Heteroskedasticity Models on the Bse

In this article, we study conditional heteroskedasticity in a market index on the Bombay Stock Exchange, from April 1979 to March 1995. We find strong evidence of heteroskedasticity in daily, weekly and monthly returns in the form of GARCH(1,1) models. We find there is seasonality in the volatility of monthly returns, and there is one regime shift in the level of unconditional variance of the data. Remarkably enough, after controlling for this, monthly returns appear homoskedastic. Both the regime shift and the seasonality have clear economic interpretations. The weekly and daily returns are still ARCH with strong evidence of the regime shift and of seasonality. Finally, we use our volatility models to test whether the market prices the observed heteroskedasticity using GARCH-in-mean models. We are unable to reject the null that higher risk is not priced. We offer qualitative arguments suggesting reasons for this behaviour and conjecture that this may change in the near future