Modelling the Impact of News on Volatility: AStudy on BSE Bankex Market Returns

The prediction of impact of news on volatility is vital for investors to measure the risk exposure in their investment. The present treatise is an attempt to construct an empirical model to study the impact of news on volatility in Indian banking sector indices of BSE Bankex. The daily banking sector indices for the period of January 2004 to December 2013 are taken from the online database maintained by the Bombay Stock Exchange. The data was initially studied for stationarity with the help of Augmented Dickey-Fuller test and further tested for autoregressive conditional heteroskedasticity with the help of Eng/e's ARCH test (i.e. Lagrange multiplier test) and Breush-Godfrey-Pagantest. These tests confirmed the stationarity and presence of ARCH effect in the BSE Bankex return series. The Nelson's EGARCH model was employed to study the impact of news on volatility in BSE Bankex return series. The test results indicate that the volatility in banking sector indices is highly persistent. The conditional variance of the BSE Bankex return series als9 reacts differently to a given positive shock than to a negative shock. Thenews impact curve indicates higher uncertainty following negative newsas compared to positive news.