Description
This is a presentationdescribes impact of interest rate announcement on Indian stock market.
1
Flow of presentation
? ? ? ? ? ? ? ? ? ? ?
Introduction Review of literature Research Methodology Research Tools Testing of hypothesis Analysis – Rate decrease Analysis – Rate increase Overall impact Key observations Conclusion Investment Strategy
2
Introduction
? Market Efficiency
? Market efficiency does not require that the market price be equal to the true value at
every point in time. ? There is an equal chance that stocks are under or over valued at any point in time. ? No group of investors should be able to consistently find under or overvalued stocks.
? Three forms
? Weak-form efficiency ? Semi-strong form efficiency ? Strong-form efficiency
? Event Study
3
Review of Literature
? Event Studies in Economics and Finance , Craig MacKinlay
? The Efficient Market Hypothesis and its critics, Malkiel, B.G. ? The valuation effects of stock splits in NASDAQ, Lyroudi, K. & Dasilas,
A ? The impact of the Union Budget on the Indian Stock Market in terms of returns and volatility, Gurcharan, S., & Salony, K. ? Test the speed with which the bonus issue announcement contained information impounded in the share prices of IT companies and suggest investment strategies for the investors, Raja, M. & Sudhakar, J.C. ? The nexus between stock market and economic activity in India, Padhan, P.C.
4
Research Methodology
? Primary Research Objective ? To test the market efficiency of the Indian Stock Markets with respect to interest rate adjustments and examine the speed of adjustment of stock prices to the release of such information to investors. ? Secondary Research Objectives ? To analyze the reaction of the stocks comprising the BANKEX to interest rate adjustments announced by the RBI ? To compare the reaction of the stocks comprising the BANKEX to interest rate decrease and increase ? To suggest investment decisions based upon the above analysis
5
Research Tools
Identify the event Compute the daily returns on the SENSEX and BANKEX Stocks for the Estimation Window
Run a regression between SENSEX Returns and each of the BANKEX Stock returns to get the alpha and beta for each stock
Compute the expected returns for each stock for the Event Window
Calculate the Abnormal Returns for each stock
Compute the average abnormal returns for all the stocks put together and standardize it
Compute the Cumulative Average Abnormal Returns, plot a graph of this and check for any visible graphical pattern 6
Testing of hypothesis
Hypothesis 1: Testing Statistical significance of abnormal returns H0: The abnormal returns on the stocks are not significantly different from 0. H1: The abnormal returns on the stocks are significantly different from 0. (This will be tested using t test).
Hypothesis 2: Testing semi strong form efficiency H0: The Stocks comprising the BANKEX exhibit semi strong form efficiency H1: The stocks comprising the BANKEX do not exhibit semi strong form efficiency (This will be tested by observing the pattern of CAAR with time).
7
Analysis – Rate Decrease
Event date: 8th Dec. 2008
Cumulative Average Abnormal Returns
2.00% 0.00% -15-13-11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 -2.00% -4.00% -6.00% -8.00% -10.00%
Cumulative Average Abnormal Returns
-12.00%
8
Analysis – Rate Decrease
Event date: 20th Oct. 2008
Cumulative Average Abnormal Returns
0.00% -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 -5.00% -10.00%
-15.00%
-20.00% -25.00% -30.00%
Cumulative Average Abnormal Returns
9
Analysis – Rate Decrease
Event date: 21st April 2009
Cumulative Average Abnormal Returns
16.00% 14.00%
12.00%
10.00%
8.00%
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
Cumulative Average Abnormal Returns
10
Analysis – Rate Increase
Event date: 24th Jan 2006
Cumulative Average Abnormal Returns
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 -2.00% -4.00% -6.00% -8.00%
11
1
3
5
7
9 11 13 15
Cumulative Average Abnormal Returns
Analysis – Rate Increase
Event date: 31st Jan. 2007
Cumulative Average Abnormal Returns
5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -12 -9 -6 -3 0 3 6 9 12 15 Cumulative Average Abnormal Returns
-5.00%
12
Analysis – Rate Increase
Event date: 25th June 2008
Cumulative Average Abnormal Returns
10.00%
5.00% 0.00% -11 -5.00% -10.00% -15.00% -20.00% -9 -7 -5 -3 -1 1 3 5 7 9 11 Cumulative Average Abnormal Returns
13
Analysis – Rate Increase
Event date: 27th July 2010
Cumulative Average Abnormal Returns
6.00% 5.00% 4.00%
3.00% 2.00% 1.00% 0.00% -1.00% -2.00%
14
Cumulative Average Abnormal Returns
-15 -13 -11 -9 -7 -5 -3 -1
1
3
5
7
9 11 13 15
Analysis – Rate Increase
Event date: 25th Jan. 2011
Cumulative Average Abnormal Returns
0.00%
-15 -13 -11 -9 -7 -5 -3 -1 -1.00% -2.00% -3.00% -4.00% Cumulative Average Abnormal Returns 1 3 5 7 9 11 13 15
-5.00%
-6.00% -7.00%
15
Overall Impact
Rate Decrease
CUMULATIVE AVERAGE ABNORMAL RETURNS
10.00%
8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -15 -13 -11 -9 -4.00% -6.00% -8.00% -10.00% CUMULATIVE AVERAGE ABNORMAL RETURNS -7 -5 -3 -1 1 3 5 7 9 11 13 15
•CAAR has fallen in the post event period. •This shows that the Indian Stock Markets are not semi-strong-form efficient. •The news of rate decrease may not have been factored into the stock prices prior to event announcement.
16
Overall Impact
Rate Increase
CUMULATIVE AVERAGE ABNORMAL RETURNS
3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
CUMULATIVE AVERAGE ABNORMAL RETURNS
-5.00%
-6.00%
•CAAR has begun decreasing from the pre event period starting from day -6 and continued beyond the event date upto day +9 before returning to pre event levels. •This also shows that the Indian Stock Markets are not semistrong-form efficient.
17
Key Observations
Both rate decrease and rate increases are seen negatively by the market with a reduction in the CAAR around the event date. No major difference in the trend of CAAR in those cases where reverse repo rate has also been adjusted in addition to repo
However, in the case where CRR was adjusted in addition to the repo rate, there is a significant drop in the CAAR. (See event date 25/06/2008) In the scenario when the RBI announced a rate adjustment which was not in line with the market expectations, the banking stocks reacted severely with a sharp fall in CAAR (See event date 20/10/2008) The reaction of banking stocks to interest rate adjustments is irrespective of the condition of the economy.
18
Conclusion
? Results show a significant negative market reaction prior to and post
the announcement of both increases and decreases in the repo rate. ? Impact of the announcements, either decrease or increase in the rates has not been consistent ? We can see vast fluctuations between the various events. ? Moreover, the Indian Markets do not exhibit semi-strong-form efficiency.
19
Investment Strategy
? We clearly see that there is volatility in the stock market prior & post
announcement of adjustment of interest rates by RBI. ? BANKEX stocks react negatively to both interest rate increase & decrease. ? Good investment opportunity for those traders & big investors, looking for a short term gain. Timing is very important in these events
20
21
doc_697411089.pptx
This is a presentationdescribes impact of interest rate announcement on Indian stock market.
1
Flow of presentation
? ? ? ? ? ? ? ? ? ? ?
Introduction Review of literature Research Methodology Research Tools Testing of hypothesis Analysis – Rate decrease Analysis – Rate increase Overall impact Key observations Conclusion Investment Strategy
2
Introduction
? Market Efficiency
? Market efficiency does not require that the market price be equal to the true value at
every point in time. ? There is an equal chance that stocks are under or over valued at any point in time. ? No group of investors should be able to consistently find under or overvalued stocks.
? Three forms
? Weak-form efficiency ? Semi-strong form efficiency ? Strong-form efficiency
? Event Study
3
Review of Literature
? Event Studies in Economics and Finance , Craig MacKinlay
? The Efficient Market Hypothesis and its critics, Malkiel, B.G. ? The valuation effects of stock splits in NASDAQ, Lyroudi, K. & Dasilas,
A ? The impact of the Union Budget on the Indian Stock Market in terms of returns and volatility, Gurcharan, S., & Salony, K. ? Test the speed with which the bonus issue announcement contained information impounded in the share prices of IT companies and suggest investment strategies for the investors, Raja, M. & Sudhakar, J.C. ? The nexus between stock market and economic activity in India, Padhan, P.C.
4
Research Methodology
? Primary Research Objective ? To test the market efficiency of the Indian Stock Markets with respect to interest rate adjustments and examine the speed of adjustment of stock prices to the release of such information to investors. ? Secondary Research Objectives ? To analyze the reaction of the stocks comprising the BANKEX to interest rate adjustments announced by the RBI ? To compare the reaction of the stocks comprising the BANKEX to interest rate decrease and increase ? To suggest investment decisions based upon the above analysis
5
Research Tools
Identify the event Compute the daily returns on the SENSEX and BANKEX Stocks for the Estimation Window
Run a regression between SENSEX Returns and each of the BANKEX Stock returns to get the alpha and beta for each stock
Compute the expected returns for each stock for the Event Window
Calculate the Abnormal Returns for each stock
Compute the average abnormal returns for all the stocks put together and standardize it
Compute the Cumulative Average Abnormal Returns, plot a graph of this and check for any visible graphical pattern 6
Testing of hypothesis
Hypothesis 1: Testing Statistical significance of abnormal returns H0: The abnormal returns on the stocks are not significantly different from 0. H1: The abnormal returns on the stocks are significantly different from 0. (This will be tested using t test).
Hypothesis 2: Testing semi strong form efficiency H0: The Stocks comprising the BANKEX exhibit semi strong form efficiency H1: The stocks comprising the BANKEX do not exhibit semi strong form efficiency (This will be tested by observing the pattern of CAAR with time).
7
Analysis – Rate Decrease
Event date: 8th Dec. 2008
Cumulative Average Abnormal Returns
2.00% 0.00% -15-13-11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 -2.00% -4.00% -6.00% -8.00% -10.00%
Cumulative Average Abnormal Returns
-12.00%
8
Analysis – Rate Decrease
Event date: 20th Oct. 2008
Cumulative Average Abnormal Returns
0.00% -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 -5.00% -10.00%
-15.00%
-20.00% -25.00% -30.00%
Cumulative Average Abnormal Returns
9
Analysis – Rate Decrease
Event date: 21st April 2009
Cumulative Average Abnormal Returns
16.00% 14.00%
12.00%
10.00%
8.00%
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
Cumulative Average Abnormal Returns
10
Analysis – Rate Increase
Event date: 24th Jan 2006
Cumulative Average Abnormal Returns
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 -2.00% -4.00% -6.00% -8.00%
11
1
3
5
7
9 11 13 15
Cumulative Average Abnormal Returns
Analysis – Rate Increase
Event date: 31st Jan. 2007
Cumulative Average Abnormal Returns
5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -12 -9 -6 -3 0 3 6 9 12 15 Cumulative Average Abnormal Returns
-5.00%
12
Analysis – Rate Increase
Event date: 25th June 2008
Cumulative Average Abnormal Returns
10.00%
5.00% 0.00% -11 -5.00% -10.00% -15.00% -20.00% -9 -7 -5 -3 -1 1 3 5 7 9 11 Cumulative Average Abnormal Returns
13
Analysis – Rate Increase
Event date: 27th July 2010
Cumulative Average Abnormal Returns
6.00% 5.00% 4.00%
3.00% 2.00% 1.00% 0.00% -1.00% -2.00%
14
Cumulative Average Abnormal Returns
-15 -13 -11 -9 -7 -5 -3 -1
1
3
5
7
9 11 13 15
Analysis – Rate Increase
Event date: 25th Jan. 2011
Cumulative Average Abnormal Returns
0.00%
-15 -13 -11 -9 -7 -5 -3 -1 -1.00% -2.00% -3.00% -4.00% Cumulative Average Abnormal Returns 1 3 5 7 9 11 13 15
-5.00%
-6.00% -7.00%
15
Overall Impact
Rate Decrease
CUMULATIVE AVERAGE ABNORMAL RETURNS
10.00%
8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -15 -13 -11 -9 -4.00% -6.00% -8.00% -10.00% CUMULATIVE AVERAGE ABNORMAL RETURNS -7 -5 -3 -1 1 3 5 7 9 11 13 15
•CAAR has fallen in the post event period. •This shows that the Indian Stock Markets are not semi-strong-form efficient. •The news of rate decrease may not have been factored into the stock prices prior to event announcement.
16
Overall Impact
Rate Increase
CUMULATIVE AVERAGE ABNORMAL RETURNS
3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
CUMULATIVE AVERAGE ABNORMAL RETURNS
-5.00%
-6.00%
•CAAR has begun decreasing from the pre event period starting from day -6 and continued beyond the event date upto day +9 before returning to pre event levels. •This also shows that the Indian Stock Markets are not semistrong-form efficient.
17
Key Observations
Both rate decrease and rate increases are seen negatively by the market with a reduction in the CAAR around the event date. No major difference in the trend of CAAR in those cases where reverse repo rate has also been adjusted in addition to repo
However, in the case where CRR was adjusted in addition to the repo rate, there is a significant drop in the CAAR. (See event date 25/06/2008) In the scenario when the RBI announced a rate adjustment which was not in line with the market expectations, the banking stocks reacted severely with a sharp fall in CAAR (See event date 20/10/2008) The reaction of banking stocks to interest rate adjustments is irrespective of the condition of the economy.
18
Conclusion
? Results show a significant negative market reaction prior to and post
the announcement of both increases and decreases in the repo rate. ? Impact of the announcements, either decrease or increase in the rates has not been consistent ? We can see vast fluctuations between the various events. ? Moreover, the Indian Markets do not exhibit semi-strong-form efficiency.
19
Investment Strategy
? We clearly see that there is volatility in the stock market prior & post
announcement of adjustment of interest rates by RBI. ? BANKEX stocks react negatively to both interest rate increase & decrease. ? Good investment opportunity for those traders & big investors, looking for a short term gain. Timing is very important in these events
20
21
doc_697411089.pptx