Understanding the irrational sentiments of the market participants is necessary for making good investment decisions. Despite the recent academic effort to examine the role of investors’ sentiments in market dynamics, there is a lack of consensus in delineating the structural aspect of market sentiments. This research is an attempt to address this gap. The study explores the role of irrational investors’ sentiments in determining stock market volatility. By employing monthly data on market-related implicit indices, we constructed an irrational sentiment index using principal component analysis. This sentiment index was modelled in the GARCH and Granger causality framework to analyse its contribution to volatility. The results showed that irrational sentiment significantly causes excess market volatility. Moreover, the study indicates that the asymmetrical aspects of an inefficient market contribute to excess volatility and returns. The findings are crucial for retail investors as well as portfolio managers seeking to make an optimum portfolio to maximise profits.
The purpose of this study is to examine the long-run and short-run impact of crude oil price and exchange rate shocks on domestic inflation in India within the framework of the Autoregressive Distributed Lag (ARDL) model. The results show that the exchange rate and oil price shocks significantly influence domestic inflation during the study period (April 1994 to February 2018. Further, the breakpoint unit root test revealed the severe impact of the 2008 financial crisis on inflation in India. The findings show that any move to scale down fuel subsidies will escalate cost-push inflation severely, as the country is an energy-dependent economy. So, policymakers shall stabilise the impact of these shocks through suitable monetary policy actions.
Despite the adoption of a market-oriented regime, Reserve Bank of India explicitly practices sterilized intervention to normalize unfavourable developments in the market. This study seeks to find empirical evidence on the intensity to which the monetary authority was able to achieve its policy objective of directing exchange rate in the anticipated trail. The study employed an Autoregressive Distributed Lag (ARDL) model to estimate the central bank reaction function in this regard. It was found that 1% purchase of foreign exchange reserve (net intervention) depreciated Indian Rupee by 0.255% for long-term. Whereas in short-term, intervention followed “leaning against the wind” policy to curb market vagueness. The findings of the study recommend that there should be more coordinated approach between official intervention policy and monetary policy formulation in consonance with the economic fundamentals for increasing the effectiveness and sustainability of the intervention operations.
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