Chasing the black swan and the grey rhino: volatility asymmetries in the Indian stock market

What the paper says

Purpose This study aims to investigate the impact of volatility asymmetries and external shocks, including the global financial crisis of 2007 and the COVID-19 pandemic, on the returns and volatility of the stock market in the Indian context. Design/methodology/approach The data used is extensive, covering around 24 years of stock market activity in terms of prices and subsequent returns. To achieve the objectives, variants of conditional models that incorporate the effect of volatility asymmetries and external shocks have been estimated. Findings This study found that the asymmetric effect is significant, and due to both the global financial crisis and the COVID-19 pandemic, volatility has increased significantly. The inclusion of the asymmetric effect of volatility, global financial crisis and COVID-19 into volatility modeling reveals that the effect of both past innovation or shocks and past volatility has increased, which is evident from the change in lag length structure found in different conditional models of volatility. Research limitations/implications This study has important implications for understanding the dynamics of stock market volatility across various economic phases. It provides insights into how stock markets evolve in terms of volatility swings and the subsequent price formation. Moreover, this study provides insights for policymakers to devise efficient mechanisms to control the possible effects of such shocks on the financial system. Originality/value This study contributes toward a comparative study of events based on their likelihood of occurrence and thereupon impact on stock market performance.