ASSIGNEMENT 1

NIFTY ENERGY
NIFTY Energy sector Index includes companies belonging to Petroleum, Gas and Power sectors.
The Index comprises of 10 companies listed on National Stock Exchange of India (NSE).

NIFTY Energy Index is computed using free float market capitalization method, wherein the
level of the index reflects the total free float market value of all the stocks in the index relative to
particular base market capitalization value. NIFTY Energy Index can be used for a variety of
purposes such as benchmarking fund portfolios, launching of index funds, ETFs and structured
products.

PORTFOLIO CHARACTERISTIC

Methodology Free Float Market Capitalization

No. of Constituents 10
Launch Date July 01, 2005
Base Date January 01, 2001
Base Value 1000
Calculation Frequency Online Daily
Index Rebalancing Semi-Annually

1 Year Performance Comparison of Sector Indices

Statistics
QTD YTD 1 YEAR 5 YEAR SINCE
INCEPTION
RETURN % 11.56 38.73 38.73 12.44 16.91

1 YEAR 5 YEAR SINCE

INCEPTION
STANDERED 14.22 19.07 25.95
DEVIATION

BETA(NIFTY 50) 0.94 1.02 0.96

CORELATION(NIFTY 0.60 0.78 0.85

50)

Fundamentals
P/E P/B DIVIDEND YEILD
16.29 2.0 1.7

Top constituents by weightage

COMPANY NAME WEIGHT(%)

RELIANCE INDUSTRIES LTD. 49.72

Oil & Natural Gas Corporation Ltd. 8.63
NTPC Ltd. 8.46
Power Grid Corporation of India Ltd. 6.89
Bharat Petroleum Corporation Ltd. 6.33
Indian Oil Corporation Ltd. 6.20
GAIL (India) Ltd. 5.03
Hindustan Petroleum Corporation Ltd. 4.89
Tata Power Co. Ltd. 2.65
Reliance Infrastructure Ltd. 1.19
 Index Methodology

Eligibility Criteria for Selection of Constituent Stocks:

i. Companies must rank within the top 500 companies by average free-float market capitalization and
aggregate turnover for the last six months.

ii. Companies should form a part of energy sector.

iii. The company's trading frequency should be at least 90% in the last six months.

iv. The company should have a listing history of 6 months. A company, which comes out with an IPO
will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3
month period instead of a 6 month period.

v. Final selection of 10 companies shall be done based on the free-float market capitalization of the
companies.

Index Re-Balancing:

Index is re-balanced on semi-annual basis. The cut-off date is January 31 and July 31 of each year, i.e.
For semi-annual review of indices, average data for six months ending the cut-off date is considered.
Four weeks prior notice is given to market from the date of change.

Index Governance:

A professional team at IISL manages NIFTY Energy Index. There is a three-tier governance structure
comprising the Board of Directors of IISL, the Index Policy Committee and the Index Maintenance Sub-
Committee.
 ASSIGNMEMT 2

INDIA VIX
Abstact

The success of VIX introduced by CBOE has encouraged other markets to introduce implied volatility
index. In this context in India after introduction of options trading, in April 2008 India VIX was
introduced. India VIX captures the expected market volatility over the next 30 calendar days based on
Nifty Options. This paper examines the relationship by implementing Johanson's co-integration and
Granger causality methods between India VIX and Nifty index returns. As the causality of VIX return and
index return is an important determinant in prediction, this study is useful for understanding the behaviour
of India VIX and helps policymakers in the design of appropriate instruments based on India VIX for
hedging and risk management.

Introduction

Volatility in financial markets is the degree of fluctuation in asset prices. The volatility in financial
market is not necessarily a bad thing but fundamentally justified volatility can form the basis for efficient
price discovery in the underlying asset. Financial market volatility has the continuous and clustering
character resulting in large variation in the security prices, which lead to fluctuation in realised returns.
There is a strong relationship between volatility and market performance. Volatility tends to decline as the
stock market rises and increase as the stock market falls. When volatility increases, risk increases and
returns decrease. Thus existence of negative correlation between volatility and asset return can be
observed. Most of those researches are based on historical volatility modelling. As historical volatility
looks only at past return fluctuations it has less predicting capability for the future. In this context the
need for correct volatility prediction was felt and in 1993 CBOE has introduced Volatility Index (VIX)
based on S&P 100 stock index options. It is a measure of market expectation of volatility over a short-
term period and indicates the implied volatility as well as implied risk of the stock market. Since volatility
index looks into the future and it is derived from the option prices, it may offer important clues to the
investors by observing the sentiments of the option investors to buy and sell in the market. In India NSE
introduced India VIX with simple modification in the computation in April 2008. The change in the
computation methodology is carried in order to suit the microstructure design of NIFTY options order
book. India VIX captures the expected market volatility over the next 30 calendar days. It uses the best
bid and asks quotes of the out-of-the-money near and mid-month NIFTY option contracts traded on the
Derivatives segment of NSE. Thus market participants’ perception of volatility in the near term is
depicted from the disseminated real time data on India VIX on each trading day.

Review of literature

Volatility is being regarded as the measure of investor’s sentiment and volatility implied by options
prices represents market based estimate of future return volatility. The predictability ability of index
return by implied volatility index is being studied by different researchers. A negative andstatistically
significant relationship was being shown by Giot (2003). His study reveals that for S&P 100 index, there
exists asymmetric relationship as negative stock index returns yield bigger changes in VIX than positive
index returns. Corrado, et al. (2003) study the implied volatility indexes in “The Forecast Quality of
CBOE Implied Volatility Indexes”. The researchers find that the forecast quality of CBOE implied
volatilities for VIX has significantly improved. The research assessed the information content and
forecast quality of implied volatility. Statistical technologies of OLS Regressions and instrumental
variable regressions are used. The results suggest that the CBOE Implied Volatility indexes dominate
historical index volatility in providing forecasts of future price volatility for the S&P 100 and NASDAQ
100 stock indices. Alessandro (2007) examines whether VIX is an important factor influencing the S&P
500 future returns. The regression method adopted is based on dummy variables. The author finds that
VIX based strategy outperforms the long-only strategy on the same underlying index. This is a belief
shared by traders and market participants as opined by the author. The short term dynamic relation
between the S&P 500 (Nasdaq100) index return and change in implied volatility at both daily and
intraday level is studied by Hibbert, et al (2008). The study proposes a behavioural explanation as an
alternative to Leverage hypothesis and the Volatility feedback hypothesis. The empirical results indicate a
strong daily and intraday negative returnimplied volatility relation. The research further suggests that the
presence and magnitude of the negative relation and the asymmetry are closely associated with extreme
changes in the index returns and the strength of this relationship is consistent with the implied volatility
skew. Whaley (2009) in the study entitled “Understanding VIX” describes the VIX and its history and
purpose. The author examines the VIX relation to the stock market. The study tested and accepted the
proposition that the change in VIX rises at a higher absolute rate when the stock market falls than when it
rises. The literature attributes the introduction of VIX to Whaley (1993). Badshah (2009) in his paper
titled “Asymmetric Return-Volatility Relation, Volatility transmission and implied volatility indexes”
investigates the asymmetric volatility-return phenomenon using VIX, VXN, VDAX and VSTOXX. The
author further examines implied volatility transmissions across implied volatility indexes using Granger
Causality, generalized impulse response function and variance decomposition. The study found that there
are pronounced negative and asymmetric volatility-return relationships between each volatility index and
its underlying stock market index. It further reveals that there are significant spill over effects across the
volatility indexes and bi-directional causality running between the volatility indexes. Siripoulos, et al.
(2009) in his paper titled “Implied Volatility Indices – A review” studies the information content of
implied volatility indices across the world. The authors’ research findings suggest that implied volatility
indices include information about future volatility beyond that contained in past volatility. The study
further reveals that there is a statistically significant negative and asymmetric contemporaneous
relationship between implied volatility changes and the corresponding underlying equity index returns. In
his master thesis entitled “The secret life of Fear: Interdependencies among implied volatilities
represented by different stock volatility indices treated as assets”; Nousiainan (2010) investigates the
systemic interdependencies of selected volatility indices with underlying assets as major stock indices of
developed financial markets. The time period under study ranges from January 2000 to June 2009 thus
including normal market conditions and crises. The studies on India VIX are very scanty since it has less
data history. Mishra, et al. (2010) in their paper entitled “Global Financial Crisis and Stock Return
Volatility in India” the researchers examine the volatility of stock returns and the impact of Global
financial crisis. The author argues that “The stock market volatility has drastically increased in recent
days and economies are currently passing through a turbulent period, as reflected in all financial markets
and asset classes. The study of volatility is, therefore, imperative in an emerging market nation like India.
The paper examines the behaviour of time varying stock return volatility in India. Using S&P CNX Nifty
based daily stock returns for a period from March 2006 to March 2009 in GARCH class models; the
study concludes the persistence of stock return volatility and its asymmetric effect.” Debasis (2011)
examines the predictive ability of India VIX. In a NSE paper entitled “Some Preliminary Examination of
Predictive ability of India VIX”, the researcher examines the behaviour of India VIX. The author employs
Market-to-Book value of equity and market capitalization as controlling variables and document that
India VIX yields a positive and significant relationship with portfolio returns. The author suggests that
India VIX is a distinct risk factor, capable of predicting the price discovery mechanism of the market.
Padhi (2011) in a NSE working paper titled “On the linkages among selected Asian, European and US
Implied volatility Indices”, examines the implied volatility linkages. Their results suggest that the US
implied volatility index has substantial impact over the variations of other international implied volatility
indices. The authors’ research reveals that the selected volatility indices have no notable impact over
India VIX. The author surmises that this may be attributable to Indian markets lag in terms of integration
with the global financial system. The extant of literature has revealed a negative and asymmetric
relationship between implied volatility and its underlying asset in the developed markets. In the emerging
market like India, this study also exhibit the identical relationship as of in developed markets. Apart from
negative correlation the literature is silent about causality of VIX and Nifty return. Thus is there a causal
relationship exists between the India VIX and Nifty returns of emerging markets like India. If no causal
relationship is found, can this explain the theory of decoupling? Since the causality of VIX return and
index return is an important determinant in prediction. Therefore the present research is a further addition
to the existing works with regards to forecasting ability of India VIX.

Objective and Methodology:

The objective are to study on the India VIX and The data for this study are used from nse website to gets
its historical data and comparision with nifty 50.

Data Analysis
THE END

-BY AKASH PUJARI