*Assistant Professor, International Management Institute (IMI), Bhubaneshwar, Odisha, India
**Professor, International Management Institute (IMI), Qutab Institutional Area, New Delhi, India
***Student, International Management Institute (IMI), New Delhi, India
Online published on 4 October, 2013.
This study analyses the time series dynamics of the valuation ratios, namely the PE and the PB ratios and its effect on stock market volatility. For this, daily data of PE, PB, Bombay Stock Exchange Sense x -30 (BSE 30) and S&P CNX Nifty indices are used. Using the GARCH models, the persistence of these valuation ratios is re-established in the Indian financial market. The existence of the leverage effect is confirmed using the GJR-GARCH and EGARCH models. In addition, the predictive regression is carried out in which the change in the log index values are regressed upon market adjusted valuation ratios. We find that the Price-Earnings ratio (PE) has more predictive ability than the Price-Book Ratio (PB). The asymmetric nature of the time series variables is also assessed. It is found that the leverage effect is present in all the variables selected. We also find non-linearity in the dynamics of valuation ratios using kernel density function
PE - Price Earning Ratio, PB-Price to Book Raio, SENSEX – Bombay stock Exchange sensitivity Index, GARCH – Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) Process
