Historic Volatility Calculation

Dynamic replication of option price requires a key ingredient, volatility. Often we get into arguments about using Implied market volatility, Expected volatility (could be forecast/ prediction) or just historic volatility.

I was just trying to calculate historic volatility of major currency pairs and the Indian and World indexes. At first I thought using daily closing prices would be the most logical method. But later wanted to see if there is significant difference between calculations done on closing prices vs. opening and day high and day close.



I was expecting more or less same volatility figures for different data. But to my surprise the volatility figures based on Day high were significantly less volatile across markets and benchmarks.



The effect is more pronounced in stock Indexes like NSE Nifty, BSE Sensex and foreign indexes like Nikkei 225 and the Dow Jones. This is something very counter intuitive because in the last year all indexes have gone down but still the market highs from one day to other are less volatile compared to Open and High data.

The volatility was calculated by using daily log returns for past 256 data points (roughly 1 yr with 5 market days and 5 holidays)

The Currrencies are Pound, Euro, Yen and Swedis Krona all against USD.

Fortune India 2007: Index

Fortune India 2007

Indian stock market has gone up by close to 30% from the beginning of the year. This upswing in the market has resulted in almost all sectors doing phenomenally well. The growth story is not just applicable to the Large caps but also to the mid caps and the small caps. In this kind of a market picking a portfolio that makes more money than the Fixed deposit rates (close to 10% per an) is not at all difficult, but beating the indexes like Nifty and Sensex would be the thing that fund managers look forward to.

Picking a basket of shares like the Sensex (top 30 shares by market cap) or Nifty (top 50 by market cap) would be the ideal thing to do. But recently I found that that in Prowess database there is a group of companies called to Fortune India list. This list has selected companies as per the fortune rankings. I thought this would be a very good method to pick the top companies in the country and as long as the stock market is doing well this index must also perform better. The companies in the list are as following:



Watchout this space for more analysis to see how sucessful is it to invest in such index.

Dow to beat S&P

The Dow is touching new highs and so is S&P.In this rising market it is important to know if the blue chip companies are going to be better or the Mid-caps. In my opinion exports and foriegn operations of compaies is now going to matter. Given the economic conditions where dollar is constantly depreciating companies with higher proportions of income from abroad are going to benefit. Traditionally companies in the Dow make a lot of money outside the country because of their multinational operations.Historically large caps have outperformed S&P by close to 15%. But in the last few years small caps were getting more attractive. This trend is now goin to change with MNC companies of DOW reporting higher earnings from abroad incomes.So in my opinion the Dow should confrotabily beat the S&P, in future at least in earinings.

Now lets get back to Indian Stock Markets.

The heavyweight companies in india are very much dependent on exports. So with current appreciating rupee it is logical to think that their performance will get worse compared to the Mid Caps. But in Indian context, my opinion is that the large caps will outperform the Mid Caps. The reason is that Large caps like TCS which rely heavily on exports are better prepared with hedge positions to protect themselves from adverse currency movements. Majority midcaps which are also into exports don't have highly hedged positions. This means that in the end the Large Caps basically comprising of Nifty (top 50) and Sensex (top 30), could still outperform the Mid caps and Small caps.

The first part of the article was written as comment on "US Market Watch"

Sensex touching alltime high

Sensex today closed at 12,928 up 191 points after touching the lifetime high of 12,968. TCS also showing a good Q2 net profit up 14.91% at Rs. 991 crores. HCL numbers to soon hit the market.

TCS is showing volume growth of 50.5% YoY and 10.8% quarter on quarter. The operating margin of the company improved by 300 bps; mainly due to exchange rate and offshoring. TCS closed on Sensex at Rs. 1,129.70.

HCL at closed on Sensex at Rs. 548.78, the net profit at improved at Rs. 250 crores vs Rs. 233 crores revenues Rs. 1379 crores vs Rs. 1253 crores

Two of the biggest worries for the markets at this stage are the crude oil prices and the interest rates. Rate hike due to inflation of close to 5% doesn’t take into account the lowering of crude oil prices by close to 20%. This means that the rate hikes do not look very likely.

So with the good earning season more up-swing in the markets can be expected for the last quarter of the year.

Earning Season to Start

Most analys are optimistic about the Q'2 earnings after the sensex gained its grounds in the last three months (up 16% for the quarter). The sensex is very close to the May levels after the decline below 10,000. According to study by Motilal Oswal of 127 companies for the next quarter sales projected to increase by 27%, EBIT by 39% and net profit also by 39%.

This quarter's earning season will start with high expectations from Infosys. Technology sector is expected to grow at about 40%. Infosys as projected by CNBC TV 18, is supposed to increase by 7.59% and revenues by 10.53%. Over the last three months Infosys has performed well with growth in share price from Rs. 1500 level to Rs. 1860 latest closing price. With its long reputation and investor expectations infosys still remains the best buy in the IT sector. Mphasis-BFL is close to its 3 month high of 198.40 from lows of arround Rs 130 to Rs. 120.

Auto and steel still looking promising. Expect Mahindra, Maruti, Cement are still strong in terms of valuation after a good run. The FY07 EPS of sensex is supposed to grow by 31% and FY05 by 14%. With crashing crude oil prices and global stock market boom not just in emerging markets but also in developed markets (Dow Jones US at all time high) the outlook for the markets look positive.

Sensex on Year's Lowest

The stock markets openned low on Monday this was another day of selling with no buyers having courage to hold on to their investments. The Sensex was hit by close to 420 points and the Nifty by 120 points. This Mid-cap and the small caps were the worst hit in todays markets, with many companies falling close to 10% and falling to their 6 month lows. This selling preasure is said to be created by the selling of the Mutual Funds by investors (both HNI
's and retail) who entered the market late or were slow at booking their profits at 12,000 levels. When they saw a fall of close to 20-30% in their investment they started to liquidate.

Global Fall

Globally the stock markets have all gone down in the past one month in both emerging as well as global markets. In the developed markets like USA markets have had a 10% correction compared to gains made during the bull run this is very substantial. Markets like Japan have also fallen heavly, with Nikkei falling close to 4%. In other asian markets like Korea Foriegn investor have net sold as much as $ 1 billion.In India last few trading sessions shows that they are net buyers in the indian share markets the FII have been the net buyers. And the Mutual Funds the Net sellers.

Selling Preasure

(A) The main selling is comming from the Mutual Fund companys that are heavily invested in the Mid-Cap sector. Because of redemption of MF's by HNI's and Retail investors the Fund is trying its best to sell off its shares. The problem is that the Mid-Caps are very illiquid and because of that they have ot selloff their core investments.

(B) The investors who followed the principle of buying into cheap low price shares afters doing value research are also the culprits. These investors who follow share markets analysts like Mr. Rakesh Jhunjhunwala purchase heavily in companies that undervalued through margin trade. Now they face the problem of meeting the settlement of their accounts. So, the Brokers are selling off the collateral shares or selling the share held by the investors in liew of the cash obligations.

Let us hope that the markets do not plunge further and the bull rally of the indian economy would continue.

Down on Monday

The markets plunged further on Monday, with all sectoral indexes falling sharply. The Sensex was down 2.28% (237.9) at 10,213.4 and the NSE Nifty down 2.4% (74.7) at 3061.6 at the close of the trading hours.

Quick Look at Market

	Percentage Decline
BSE Metal Index	style="text-align: right">3.68 %
Oil $ Gas	style="text-align: right">2.68 %
FMCG	style="text-align: right">2.5 %
Hindustan Zinc	style="text-align: right">7.68 %
Sterlite	style="text-align: right">5.6 %
Tisco	style="text-align: right">4.32 %

It is clear the markets are still in the phase of deep correction that started with the fall in May. It seems that the markets will continue their bad run for a while, and the month of June will be either rage bound or the makets may further correct to the levels of 9,000 - 10,000.

Most analysts belive that this current phase is temporary and the long term prespective of the markets is still very much intact. Some even predict at the end of the year we may end up at 15,000 for the Sensex! So let us just keep our fingers crossed and hope that the FII's would understand this and bring their money back to our markets.