volatility of stock market and gold prices
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VOLATILITY OFSTOCK
MARKET ANDGOLD PRICES
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What is Volatility?Volatility refers to the actual
current volatility of a financialinstrument for a specified period(for example 30 days or 90 days). It
is the volatility of a financialinstrument based on historical
prices over the specified period withthe last observation the most recentprice.
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What is Stock
Market Volatility?When the stock market goes upone day, and then goes down forthe next five, then up again, and
then down again, thats what youcall stock market volatility.
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As a concept, volatility measuresthe variability or dispersion about a
central tendency. In other words, itmeasures how for the current price
of an asset deviates from itsaverage past values
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The issues of volatility and risk
have become increasinglyimportant in recent times to :
financial practitioners
market participants
Regulators
researchers.
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Why do StockPrices Change?
Share prices change because of supply anddemand.
.
If Demand of a stock > Supply of a stock PriceRises
If Demand of a stock < Supply of a stock PriceFalls
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Volatility in the stock return is an integralpart of stock market with the alternating
bull and bear phases.
In the bullish market, the share pricessoar high and in the bearish market
share prices fall down.
These ups and downs determine thereturn and volatility of the stock market.
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Data is collected from BSE Sensex and
NSE Nifty for calculating return andvolatility.
Sensexis a basket of 30 constituentstocks representing a sample of large,
liquid and representative companies. Dueto its wide acceptance amongst the Indianinvestors, sensex is regarded the pulse of
the Indian stock market.
Niftyis a well diversified 50 stock indexaccounting for 24 sectors of the
economy.
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Return is calculated using logarithmicmethod as follows.
rt = (log pt-log pt-1)*100
Where
rt = Market return at the period t
Pt = Price index at day t
Pt-1 = Price index at day t-1 and
log = Natural log
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What causes
Volatility?A confluence of fears and events, it turnsout. Here are seven reasons for the wildride:
Fear factor
Double-dip worries
Europe uncertainty
Lack of political leadership
Computer trades are destabilizing
Forced selling
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What is a Stock
Market?A stock market which is also known asequity market is a public body in which
a free network of economictransactions occurs.
It is not a physical facility or secret body. Itis the place for the trading of stock or
shares of company and its derivatives atan agreeable price. These shares and
derivatives are securities that are listed ona stock exchange.
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A stock exchange isestablished to facilitate the
securities exchange betweenbuyers and sellers and these
activities provide amarketplace whether it is
virtual or physical.
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Examples of a fewStock Exchangesacross the globe:
New York Stock Exchange (biggest stock market inUS)
Toronto Stock Exchange (in Canada)
London Stock Exchange
Paris Bourse
JSE Limited
Nigerian Stock Exchange
Tokyo Stock Exchange
Bombay Stock Exchange
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Stock Market Crash
A stock market crash is a suddendramatic decline of stock prices
across a significant cross-section of astock market, resulting in a significant
loss of paper wealth. Crashes aredriven by panic as much as byunderlying economic factors.
There is no numerically specific definitionof a stock market crash but the termcommonly applies to steep double-digit
percentage losses in a stock market indexover a period of several days.
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Generally speaking, crashes usuallyoccur under the following conditions:
a prolonged period of rising stock prices
excessive economic optimism
a market where P/E ratios exceed long-term averages
extensive use of margin debtleverage by market participants.
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Wh i C di
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What is CreditCrunch?
A credit crunch (also known as a credit squeezeor credit crisis) is a reduction in the generalavailability of loans (or credit) or a sudden
tightening of the conditions required to obtain a
loan from the banks.
A credit crunch generally involves a reduction inthe availability of credit independent of a rise in
official interest rates. In such situations, the
relationship between credit availability andinterest rates has implicitly changed, such that
either credit becomes less available at any givenofficial interest rate, or there ceases to be a clear
relationship between interest rates and creditavailability (i.e. credit rationing occurs).
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Wall Street Crash of
1929The Wall Street Crash of 1929(October 1929), also known as
the Great Crash, and theStock Market Crashof 1929,
was the most devastating stockmarket crash in the history ofthe United States, taking into
consideration the full extent andduration of its fallout. The crash
signaled the beginning of the
10-yr Great Depression thataffected all Western
industrialized countries and didnot end in the United States
until 1947
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General Causes of
the CrashRampant over-speculation in market
People holding companies and
investment trusts (which by naturecreates debt)
Bursting of Bull market economic bubblein August 1929
Large bank loans could not be liquidated
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ac urs ay
On October 18, 1929 pries began to fallPanic stuck out on October 24 Black
Thursday after the announcements from
the senate
Record of12,894,650 shares weretraded
Major banks and investment companies
bought up great blocks of stocks to stopthe panic BUT
THEIR ATTEMPTS FAILED!!!
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Black Tuesday
Black Tuesday was a day of chaos.
The Dow Jones Industrial Average fell38 points to 260, a drop of 12.8%
Forced to liquidate their stocks becauseof margin calls, overextended investorsflooded the exchange with sell orders.
The glamour stocks of the age saw theirvalues plummet.
Across the two days, the Dow JonesIndustrial Average fell 23%.
Th G
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The GreatDepression
(1929-1939)Stock Market Crash
Thousands of Individual Investors
Ruined
Loss of Savings
Poverty and Panic
Less Spending and Demand
Unemployment
Wages Decrease
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Stock market falls in
2008Global markets saw record falls in 2008 as thefinancial turmoil and economic slowdown endedthe stock market boom.
Shanghai was one of the worst-hit majormarkets, ending the year 65% lower, which wasalso a record loss.
In New York, the Dow Jones was up slightly on
the day, but it has lost almost 34% of its value in2008, its worst year since 1931.
Japanese shares also suffered their biggestyearly decline, with the Nikkei dropping 42% asworld's second-largest economy slid into
recession.
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As a meltdown of the US housing
market led to a global slump inconsumer spending and industrialproduction, foreign firms withdrew
investments from Asia to repay debts
back home. In many cases, marketsthat had benefited most during theprevious bull-run were the worst
affected as it ended.
India's main index in Mumbai wasmore than halved.
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Impact of Global
Financial Crisis onIndia
Stock Market Crash
Depreciation of Indian Rupee
Liquidity Crunch in the Banking Sector
Impact on Indian Economic GrowthSlowdown in the Manufacturing Sector
Balance of Payments
n a s ra e
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n a s ra eCollapse
India escaped the direct adverse impactof the Great Recession of 2008-09, since
its financial sector, particularly itsbanking, is very weakly integrated with
global markets and practically unexposedto mortgage-backed securities. However,Indias real economy is increasingly
integrated into global trade and capital
flows. It thus did suffer secondround effects when the financial
meltdown morphed into a worldwideeconomic downturn.
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As seen in the above Figure, Indian exports fellin line with global trade flows. This shouldfirmly dismiss the decoupling myth for the
Indian economy. Collapsing foreign trade,capital flows, and exchange rate movementsall transmitted negative impacts to the Indianeconomy
Major Market Falls of
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Major Market Falls of2008
New York - down 33.84%
London - down 31.3%
Paris - down 42.7%
Frankfurt - down 40.4%
Mumbai - down 51.9%
Singapore - down 49.2%
Sydney - down 41.3%
Hong Kong - down 48.3%
Shanghai - down 65.2%
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GOLDThe yellow
metal
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Gold, the shiny yellowsparkling metal issupposed to be precious
and understandablyeveryone wants a piece ofit, so is it any wonder that
the gold price has alwaysbeen volatile.
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Regarded as a currency, a medium to barter, asign of prosperity, an investment and a
possession many would kill for
Useful in the many applications that surroundthe medical world and in electronic devices
Most non-reactive of all known metals
Almost indestructible and will never rust or gettarnished by the rigors of everyday life
Very delicate and in order to use in jewelry it
has to be mixed with other metals to sustainshape and withstand wear and tear
Very high electrical conductor
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VOLATILITY
OF GOLDPRICES
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The liberalisation of the gold sectorhas been made in stages:
Allowing a number of banks to importgold braking the monopoly of the State
Trading Corporations
Considerably reducing the import dutydestroying a lucrative parallel smuggling
channel
Allowing traders, manufacturers as wellas investors to trade in gold futures in
India itself.
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Prior to the introduction of liberalizationand globalization policies, gold prices in
India showed an increasing trend(Fig.1)
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There are several reasons gold has
high demand in India:
Security- Gold offers full security as longas it is retained by central banks. There isno credit risk attached to gold.
Gold is able to maintain its liquidity evenat times of crisis situations like highglobal inflation or political turbulence.
To build a diversified portfolio.
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Reasons for sharp
rise in gold prices inIndia
Increase in Global Spot Gold Prices (asthe commodity becomes dearer to thoselooking for safe havenduring times ofeconomic crisis
Appreciation of USD against INR
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If we look at the rolling standard deviation ofmonthly gold prices since 2000, the prices are
more volatile after July 2007 which is almost thesame time when the slow down started in USA as
a result of the sub-prime crisis (Fig.2).
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Gold prices have been on an uptick since2000, while the stock market declined
from 2000 to 2003 and then again in 2008(Fig.3).
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THANK YOU
SUBMITTED BY :-
Zara Fazili
Ashima Gupta
RadhikaAgarwal
Nadia Goodwin
Mehak Saluja