A Study on the Time-varying Volatility Connectedness Between the Sectors In the Indian Stock Market

The main purpose of this study is to examine the connectedness between the sectors in the Indian stock market for the period 01/2011 through 12/2020. It uses TVP-VAR (Time-Varying Parameter Vector Autoregression) based connectedness approach to measure the time-varying connectedness between sectors....

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Bibliographic Details
Published in:Montenegrin journal of economics 2022-07, Vol.18 (3), p.77-88
Main Authors: Hassan Chowdhury, Shah Saeed, Irfan, Mohammad
Format: Article
Language:English
Subjects:
Diversification
Economic crisis
Emerging markets
International finance
Investments
Portfolio management
Securities markets
Stochastic models
Stock exchanges
Volatility
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Summary:The main purpose of this study is to examine the connectedness between the sectors in the Indian stock market for the period 01/2011 through 12/2020. It uses TVP-VAR (Time-Varying Parameter Vector Autoregression) based connectedness approach to measure the time-varying connectedness between sectors. For the whole study period, almost 84% of the forecast error variance is explained by cross-sectional shocks within the network of Indian stock market sectors. Thus, own impact only accounts for 16% of the total variability, suggesting a robust overall dependence among the sectors. In general, results suggest that cyclical stocks are usually net transmitters of shocks, whereas non-cyclical stocks are net receivers. Important political events in the past had profound impact on the connectedness between the sectors in the Indian economy. For the portfolio managers, the main implication of the findings is that they should not overly depend on sectors to diversify their portfolios - rather, they should look at the relationship between individual stocks in this regard. And, for the policymakers, the implication is that they should keep in mind that any policy changes (shocks) to cyclical sectors should be cautiously dealt with.
ISSN:1800-5845
1800-6698
DOI:10.14254/1800-5845/2022.18-3.6