volatility of stock market and gold prices

8/2/2019 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

volatility of stock market and gold prices

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