| dc.description.abstract | The Indian capital markets have been, during the past decade, a major medium of channelizing the savings to the productive sectors of the economy. The relaxation of government controls in the eighties has given a big boost to their growth. The capital issue to the public has grown from an average of Rs.100 crore p.a. in the sixties to around Rs. 3,900 crore during the year ended June 1988.
The theory of financial markets posits that the ability of the securities markets to speedily react to information which affects prices is a necessary precondition to their ability to efficiently allocate scarce resources in the economy. However, there are strong a priori arguments to assert that the Indian capital market may not be information ally efficient. These arguments range from governmental interference to the frequent closure of the exchanges.
Previous researchers in India have studied the response of share prices to corporate information releases to estimate the efficiency of the market. This study aims at understanding as to how efficient the Bombay Stock Exchange is to information about major political events and around dates of release of macroeconomic information.
Data
The daily closing prices of 45 securities and the Financial Express Equity Index for the eight - year period between 01.01.1979 and 31.12.1986 were collected. The Economic Times and The Financial Express of the period 1980¬86 were analyzed for their contents. Fifteen major political events were identified. These events were grouped into five categories. The dates of release of information about the credit policy announcements, Ml and
M3, WPI, etc. were noted.
Methodology and Results
1. Political Events: The speed of reaction (Hilmer and Yu, 1979, Ramachandran, 1985) of the market factor and the 45 scrips were computed. The mean and variance of the market factor's returns outside the period of study was used to draw the upper and lower bounds, similar to that of the Schwert Control Charts. If the market returns exceed the bounds around the event date, it signifies that the event had an impact on the market factor. For the individual securities, the effect of the market was abstracted using the methodology of Fama, Fisher, Jensen and Roll (1969). The upper and lower bounds were then drawn for the residual returns of these securities. The market factor and the individual securities behaviour prior to the occurrence of the event support the efficient markets hypothesis. However, the post - event adjustment time is on the higher side. It was examined whether this long post-event adjustment time translates into extra-normal profit possibility. It was found that for portfolios with large number of securities it would be difficult to earn extra - normal profits. But a portfolio with less number of securities, was found ex-post to earn extra-normal profits, even after transaction costs, around dates of political events.
2. Economic Events: The Volatility (Castanias, 1979) of the market factor and the 45 securities was computed around the dates of release of information about macro-economic variables. The volatility is measured as a ratio of the variance of security returns on the dates of release of the information and variances of security returns on all the other days {i.e. the dates on which this information was not released).
The market volatility is quite pronounced on the dates of release of information of the monetary variables, monetary policy changes and on the dates of budget releases.
The market is also volatile around trading days around the Diwali date. The market is however not volatile around the dates of release of WPI indicating that it has no information value.
Implications
The long post-event adjustment time around dates of political events indicates that the market may be relatively efficient for some kinds of events and not efficient for other kinds of events. It is suggested that the cause- effect relationship between any event and security prices can be viewed along two dimensions of complexity and clarity. If the relationship between an event and security prices are characterized by low complexity and high clarity, the market would possibly be more efficient for this event than for other events.
The high volatility of the security returns on dates surrounding and including Diwali negates the superstition hypothesis to explain such a volatile behaviour. It is suggested that the volatility around Diwali days could be due to the seasonality effect. | en |
