Modelling Volatility of BSE Sectoral Indices

Volatility is plays a vital role in stock market's bull and bear phases. Although existence of volatility is the symbol of inefficient market, high volatility will also complements high return. Hence volatility modeling is vital for investment decisions and construction of portfolio. Several linear and non – linear models have been developed by many researchers to model the volatility of the stock market. The objective of this study is to model the volatility of the BSE Sectoral indices. The daily sectoral indices are taken from (the BSE website) for the period of January, 2001 to June, 2012. The return of the BSE sectoral indices exhibit the characteristics of normality, stationarity and heteroskedasticity. Also the ACF and PACF indicate that ARMA(1,1) is the suitable one for modeling the average return. The residuals of the ARMA(1,1) of the sectoral index returns except for IT and TECH are heteroskedastic. Hence, a non-linear model is to found to model the volatility of the return series. An attempt is made to model the volatility of the return series and found that GARCH(1,1) model is the best one