scores along with the cycles in the respective indexes to scrutinize the underlying market behavior. Apart from looking for the latent structure, the chapter seeks to explore the following issues: How the market has behaved over the period of study? What are the trends at sectoral level? Are they similar, or otherwise to the market trends? Are the trends independent of the selection of the stock market exchanges and whether, and how financial crisis could affect such trends? The rationale behind such analyses is to see whether there has been any discernible change in the market structure before and after the shock. A clear behavioral pattern would hint toward an inefficient market and possible scope for designing profitable portfolio mix.

Stock Market Cycles and Volatility Regime Switch

This chapter initiates the empirical dissection of stock market crises by an analysis of price movements and isolates two prominent stock market cycles over the study period. While the first cycle occurred during 1998–2005, a discernible second cycle took place from 2006 to 2011. The chapter analyzes the global trends around these cycles and explores the possible presence of intra- and inter-regional association and/or global financial integration. The intrinsic nature of different crises is further analyzed and compared in terms of volatility regime switch models where we inquire whether financial crises inevitably take the form of a structural break and whether such breaks follow some discernible pattern across the markets. The second cycle, rather than the first one appears to be truly ‘global’ and is marked by strong financial integration at the global level. Regional associations are however, not so robust. The association between financial crises and volatility breaks has been ambiguous and has varied from cycle to cycle. Such associations have been stronger over the second cycle where financial market changes have almost taken the form of volatility regime switch.

Global Stock Market, Knife-Edge Stability and the Crisis

This chapter explores whether the global markets are intrinsically unstable following the line of a growing body of the literature and inquires the possible nonlinear, particularly chaotic nature of these markets. The study finds all the markets to be deterministic. While over the first cycle nineteen markets were chaotic, the number increases to twenty four during the second one. Thus stock markets are inherently unstable; or are, at best, stable on knife-edge. Cycles and crashes are manifestations of this inherent instability: norms rather than aberrations. There is no determinate equilibrium and no external shock will be required to gear financial crisis at regular intervals which, in an integrated financial world, will reverberate across the globe in no time. The findings have significant theoretical and policy implications. The relevant equations of motion underlying the nonlinear global stock market return, no doubt can be determined, but it would be nearly impossible to forecast beyond a short time frame. Policy prescriptions, based on the presumption of linearity are likely to be ineffective when applied on a system which is actually nonlinear. At the theoretical level, a chaotic stock market puts efficient market hypothesis on trial and requires reframing of traditional asset pricing models.

Crises and Latent Structure in the Global Stock Market

This chapter analyzes the stock market dynamics by exploring the latent structure in the global market, by classifying constituent markets in different categories. Once the structure is determined, the study attempts to answer a set of crucial and related questions namely, whether and how regional shocks lead to or transmit into global shock; in case of a purely regional shock, how do the regional markets behave? in case of a global shock, what is the nature of inter-regional and intra-regional stock market dynamics? And, finally, what is the source of volatility in these markets? The first stock market cycle has not been ‘global’ in true sense and was dominated by a single trend set by the combined group of the European and the American markets. The second phase was characterized by three distinct, dissociated structures. The European markets became the dominant group followed by the Asian and the American markets. Further presence of not so robust intra-regional associations offers immense scope for effective regional and global portfolio diversification. However, the fact that volatility has been consistently endogenous to each of these markets might warn us about the inherent instability of the global stock market.