International Journal of Social Science Research (IJSSR)

Indian Energy-Oil-Gas Stock Behaviour During Nifty 50 Index Reconstitution: Interpreting Volatility Dynamics Through Var Analysis

The paper examines how inclusion and exclusion of the NIFTY 50 index (i.e., index reconstitution) can affect the short term return behavior (i.e., volatility dynamics) of the sample companies selected within Indian Energy, Oil and Gas sector namely Hindustan Petroleum Corporation Ltd., Indian Oil Corporation Ltd., Suzlon Energy Ltd. and Coal India Ltd. The Vector Autoregression (VAR) analysis using the daily stock returns was run separately on the dataset preceding the event data and the post event data, to study the change in lagged relationship of the returns and the explanatory ability. This shows that the R square values tend to be low in all the companies meaning that there is not much predictability of lagged returns in the short term. Hindustan Petroleum, Indian Oil, and Suzlon Energy demonstrated minimal changes over time, whereas, Coal India was seen to significantly improvise r-square and a second-lag positive post- event result, which was also close to significant. Sector-wide testing indicated that index changes did not always lead to higher predictability in returns hence, weak-form efficiency within this context. The implication of the findings is that index events cannot be an accurate indicator of short term trading in this industry. The studies have implications to the investors, policymakers and researchers as there must be consideration of more macro economies and sector specific factors as well as alteration of the index. Suggestions are provided as to utilization of multi-factor models, and observation of market manipulation during index events and protruding research with longer or higher frequency event periods to achieve delayed or intraday impact.