A report released by Morgan Stanley Research (Asia/Pac) states that volatility could increase going forward and also analyses the correlation between Sensex and FII flows
Morgan Stanley Research (Morgan Stanley) has released a report titled “India Strategy: Elevated Importance of FII Flows”, wherein they found that the correlation between short-term returns and FIIs flows were weak and was strong only in case of long-term returns (i.e. 12 months). It warned investors to“not assume that FII flows will lead to a higher Sensex and vice versa.”
FII flows is one of the key indicators in measuring market direction and movement, as India, at the moment, is heavily driven by foreign funds, especially routed through offshore funds. The report delved into the relationship between Sensex and FII flows vis-a-vis Beta and Correlation measurements, Morgan Stanley said.
The investment bank research arm notes that the beta of Sensex has indeed risen, and continues to do so, particularly due to the strong (long-term) correlation coefficient between Sensex and FII flows rather than underlying volatility. Beta measures how strongly two variables, in this case—Sensex and FII flows—are related. A high beta would mean that FII flows would mean a higher degree of direct proportionality to each other. The report noted, “While the economy and the markets got a substantial lift from global factors between 2003 and 2007, the beta of the market to flows was not as high as we have seen since 2008. The credit crisis and the ensuing policy lethargy explain the rising beta of Sensex moves to FII flows.”
Morgan Stanley also expects that volatility could rise as the current levels of Sensex volatility are low. It cited mean reversion as the key reason why it would increase. The report said, “absolute volatility of both Sensex returns and Foreign Institutional Investors (FIIs) flows is low. Volatility tends to be mean reverting so if anything, it tells us that volatility could rise in the coming months.” And since volatility was low and below historical average, Morgan Stanley cited that it could “revert to mean” and thus see increased volatility in the coming months.
However, the report did not mention what the mean volatility was and how far the current levels were below the mean. It also cited that the key driver for increase in volatility is likely to be affected by global factors rather than local ones.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
