Stock Market Returns and Volatility in an Emerging Market: The Indian Evidence

This paper investigates the relationship between stock market returns and volatility in the Indian stock markets by employing AR(1)-EGARCH(p, q)-in-Mean model. The result shows that volatility is persistent and there is leverage effect supporting the work of Nelson (1991) in the Indian stock markets. Besides, the study reveals positive but insignificant relationship between stock return and risk for NSE Nifty and BSE SENSEX stock markets. This is in accordance with the findings of Choudhry (1996), Chiang and Doong (2001), Shin (2005) and Karmakar (2007) for the emerging stock markets. The study results also show that market returns are contributed to the high volatility persistence, implying that Indian stock markets are not weak form efficient signifying that there is systematic way to exploit trading opportunities and acquire excess profits. This provides an opportunity to the traders for predicting the future prices and earning abnormal profits.