Volatility Shocks and Stock Market Returns: An Econometric Investigation of the NIFTY 50

Abstract

This article explores the effect of market volatility on NIFTY 50 returns with reference to the relationship between India VIX and NIFTY 50 index. The India VIX is India's key index, which shows the market's expectation of volatility over the near term, derived from the NIFTY.SP CNX-0100 Index Option prices. With the help of Johansen’s co- integration probe we analyse the long-run equilibrium relationship between India VIX and NIFTY 50 returns. Moreover, the Granger causality test is used to investigate the direction of causality between market volatility and stock index returns. The objective of the research work is to find out if India VIX can be used as a robust predictor for NIFTY 50 movements or vice-versa by taking daily data. The findings of this empirical study are certainly expected to be invaluable in understanding the forecasting power for the stock market performance.