Volatility in the Mid-Cap and Small-Cap Equity Market- A Case Study based on BSE Mid-Cap Index and BSE Small-Cap Index

Abstract

Volatility modelling in the stock market has significant implications in Economics and Finance. High volatility in the stock prices has adverse effects in an economy. This paper is developed to study the ARCH effect, asymmetric effect and Persistence of time varying volatility of Indian mid-cap and small-cap equity market return using non-linear asymmetric EGARCH (Exponential GARCH) Model developed by Nelson (1991). The empirical study is based on daily return of BSE Mid-cap Index and BSE Small-cap Index from the beginning of March 2012 till the end of February 2018. Apart from using own past information we have used BSE sensex as control variable in the mean return equation. The nature of volatility of stock returns is found to possess the asymmetrical property i.e leverage effect. Volatility is also persistent in these markets. Both the indices have shown volatility clustering phenomena during the study period.