ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Reforming the Risky Financial System

Other People's Money: The Real Business of Finance by John Kay; New York: Public Affairs, 2015; pp 352, $27.99 (hardcover).

FII Trading Activity and Intraday Volatility

This paper investigates whether the trading activity of foreign institutional investors adversely affects (intraday) volatility in the Indian stock markets. It reports that aggregate trading activity of FIIs dampens market volatility whereas aggregate trading activity of domestic investors exacerbates volatility. Further, the paper finds that positive shocks in aggregate trading activity have a greater impact than negative shocks; this asymmetry is stronger for aggregate domestic trades. Using a proprietary data set, the paper also relates individual stock volatility to tick-by-tick transaction volume, conditional on trader type and transaction type. The intraday results show that trading among FIIs does not increase stock volatility, but when FIIs sell to domestic clients or when domestic clients trade amongst themselves, volatility increases.

Are Listed Indian Firms Finance Constrained?

We formulate a simultaneous equations model and with the data of a panel of 600 Indian firms for the period 1991-92 to 1997-98 test the hypothesis of finance constraint. The firms are classified by the dividend pay-out ratio into high-cost and low-cost groups; a high dividend pay-out ratio implies a low cost of information faced by the firms and vice versa. In the context of developed countries, earlier researchers found that the firms in the high-cost group shows evidence of finance constraints and severity of the constraint goes down with the decrease in the cost of information. In our study we found that the firms with medium dividend pay-out ratios are constrained in the loans market so far as investment in fixed capital is concerned. This is quite a surprising result that requires careful explanation.

Dotty about the Markets

After floundering with measures, all more or less well known and much talked about, to step up the growth of the real economy, the government is now exercised with the task of pumping up the stock market. This is misplaced activism. Apart from ensuring transparent operations and preventing malpractice and any artificial liquidity squeeze, the government has little legitimate role to play in the stock market.

Volatility of Stock Returns

This paper investigates the volatility of stock returns in some Asian emerging markets in terms of the volatility of domestic and external factors. We found that both domestic macroeconomic variables and international variables are found to have explanatory power for stock return volatility. The evidence strongly suggests the presence of a significant contagion effect and integration of capital markets in this region. We also document that the role of government in terms of fiscal and monetary policy in the smooth functioning of the stock market is crucial in this region.
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