Journal Press India^®

Author Details ( * ) denotes Corresponding author

Purpose: The present research attempts the to estimate the dynamics of correlations of stock market returns between industry sectors in India using Asymmetric DCC GARCH model and tested efficient portfolios that generates returns above the market average. Design/Methodology/Approach: In this study we estimate the time varying correlations using the Asymmetric Dynamic Conditional Correlation (DCC) model of Cappielo, Engle and Sheppard (2006). This model is an introduction of asymmetric term in original DCC model of Engle (2002) as modified by Sheppard (2002) as a general model. Findings: The analysis shows that the importance of industry selection has been tested in this study using of 10 industry sectors for equity markets in India. It can further be argued that if industry selection is important so the correlations within the industry pairs are important for portfolio optimization purpose so as to enhance portfolio returns. Research Limitations: The main limitation of the study was that the data was based only on secondary sources. Managerial Implications: The implication for management is that portfolio can be optimised in Indian Stock market. Originality/Value: This study showcased the original work of the authors in Indian stock market.

Keywords

Portfolio Management, Portfolio Optimisation, Efficient Portfolios.

1. Banerjee, S. and Sankar, S. (2006), ‘Measuring Market Integration in Indian Stock Market’, Finance India, Vol.20, No.3, pp.895-912.
2. Black, A.J., Buckland, R., and Fraser, P. (2002), ‘Efficient Portfolio Diversification: Changing UK Stock Market Sector and Sub-Sector Volatilities, 1968-2000’, Managerial Finance, Vol.28, No.9, pp.26-43.
3. Cappiello, L., Engle, R., and Sheppard, K. (2006), Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns, Journal of Financial econometrics, Advance Access published online on September 25, 2006.
4. Datar, M.K. and Basu, P.K. (2004), ‘Financial Sector Reforms in India: Some Institutional Imbalances’, Conference Volume, Academy of World Business, Marketing and Management Development Conference, Gold Coast, Australia, July.
5. Elton, E.J., Gruber, M.J., and Padberg, M.W. (1976), Simple Criteria for Optimal Portfolio Selection, Journal of Finance, Vol.31, No.5, pp.1341-1357.
6. Engle, R. (2002), Dynamic Conditional Correlation – A Simple Class of Multivariate GARCH models, Journal of Business and Economic Statistics, Vol.20, pp.339-350.
7. Government of India (2007), Economic Survey 2006-07, New Delhi: Ministry of Finance, http://indiabudget.nic.in/es2006- 07/esmain.htm (viewed in September 2007).
8. Gupta, Rakesh and Basu, P.K. (2007), ‘Weak Form Efficiency in Indian Stock Markets’, International Business and Economics Research Journal, Vol.6, No.3, pp.57-64.
9. Naka, A., Mukherjee, T.K. and Tufte, D.R. (1999), ‘Macroeconomic Variables and the Undervalued Indian Stock Markets’, Financial Management Association Meeting, Orlando, October, http://business.uno.edu/econ/staff/naka.html (viewed in October 2007.
10. Poshakwale, S. (1996), Evidence on Weak form Efficiency and Day of the Week Effect in the Indian Stock Market, Finance India, Vol.10, No.3, pp.605-616.
11. Sharma, J.L. and Kennedy, R.E. (1977), ‘A Comparative Analysis of Stock Price Behaviour on the Bombay, London and New York Stock Exchanges’, Journal of Financial and Quantitative Analysis, September.
12. Wong, Wing-Keung, Agarwal, A., and Du, Jun (2005), ‘Financial Integration for India Stock Market, A Fractional Cointegration Approach’, Departmental Working Papers wp0501, National University of Singapore, Department of Economics, http:// nt2.fas.nus.edu.sg/ecs/pub/wp/wp0501.pdf (viewed in October 2007).