Abstract
This paper studies the global financial crisis and the effect of the crisis on stock market volatility by employing the GJR GARCH model. Daily closing price of indices in the National Stock Exchange (NSE) and the Mumbai Stock Exchange (BSE) from March 1st, 2005 to December 30th 2012 were considered for the analysis. The study covers two periods: pre-crisis (from March 01, 2005 to January, 30 2008) and post-crisis (from February 01, 2008 to December 30, 2012). To demonstrate the influence of crisis on stock returns volatility, a dummy variable was introduced in the GJR GARCH model. It is found that the volatility of mean returns had increased during the post crisis period as compared to the pre-crisis period. The findings also suggest that the recent financial crisis had an adverse impact on mean returns and the volatility in the Indian stock market.
Highlights
The sub-prime lending crisis in US economy spread across the entire world causing a global financial crisis
Closing price of indices in the National Stock Exchange (NSE) and the Mumbai Stock Exchange (BSE) from March 1st, 2005 to December 30th 2012 were considered for the analysis
The global financial crisis originated in the United States, spread all over the world, and had a drastic impact on the stock markets in the developed and the emerging economies
Summary
The sub-prime lending crisis in US economy spread across the entire world causing a global financial crisis. As a result of U.S sub-prime lending crisis, foreign institutional investors had to pull out their investments from the Indian stock market. The regulatory authorities in India were very much concerned about the impact of the global financial crisis on the Indian stock market. Many studies show that volatility stock markets across the world had increased after global financial crisis (Verma & Mahajan, 2012; Ali & Afzal, 2012; Adamu, 2010). Ali and Muhammad (2012) found recent financial crisis contributed to volatility in stock returns. Karunanayake and Brien (2010) state that recent global financial had no any significant impact on stock returns.
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