Nifty 50 Index Reshuffling of Indian Banking Stocks: Interpreting Volatility Dynamics through Arch Model

The paper examines the effectiveness of NIFTY 50 index reshuffling in terms of its effects on the volatility of stock returns in the Indian banking industries with the help of the Autoregressive Conditional Heteroskedasticity (ARCH) model. A total of four leading banks--Kotak Mahindra Bank, YES Bank, Bank of Baroda, and IndusInd Bank were compared during post-index reconstitution period and pre-index period in order to measure the upper and lower volatility dynamics. The findings indicate that the banks respond heterogeneously. e.g., Volatility became more persistent for Kotak Mahindra Bank during post-index period. Whereas volatility was not persistent for Bank of Baroda and IndusInd Bank during both the periods. Yes Bank had a high volatility. However, it was more internally-driven rather than index-driven. The results emphasize that index-reshuffling has different impacts across different stocks and firm-specific fundamentals important to the volatility behavior. This paper can add value to the current knowledge of the event-based volatility in emerging economies and provide valuable guidelines to the investors, fund managers and policy advisors dealing with index-oriented investment milieu.