Vol 25, No 3; Article by P. Krishna Prasanna and Anish S. Menon, September 2013
The speed at which domestic as well as global news gets absorbed by the stock market prices and indices is an essential input parameter for investment decisions.
This study attempts to analyse the speed at which information gets incorporated into the various stock indices in India. Four alternate speed estimators viz., the AR (1) model, the ARMA (1, 1) model, the ARMA (1, X) model, and the cross-covariance estimator were calculated to estimate the rate at which information is adjusted. The lead-lag relationships between indices with varied characteristics were also analysed. The speed at which the benchmark indices such as the Sensex and the Nifty adjust to information increased during the study period, indicating an improvement in Indian stock market efficiency.
It was observed that the Sensex and the Nifty indices, the constituents of which are large capitalisation stocks, led the smaller indices till 2009. The speed of information adjustment in the Nifty and Sensex index series was not only higher but also improved consistently from 2005 till 2009 and had been sustained during the financial crisis period. But in the years 2010 and 2011, this pattern was disturbed, especially in the banking indices. The Bankex, which is composed exclusively of banking stocks, was the most affected index during the financial crisis, and its speed of information adjustment reduced substantially during this time period. The ARMA (1, X) model in which the MA (X) component was used to capture the effects of thin trading showed that thin trading has reduced considerably, which is quite natural considering the nature of the constituents of the indices in the study and the state of the Indian markets as a whole.
