CH AP T E R 1 I N T R O D U C T I O N
S t o c k m a r k e t s e x i s t in c a p i t a l i s t i c a nd m i x e d e c o n o m i e s b a s i c a l l y for b u y i n g and s e l l i n g of shares. T h e y e n a b l e c o r p o r a t i o n s to sell new i s s u e s a nd r ai s e fun d s for i n v e s t m e n t at a c o m p e t i t i v e p r ice from g e n e r a l p u b l i c and f r o m o t h e r c o r p o r a t i ons a n d i n s t i t u t i o n s . T h e y a l s o a l l o w the i n v e s t o r s to sell a n d bu y s e c u r i t i e s v e r y e a s i l y . T h u s s e c u r i t y m a r k e t s h e l p s i p h o n i n g of h o u s e h o l d s a v i n g s to t h e c o r p o r a t e s e c t o r f or i n v e s t m e n t t o w a r d s p r o d u c t i o n of goods and s e r v i c e s . S i n c e m o s t of t h e c o u n t r i e s t o d a y w a n t to m a x i m i z e t h e i r G N P s , s t o c k m a r k e t s , u n d o u b t e d l y , act as p r i m e - m o v e r s of such e c o n o m i e s . It is t h u s v e r y i m p o r t a n t t h a t the c h a r a c t e r i s t i c s of stock m a r kets are f u l l y u n d e r s t o o d so that v i a b l e p o l i c i e s can be f o r m u l a t e d to r e g u l a t e the stock m a r k e t a c t i v i t i e s . In this t h e s i s an a t t e m p t ha s b e e n m a d e to s t u d y e q u i l i b r i u m a n d e f f i c i e n c y c h a r a c t e r i s t i e s of the I n d i a n stoc k market.
1.1 I N D I A N S T O C K M A R K E T - P A S T A N D P R E S E N T
P r i v a t e c o r p o r a t e s e c t o r c o m p a n i e s are e x p e c t e d to i n v e s t R s . 5 4 , 2 3 6 c r o r e * (at 1 9 8 4 - 8 5 p r i c e s ) d u r i n g t h e I n d i a ' s s e v e n t h p l a n p e r i o d ( A p r i l 1 9 8 5 to M a r c h 1 9 9 0 ) . T h e r e w a s an i n v e s t m e n t of R s . 2 5 , 521 c r o r e ( 1 9 8 1 - 8 2 p r i c e s ) in th e s i x t h p l a n p e r i o d . To a c h i e v e t h e i n v e s t m e n t t a r g e t of R s . 5 4 , 2 3 6 c r o r e , t h e p r i v a t e c o r p o r a t e s e c t o r is e x p e c t e d to r a i s e R s . 15 , 1 9 1 c r o r e (28% of total i n v e s t m e n t ) f r o m h o u s e h o l d s e c t o r
* 1 c r o r e is e q u i v a l e n t to 10 m i l l i o n s .
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v i a t h e c a p i t a l m a r k e t . F u r t h e r , it ha s b e e n v i s u a l i z e d t h a t th e c o r p o r a t e s e c t o r w i l l i n t e r n a l l y g e n e r a t e R s. 2 8 , 7 7 9 c r o r e (53%) a n d b o r r o w i n t e r n a l l y f r o m p u b l i c f i n a n c i a l i n s t i t u t i o n s a b o u t R s . 8 2 6 6 c r o r e (15.3%) a n d m e e t the b a l a n c e
^ 'A*
of R s .20 00 c r o r e (3.7%) by e x t e r n a l b o r r o w i n g (47)
In the sixth p l a n p e r i o d the c o r p o r a t e s e c t o r i n t e r n a l l y g e n e r a t e d R s . 1 4 , 6 9 0 c r o r e s of fund. T h e y e a r w i s e f i g u r e s ar e giv e n in the T a b l e 1. 1( 4 7 ) .
TABLE 1.1
I N T E R N A L G E N E R A T I O N OF FUNDS BY THE P R I V A T E
C O R P O R A T E S E C T O R D U R I N G S I X T H PLAN PE RI OD (I N RS . C R O R E )
1 9 8 0 - 198 1 - 1 9 8 2- 1 9 8 3 - 1 9 8 4 - Tot al
C o m p o n e n t 1981 1982 1983 1 9 8 4 1985
R e t a i n e d 940 10 00 1100 1 0 5 0 1 1 5 0 5 2 4 0
P r o f i t
D e p r e c i a t i o n 1 4 1 0 16 10 1 8 5 0 2 1 3 0 2 4 5 0 9 4 5 0 Total inter n a l 2 3 5 0 2610 2 9 5 0 3 1 8 0 3600 1 4 6 9 0
g e n e r a t i o n s
D u r i n g the S i x t h p l a n p e ri od, the c a p i t a l m a r k e t e m e r g e d as one of the m a j o r s o u r c e s of f u nds for the p r i v a t e c o r p o r a t e s e c t o r . T h e c a p i t a l m a r k e t w h i c h u s e d to r a i s e 1 0 0 c r o r e p e r a n n u m d u r i n g t h e 1 9 7 0 s c o u l d r a i s e R s . 4 1 4 c r o r e in 1 9 8 1 a n d R s . 1 8 8 9 c r o r e s in 1 98 5 . T h e c a p i t a l r a i s e d by t h e p r i v a t e c o r p o r a t e s e c t o r r e p r e s e n t e d 5.3% of d o m e s t i c s a v i n g s c o m p a r e d
** N u m b e r s in the p a r e n t h e s i s r e f e r to the r e f e r e n c e s g i v e n at the end of the thesis.
2
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to 1. 7% in 1981. T a b l e s 1.2 a n d 1.3 p r e s e n t d e t a i l s o f . c a p i t a l issues to p u b l i c by p r i v a t e c o r p o r a t e s e c t o r d u r i n g the s i x th plan p e r i o d (47).
T a b l e 1.2
C A P I T A L ISSUES TO P U B L I C
BY P R I V A T E C O R P O R A T E S E C T O R (IN RS . C R O R E )
S h a r e s D e b e n t u r e s
Y e a r E q u i t y Pref. C o n v e r - N o n c o n v e r - Total ti b l e s t i b l e s ( N C D )
1981 201. 8 3. 0 131. 9 76. 9 413. 6
1982 229. 7 7. 5 263. 9 1 3 6 . 5 637. 6
1 983 240. 0 2. 1 77.3 513. 8 833. 2
1984 3 5 2 . 2 0. 3 187. 7 7 6 3.8 1 3 0 4 . 0
1 985 642. 5 0.9 27. 3 1 2 1 8 . 4 1 8 8 9 . 1
T a b l e 1.3
C A P I T A L ISSUES TO P U B L I C IN P E R C E N T I L E S
Y e a r
E qui ty as
of Total % N CDS as %
of Total
T o t al as % of d o m e s t i c s a v i n g s
1981 48.8 18.6 1.7
1982 36.0 2 1 . 4 2.5
1 9 8 3 28. 8 61. 7 2.8
1984 27. 0 58.6 4.0
1 9 8 5 34.0 64. 5 5. 3
A s is e v i d e n t f r o m the t a b l e s , N o n c o n v e r t i b l e d e b e n t u r e s r o s e to a r e c o r d of Rs. 1 2 1 8 c r o r e in 1 9 8 5 , e q u i v a 1 en t to n e a r l y two- t h i r d o f t h e t o t a l f u n d s m o b i l i z e d by t h e c o r p o r a t e s e c t o r fro m the m a r k e t .
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P r o j e c t e d Growth of Capital M a rk e t
S e v e n t h p l a n p r o j e c t i o n s r e q u i r e that the p r i v a t e c o r p o r a t e s e c t o r d o u b l e s th e a m o u n t g e n e r a t e d i n t e r n a l ly o v e r the s i x t h p l a n . W i t h t h e g r a d u a l d i s a p p e a r a n c e of t he p r o t e c t i v e a t m o s p h e r e to w h i c h the i n d u s t r i a l s e c t o r has g ot a c c u s t o m e d so far, the c a p a c i t y of the i n d u s t r y to g e n e r a t e s u r p l u s e s w o u l d r e m a i n c o n s i d e r a b l y l i m i t e d u n t i l it is a b l e to s t e p up th e p r o d u c t i v e e f f i c i e n c y of its capital. T h u s the c a p i t a l m a r k e t has n o t o n l y to r a i s e l a r g e f u n d s b u t m a y a l s o h a v e to fil 1 the g a p b e t w e e n t h e p l a n n e d , i n t e r n a l l y g e n e r a t e d f u n d a n d th e a c t u a l .
A l t h o u g h t h e c a p i t a l m a r k e t h a s b e c o m e v e r y a c t i v e , it m i g h t not p r o v e to be a s o u r c e of f u n d s for the p r i v a t e c o r p o rate s e c t o r to the e x t e n t e n v i s a g e d . T h e c a p i t a l m a r k e t may not c o n t i n u e to g r o w at a c o m p o u n d g r o w t h r a t e of 50 p e r c e n t p e r a n n u m as it d i d in t h e s i x t h p l a n p e r i o d . D u r i n g 1 9 5 7 - 6 1 tjie c a p i t a l m a r k e t e x h i b i t e d a b u o y a n t s t a t e and f u n d s r a i s e d on the m a r k e t a c c o u n t e d for a b o u t 1 0 % of the net d o m e s t i c s a v i n g s as a g a i n s t 5.3% e n v i s a g e d in 198 5 . T h e d e c a d e o f 1 9 6 0 s a n d t h e f i r s t h a l f of 1 9 7 0 s w i t n e s s e d a d o r m a n t p h a s e of c a p i t a l m a r k e t a r i s i n g out of a s e q u e n c e of u n f a v o u r a b l e d e v e l o p m e n t s
th e C o n g r e s s p a r t y ( 1 9 6 9 ) , a n d s u b s e q u e n t p o l i c i e s of t h e g o v e r n m e n t , e s p e c i a l l y the p o l i c y of r e s t r i c t i o n s on p a y m e n t of d i v i d e n d s . T h e m a r k e t s t a r t e d b e c o m i n g a c t i v e a g a i n o n l y a f t e r a l a r g e n u m b e r of F o r e i g n E x c h a n g e R e g u l a t i o n A c t (FERA) c o m p a n i e s s t a r t e d d i l u t i n g e q u i t y in f a v o u r of I n d i a n i n v e s tors.
s u c h d e v a l u a t i o n ( 1 9 6 6 ) , th e s p l i t in
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A s s u m i n g that the c u r r e n t f a v o u r a b l e c l i m a t e w o u l d c o n t i nue, P a t i l (47) p r o j e c t s t h e c a p i t a l m a r k e t to d e v e l o p as f ol 1 ows:
Y e a r Rs. in C r o r e
1987 - 88 1988 - 89 1989 - 90
It is i m p o r t a n t to note that i n d i v i d u a l as w e l l as i n s t i t u t i o nal i n v e s t o r s p r o v i d e f u n d s to the c a p i t a l m a r k e t . A l t h o u g h s e p a r a t e data for i n d i v i d u a l and i n s t i t u t i o n a l i n v e s t o r s are n o t a v a i l a b l e , it is k n o w n t h a t i n v e s t m e n t i n s t i t u t i o n s l i k e L ife I n s u r a n c e C o r p o r a t i o n of India, U n i t T r u s t of India, etc., h a v e b e e n p r o v i d i n g s u b s t a n t i a l a m o u n t of fund to the c o r p o r a t e s e c t o r by s u b s c r i b i n g to t h e b o n d s a n d s h a r e s f l o a t e d by it in t h e c a p i t a l m a r k e t a n d by p a r t i c i p a t i n g in c o n s o r t i u m l e n d i n g w i t h I n d u s t r i a l D e v e l o p m e n t B a n k of India, etc.It can be a p p r o x i m a t e l y s t a t e d th at o u t of the total r e q u i r e d f u n d of R s . 1 0 , 5 0 0 c r o r e , R s . 7 , 0 0 0 c r o r e m a y f l o w d i r e c t l y f r o m t h e h o u s e h o l d s e c t o r s and the b a l a n c e f ^ o m the i n v e s t m e n t i n s t i t u tions.
S o m e C h a l l e n g e s Ahead:
P u b l i c S e c t o r Uni t s in C a p i t a l M a r k e t :
P u b l i c s e c t o r u n i t s h a v e s t a r t e d e n t e r i n g into the c a p i tal m a r k e t in a big way. Th e r e q u i r e m e n t s of s o m e of the p u b l i c
3 0 0 0 3 500 4 0 0 0 Total: 1 0 , 5 0 0
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s e c t o r u n d e r t a k i n g s are s u b s t a n t i a l l y h i g h e r than the a v e r a g e s i z e of i s s u e s t h a t h a v e b e e n c o m i n g to t h e m a r k e t d u r i n g the l a s t c o u p l e of y e a r s . E x c e p t f o r the 'jumbo' i s s u e s by s u c h c o m p a n i e s l i k e R e l i a n c e I n d u s t r i e s a n d L a r s e n a n d T o u b r o , a m a j o r i t y of the l a r g e p r i v a t e s e c t o r i s s u e s is in the ran g e of R s . 2 0 c r o r e to R s . 3 0 c r o r e . On the o t h e r h a n d , the b o n d i s s u e s o f th e N a t i o n a l T h e r m a l P o w e r C o r p o r a t i o n , I n d i a n T e l e p h o n e I n d u s t r i e s , and the Rural E l e c t r i f i c a t i o n C o r p o r a t i o n h a v e been o f R s . 1 0 0 c r o r e each. P a t i l (47) o b s e r v e s t h a t the r e s o u r c e n e e d s of t h e s e p u b l i c s e c t o r u n i t s a r e so l a r g e t h a t t h e m a r k e t c o u l d be s w a m p e d by t h e i r a c t i v i t i e s .
The ter m s o f f e r e d by p u b l i c s e c t o r c o r p o r a t i o n s a r e c o n s i d e r a b l y m o r e a t t r a c t i v e t h a n t h o s e o f f e r e d by t h e p r i v a t e s e c t o r u n i t s . T h e n o n - c o n v e r t i b l e d e b e n t u r e s i s s u e d by the p r i v a t e s e c t o r c o m p a n i e s f e t c h 1 5 % w i t h a 5 p e r c e n t p r e m i u m at the time of r e d em ption. In c o n t r a s t the b o n d s f l o a t e d by the p u b l i c s e c t o r u n i t s y i e l d n o m i n a l l y 14 per c e n t but the e f f e c t i v e r a t e of r e t u r n is s i g n i f i c a n t l y h i g h e r on a c c o u n t of a n u m b e r of t a x b e n e f i t s . N o t o n l y t h e i n t e r e s t i n c o m e s f r o m t h e s e b o n d s are e l i g i b l e for c o n c e s s i o n s u n d e r i n c o m e tax laws, t h e e n t i r e h o l d i n g s of t h e s e b o n d s a r e e x e m p t e d f r o m w e a l t h tax. T h u s the p r i v a t e c o r p o r a t e s e c t o r w o u l d find it i n c r e a s i n g l y d i f f e r e n t to c o m p e t e w i t h p u b l i c s e c t o r b o n d s to r a i s e l a r g e a m o u n t of resour ces.
G o v e r n m e n t B o r r o w i n g s from Capital M a r k e t
In a d d i t i o n to the p u b l i c s e c t o r units , the g o v e r n m e n t is a l s o l i k e l y to b o r r o w f r o m t h e c a p i t a l m a r k e t . In A p r i l 1 9 8 5 , a
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R e s e r v e B a n k of I n d i a C o m m i t t e e , u n d e r th e c h a i r m a n s h i p of Prof. S u k h a m o y C h a k r a v a r t y , s u b m i t t e d a r e p o r t r e c o m m e n d i n g the l i n e s a l o n g w h i c h the m o n e t a r y s y s t e m of the c o u n t r y c o u l d be r e f o r m e d . T h e C o m m i t t e e h a s r e c o m m e n d e d t h a t to a v o i d the i n f l a t i o n a r y i m p a c t of G o v e r n m e n t b o r r o w i n g s f r o m the R e s e r v e B a n k of I n d i a , t h e G o v e r n m e n t s h o u l d i n c r e a s i n g l y t a p the s a v i n g s of t h e p u b l i c t h r o u g h an a p p r o p r i a t e i n t e r e s t r a t e s t r u c t u r e and by o f f e r i n g a w i d e r s p e c t r u m of s a v i n g s i n s t r u m e n t s w i t h a t t r a c t i v e f e a t u r e s (47).
L e n d i n g by t h e R e s e r v e B a n k of I n d i a to the G o v e r n m e n t l e a d s to t h e c r e a t i o n of r e s e r v e m o n e y or w h a t is s o m e t i m e s c a l l e d 'the h i g h e r - p o w e r e d m o n e y ' w h i c h in t u r n l e a d s to m u l t i p l e c r e d i t c r e a t i o n in t h e e c o n o m y . T h u s t h e G o v e r n m e n t b o r r o w i n g s f r o m R e s e r v e B a n k o f I n d i a (RBI) h a s a g r e a t e r i n f l a t i o n a r y i m p a c t than its b o r r o w i n g s f r o m public. G i v e n the G o v e r n m e n t ' s c o n c e r n for i n f l a t i o n , the RBI and the G o v e r n m e n t a r e l i k e l y to a c c e p t t h e C o m m i t t e e ' s r e c o m m e n d a t i o n s . T h e G o v e r n m e n t is, t h e r e f o r e , l i k e l y to b o r r o w d i r e c t l y f r o m i n v e s t o r s by f l o a t i n g s p e c i a l t y p e s of b o n d s or n e w t y p e s of s e c u r i t i e s a n d d e p o s i t i n s t r u m e n t s . D u r i n g 1 9 8 3 - 8 4 , the G o v e r n m e n t b o r r o w e d R s . 3 9 8 7 c r o r e f r o m RBI. T h e b o r r o w i n g s i n c r e a s e d s u b s t a n t i a l l y to R s . 7 4 2 6 c r o r e in 1 9 8 4 - 8 5 . If th e G o v e r n m e n t w a n t s to b r i n g it d o w n , t h e n it w i l l h a v e to b o r r o w m u c h m o r e f r o m t h e m a r k e t a n d t h e i n v e s t o r s . T h e s e b o r r o w i n g s w o u l d be o v e r a n d a b o v e its c u r r e n t b o r r o w i n g s f r o m the p u b l i c t h r o u g h N a t i o n a l S a v i n g s C e r t i f i c a t e s and N a t i o n a l D e p o s i t S c h eme .
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1.2 A BRIEF REV IE W OF LI TERATURE ON THEORIES OF E F F I C I E N C Y A ND E Q U I L I B R I U M OF S T O C K MAR KE T
T h i s s e c t i o n p r e s e n t s an o v e r v i e w of t h e t h e o r i e s of e f f i c i e n c y a n d e q u i l i b r i u m of s t o c k m a r k e t . T h e d e t a i l e d d i s c u s s i o n on t h e s p e c i f i c t h e o r i e s a r e g i v e n in t h e r e s p e c t i v e chapters.
A m a r k e t in w h i c h p r i c e s i n s t a n t a n e o u s l y a d j u s t and f u l l y r e f l e c t all a v a i l a b l e r e l e v a n t i n f o r m a t i o n 'is c a l l e d e f f i c i e n t . In an e f f i c i e n t market, p r i c e s s e r v e as a c c u r a t e s i g n a l s for c a p i t a l a l l o c a t i o n . F a m a (20) h a s d e f i n e d t h r e e l e v e l s of e f f i c i e n c y e a c h of w h i c h is b a s e d on a d i f f e r e n t n o t i o n of e x a c t l y w h a t ty pe of i n f o r m a t i o n is u n d e r s t o o d to be r e l e v a n t . If no i n v e s t o r is a b l e to e a r n e x c e s s r e t u r n s by d e v e l o p i n g t r a d i n g r u l e s b a s e d on h i s t o r i c a l r e t u r n i n f o r m a t i o n , t h e n the m a r k e t is w e a k f o r m e f f i c i e n t . T h e m a r k e t is s e m i - s t r o n g e f f i c i e n t if all public?, ly a v a i l a b l e i n f o r m a t i o n is r e f l e c t e d in t h e s t o c k p r i c e . In a s t r o n g f o r m e f f i c i e n t m a r k e t , no i n v e s t o r can e a r n e x c e s s r e t u r n u s i n g any i n f o r m a t i o n w h e t h e r p u b l i c a l y a v a l a b l e or not.
T h e C a p i t a l A s s e t s P r i c i n g M o d e l (CAPM) is an e q u i l i b r i u m t h e o r y of s t o c k m a r k e t w h i c h p r e d i c t s t h a t s e c u r i t y r a t e s of r e t u r n w i l l be l i n e a r l y r e l a t e d to a s i n g l e c o m m o n f a c t o r - r a t e of r e t u r n on m a r k e t p o r t f o l i o . T h e m o d e l (15) w a s d e v e l o p e d a l m o s t s i m u l t a n e o u s l y by S h a r p e a n d T r e y n o r w h i l e M o s s in, L i n t e r a n d B l a c k d e v e l o p e d it f u r t h e r . T h e t h e o r y of C A P M and its e m p i r i c a l test in I n d i a n e n v i r o n m e n t are r e p o r t e d in C h a p t e r 3. A l t h o u g h C A P M has b e e n p r e d o m i n a n t in e m p i r i c a l
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w o r k o v e r th e p a s t 15 y e a r s a n d is the b a s i s of m o d e r n p o r t f o l i o theory, a c c u m u l a t i n g r e s e a r c h has i n c r e a s i n g l y cast d o u b t on its a b i l i t y to e x p l a i n the e m p i r i c a l c o n s t e l l a t i o n of a s s e t retu rn s.
T h e A r b i t r a g e P r i c i n g T h e o r y (APT) has been f o r m u l a t e d by R o s s (52) a n d o f f e r s a t e s t a b l e a l t e r n a t i v e to t h e C A P M . It a s s u m e s t h a t r a t e o f r e t u r n on a n y s e c u r i ty i s a l i n e a r f u n c t i o n of s e v e r a l factors. The A P T st a r t s w i t h an a s s u m p t i o n of s u c h a r e t u r n g e n e r a t i n g p r o c e s s . R o l l ( 5 0 , 5 1 ) o b s e r v e s t h a t in t e s t i n g A P T , it is n o t a p p r o p r i a t e to d w e l l on t h e u n d e r l y i n g c a u s e s of t h e g e n e r a t i n g p r o c e s s of r e t u r n s . H o w e v e r , B l u m e a n d G u l t e k i n (9, 29) f e e l t h a t A P T s p e c i f i e s n e i t h e r t h e m i n i m u m n u m b e r of f a c t o r s r e q u i r e d to g e n e r a t e s e c u r i t y r e t u r n s nor any e c o n o m i c h y p o t h e s i s as to w h a t f a c t o r s s h o u l d b e r e p r e s e n t e d . A n o t h e r s i g n i f i c a n t a r e a of r e s e a r c h in t h i s f i e l d is in the a r e a of d i v e r s i f i c a t i o n / c o r p o r a t e m e r g e rs( 62).
1.3 OBJECTIVE A N D S CO PE OF THE P R E S EN T I N V E S T I G A T I O N
T h i s d i s s e r t a t i o n a i m s at u n d e r s t a n d i n g t h e i n h e r e n t c h a r a c t e r i s t i c s of I n d i a n sto c k m a r k e t and i n v e s t i g a t e s w h e t h e r s t o c k p r i c e s are fair as s u g g e s t e d in the l i t e r a t u r e . A n e f f i c i e n t l y p r i c e d m a r k e t as s u g g e s t e d by t h e o r y s h a l l h e l p the m a c r o e c o n o m y to r a t i o n a l l y a l l o c a t e its r e s o u r c e s . F u r t h e r an e f f i c i e n t m a r k e t s p e a k s of h ow o p e r a t i o n a l l y e f f i c i e n t it is. A n ew a p p r o a c h to t r a c k the s t o c k p r i c e m o v e m e n t s is s u g g e s t e d in
.... ...^in.n-ir ff-n turn* ii>ii.i.Yii «» , mi t
t h i s t h e s i s . T h u s an a t t e m p t is m a d e in t h i s t h e s i s to u n d e r s t a n d some of the f e a t u r e s of I n d i a n s t o c k m a r k e t u s i n g a v a i l a b l e theories.
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1.4 CH AP T ERWISE S U M M A R Y
T h e t h e s i s is d i v i d e d into six c h a p t e r s .
C h a p t e r 1 d i s c u s s e s the g r o w t h tha t I n d i a n C a p i t a l M a r k e t has w i t n e s s e d o v e r the past few y e a r s , the r o l e it has to p l a y and the p r o b l e m s i t M s l i k e l y to face d u r i n g the s e v e n t h p l a n p e r i o d . A b r i e f r e v i e w on t h e s u r v e y of l i t e r a t u r e is a l s o p r e s e n t e d in this chapt er.
C h a p t e r 2 r e p o r t s th e r e s u l t s of t e s t s f o r w e a k f o r m e f f i c i e n c y a n d s e m i s t r o n g e f f i c i e n c y of s^tock m a r k e t . A w e a k f o r m e f f i c i e n c y c h a r a c t e r i z e s a m a r k e t w h e r e no i n v e s t o r c a n e a r n e x c e s s r e t u r n s by d e v e l o p i n g t r a d i n g r u l e s b a s e d on p ast p r i c e b e h a v i o u r . T h e m a r k e t is semi s t r o n g e f f i c i e n t if a l l p u b l i c ly a v a i l a b l e i n f o r m a t i o n is r e f l e c t e d in s t oc k price.
T h e t e s t s s u g g e s t t h a t the I n d i a n s t o c k m a r k e t is w e a k f o r m e f f i c i e n t but n o t s e m i - s t r o n g e f f i c i e n t .
C a p i t a l A s s e t s P r i c i n g M o d e l a s s e r t s t h a t t h e r e is a l i n e a r r e l a t i o n s h i p b e t w e e n the risk a s s o c i a t e d w i t h an a s s e t a n d the r e q u i r e d rate of r e t u r n of a sec urity . E m p i r i c a l t e s t s c o n d u c t e d to t e s t it s r e l e v a n c e is r e p o r t e d in C h a p t e r 3. T h e r e s u l t s r e v e a l t h a t t h e s p i r i t of C A P M h o l d s g o o d b u t n o t e x a c t l y .
C h a p t e r 4 p r e s e n t s a c o m p u t e r p r o g r a m for some e f f i c i e n c y r u l e s that h e l p to i d e n t i f y the d o m i n a n t i n v e s t m e n t a l t e r n a t i v e f r o m a s e t of o p t i o n s . S o m e s u g g e s t i o n s a r e g i v e n f r o m a l g o r i t h m i c i m p r o v e m e n t p o i n t of view.
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S y s t e m D y n a m i c s (SD) m e t h o d o l o g y , d e v e l o p e d by F o r r e s t e r (25, 26) is used i n c r e a s i n g l y now a days to e x p l a i n the b e ha- ,4
v i o u r of c o m p l e x systems. In C h a p t e r 5, stock p r i c e f l u c t u a t i o n is g i v e n an i n t e r p r e t a t i o n f r o m S y s t e m D y n a m i c s p o i n t of view.
T h e s a l i e n t f e a t u r e s of this m o del are the f o l l o w i n g :
i) It gives a causal e x p l a n a t i o n of s t o c k price.
ii) It can e x p l a i n the s te a d y s t ate ( e q u i l i b r i u m ) as well as t r a n s i e n t b e h a v i o u r .
iii) It is a d y n a m i c model.
F u r t h e r the c o n c e p t of e f f i c i e n c y of m a r k e t r e v i e w e d in C h a p t e r 2 is i n t e r p r e t e d w i t h the h e l p of S y s t e m D y n a m i c s .
C h a p t e r 6 s u m m a r i z e s t h e r e s u l t s of t h e s t u d y a n d s u g g e s t s the s c o p e f o r f u r t h e r w o r k in t h i s area. A f r a m e w o r k f o r a u n i f i e d m o d e l of C A P M - S D is g i v e n i n t h i s^c h a p te r.
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