Asian Journal of Research in Banking and Finance Asian Research Consortium A Comparative Study on the Synchronicity of Indian Public Sector Banks \" Shares during the Sub-Prime Crisis

$Page 1: Asian Journal of Research in Banking and Finance Asian Research Consortium A Comparative Study on the Synchronicity of Indian Public Sector Banks \" Shares during the Sub-Prime Crisis$
Asian Journal

of Research in

Banking

and

Finance Asian Journal of Research in Banking and Finance Vol. 6, No. 1, January 2016, pp. 22-31.

ISSN 2249-7323 A Journal Indexed in Indian Citation Index

22

www.aijsh.org

Asian Research Consortium

A Comparative Study on the Synchronicity of Indian

Public Sector Banks‟ Shares during the Sub-Prime Crisis

Period with that of the Pre and the Post Crisis Periods

Som Sankar Sen*; Abhisek Saha Roy**

*Assistant Professor,

The University of Burdwan,

West Bengal, India.

**Research Scholar,

The University of Burdwan,

West Bengal, India.

DOI NUMBER-10.5958/2249-7323.2015.00151.0

Abstract

The turmoil in the international financial markets of advanced economies that started around mid-

2007 and intensified substantially since August 2008 had engulfed many developed and emerging

countries within its blaze. India, a great example of an emerging economy was not far away from

the heat. The present study in this context attempted to examine whether there was any significant

change in the behaviour of share price synchronicity of the Indian Public Sector Banks during the

crisis period in compare to pre and post crisis period or not. It was found that Indian Public Sector

Banks‟ stock prices were more aligned to the market during the crisis period compared to the pre

crisis and the post crisis period.

_______________________________________________________________________________

1. Introduction

The phase of mayhem in world economy that started from mid-2007 and continued until the end of

2009 reckoned as one of the most hazardous phases in recent times. New Economic Policy of 1991

has led to a huge transformation of Indian Economy. Globalization as one of the goals of this policy

has undoubtedly brought about positive changes in India, but not without incurring some costs for

it. India is now open to any menace originating in the International Market. Thus, demanding the

regulatory bodies along with Government in India, to be more cautious in managing any downside

ramifications of integrating with International market. The recent turmoil in the international

financial markets and the role of regulatory bodies protecting an economy has influenced many

Sen & Roy (2016). Asian Journal of Research in Banking and Finance,

Vol. 6, No.1, pp. 22-31.

23

researchers to consider the role of informational environment and governance mechanisms of a

country while explaining Stock market Synchronicity. [Where, stock price synchronicity measures

the extent to which stock prices co-move with the market (Li et al., 2003, Morck et al., 2000, Roll,

1988, Skaife et al., 2005, Khandaker and Heaney, 2008)]. The literature reveals that there is a

significant relationship between the information environments of a firm with Stock synchronicity,

making the latter a strong determinant in explaining firm‟s exposure to financial crisis. Chan and

Hameed (2006), provided a positive relationship between information environment of a firm and

stock price synchronicity. Farooq and Ahmed (2014) also testified analogous findings by stating a

positive relationship between stock price synchronicity and governance mechanisms. Dasgupta et

al. (2010) documented that good information environment and improvement in governance

mechanism leads investors to make accurate future forecast of firms‟ specific events. An attempt

was made in this study to investigate whether the public sector bank stock price synchronicity

significantly differed from that during the pre crisis period and that of the post crisis period or not.

2. Literature Review

Does Information Environment and good governance mechanism affect Stock Price Synchronicity

or not?

In search of the answer for the above question one comes across with two views.

2.1: Stock Synchronicity rises when transparency level and good governance mechanism

increases or there is low opacity

Investor takes little interest to corporate governance during the days of tranquil but becomes

conscious when the market passes through a turmoil phase. The natural phenomenon during this

phase is that the manager tries to hide good information. As a result, sincere disclosure of

information is overlooked (Rajan and Zingales, 1998). This results in an information asymmetry

(Leuz et al., 2003). Absence of true information makes investors petrified enough to pull out capital

from the market creating a shortage of liquidity in the market adding more fuel to the fire.

According to Johnson et al. (2000) there is a tendency to expropriate information as the investor‟s

expected return decline during the crisis. Furthermore, the decline in the expected return makes

investors brood over the functioning of corporate mechanism. Thus, disclosing the supply of

relevant information is the need of the hour. It is argued that poor corporate governance mechanism

makes a firm vulnerable during financial crisis. Hence, low synchronicity is the outcome of firms

having poor corporate mechanism (Mitton, 2002). Now, symmetry of information leads to good

governance resulting in superior financial performance, relegate risk, consecutively building the

confidence of the investors. Economic theory (Diamond and Verrecchia, 1991) suggests that

greater disclosure of corporate governance lowers information asymmetry and estimating risk.

Morck et al. (2006) argued that the investors are discouraged while capitalizing on firms‟

information. The reason is weak legal protection of property rights. As a result, the stock prices are

driven by the information, predominant in the market making the stock prices synchronous. Thus,

transparency of information abets investors to appraise the banks having poor financial

performance with banks having strong financial performance.


Vol. 6, No.1, pp. 22-31.

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2.2: Stock Synchronicity increases when transparency level and good governance mechanism

decreases or high opacity

According to Jin and Myer (2006), less protection for property rights only partially explains

synchronicity in a market. Imperfect protection for investors does not affect synchronicity if the

firm is completely transparent. A decrease in transparency coupled with value capture by firm

insiders leads to lower firm-specific risk and higher synchronicity. They are of opinion that the

level of transparency adopted by a firm determines the division of risk borne by investors and

insiders. In economies where there is lack of transparent information sources to assess a firm‟s

financial performance and value, investors may not be able to confirm a firm‟s value as conveyed

by insiders (managers).Campbell et al. (2001) stated that large investors are exposed to greater risk

as stock co-movement increases. Morck et al. (2000) found that there is a threshold level for

institutional development of property rights. Below a certain threshold, synchronicity does not

decrease. For developed countries, synchronicity is higher when there is lower financial governance

in place. Beny (2000) reported a significant positive correlation between the strictness of a

country‟s proscriptions against insider trading and the lack of synchronicity of individual stock

returns. Durnev et al. (2004) found that corporate investment is more efficient when R² is low,

consistent with the notion that low R² stocks have more informationally efficient prices.

3. Data

Currently there are 25 public sector banks operating in India. The study has taken 16 such banks for

the purpose of empirical analysis. Nine banks are left out due to non-availability of data for the

entire study period. Daily stock price data of the above banks have been collected from 6th

September, 2005 to 31st December 2012 from the Capitaline database.

4. Determination of the sub period

This is very difficult to determine the exact time span of recent global financial crisis. This paper

has considered 9th

August, 2007 as the beginning of the crisis period as on that day BNP Paribus

froze three of their Collateralized Debt obligations (CDOs). As the situation eased within the year

2009, the present study has considered the period starting from 9th

august 2007 to 31st December

2009 as the crisis period. Hence, period from 6th

September 2005 to 8th

August 2007 has been

considered as the pre crisis period and the period after 31st December, 2009 to 31

st December, 2012

as the post crisis period.

5. Measure of Synchronicity

The R square measure of synchronicity is the most popular measure of synchronicity used by

researchers. Morck et al. (2000) are one of the proponents of R square statistics to measure stock

synchronicity.

In this study, the following simple market model with slight variation has been used to calculate R

square of each bank for three sub periods.


Vol. 6, No.1, pp. 22-31.

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--------------------------- (1)

Where,

is the return of firm i for the„t‟ th period.

is the SENSEX return for the same period.

is the auto regressive term included to deal with the problem of auto correlation .

is the error term.

The measure is the percentage of variation daily return of stock I explained by the variation in

the market return.

--------------------------- (2)

Where is the covariance between the share returns and share market returns and

the standard deviation for asset i and is the standard deviation for asset m.

The above measure has been applied in this study to capture synchronicity of bank stock.

In this study, synchronicity of all 16-bank stocks for the three sub periods has been calculated to

finds any difference between them.

6. Two Way Analysis of Variance (ANOVA) without replication

Two Way Analysis of Variance without replication has been used in this study to investigate

whether the synchronicity ( ), measured in three sub periods are significantly different or not.

Here, observations have been taken such that there should have only one observation per cell of the

cross tabulation table.

The General model can be written as

…………………..(3)

Where,

denotes the general effect

is the effect of i th class according to column factor

is the effect to the j th class according to row factor


Vol. 6, No.1, pp. 22-31.

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is the error component with „0‟ mean and variance

Hence, the null hypotheses are

: ,

: , H12 : At list two j ‟s are different

Decision rule:

If accept

General ANOVA table for Two-way classification without replication

Source of Variation Sum of

Square

Degree of

Freedom

Mean sum of

square

F ratio

Between

columns(Treatments)

SSC c-1 MSTR=SSC/c-1 MSIR/MSE

Between Rows

(Blocks)

SSB r-1 MSB=SSB/r-1 MSB/MSE

Residual Error SSE (c-1)(r-1) MSE=SSE/(c-

1)(r-1)

7. Comparing two population means: t test (unequal variance)

Present study also applies t test (unequal variance) to compare means of sub period synchronicity

(taking two sub periods at a time)

Test Statistics

df = ( approximately)

Decision Rule:

If


Vol. 6, No.1, pp. 22-31.

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8. Results and Discussions

R² values of three sub periods derived from the equation 1 have been reported in Table 1

Table 1. R² Values

R2

Name of Bank Pre-Crisis Period Crisis Period Post-Crisis Period

ALLAHABAD BANK 29.2 39.9 34

ANDHRA BANK 32.2 39.1 32

BANK OF BARODA 38.5 42.8 29.2

BOI 42.5 40.8 31.8

BANK OF MAHARASTRA 21.6 28.8 25.5

CANARA BANK 42.2 38.8 30.6

DENA BANK 27.4 45.4 42.2

IDBI BANK 43.3 50.6 51

INDIAN OVERSEAS BANK 30.8 39.4 33.8

ORIENTAL BANK OF COMMERCE 36.1 38.1 28.2

PNB 45.1 49.2 34.8

SBI 48 63.1 48.7

SYNDICATE BANK 37.6 37.7 40.9

UCO BANK 27.7 41.4 41.7

UNION BANK 37.7 35.1 28.3

VIJAYA BANK 33.9 41.3 41.7

8.1. The two factor ANOVA without replication

In the following two tables, the results of Two Factors ANOVA without replication have been

reported. In Table 2 the means and variances of synchronicity (R²) of all banks for three sub periods

have been reported. Moreover, cross sectional means and variances of three sub periods are also

reported.

Table 2 Means and Variances of Synchronicity (R²)

Summary Count Sum Average Variance

ALLAHABAD BANK 3 103.1 34.36667 28.72333

ANDHRA BANK 3 103.3 34.43333 16.34333

BANK OF BARODA 3 110.5 36.83333 48.32333

BOI 3 115.1 38.36667 33.06333

BANK OF MAHARASTRA 3 75.9 25.3 12.99

CANARA BANK 3 111.6 37.2 35.56

DENA BANK 3 115 38.33333 92.21333

IDBI BANK 3 144.9 48.3 18.79

INDIAN OVERSEAS BANK 3 104 34.66667 19.05333

ORIENTAL BANK OF COMMERCE 3 102.4 34.13333 27.40333

PNB 3 129.1 43.03333 55.04333

SBI 3 159.8 53.26667 72.64333

SYNDICATE BANK 3 116.2 38.73333 3.523333

UCO BANK 3 110.8 36.93333 63.96333

UNION BANK 3 101.1 33.7 23.56

VIJAYA BANK 3 116.9 38.96667 19.29333

Pre-Crisis Period 16 573.8 35.8625 54.3025

Crisis Period 16 671.5 41.96875 58.05696

Post-Crisis Period 16 574.4 35.9 57.55067


Vol. 6, No.1, pp. 22-31.

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From the ANOVA table (table no3) one can easily understand that both the F ratios for Rows and

columns are significant at one percent level. This indicates that both the null hypothesis should be

rejected and at least i ‟s and j ‟s are different. In other language at least in two sub periods

synchronicity is different and banks have different synchronicity among themselves.

Table 3. Two-Factor without Replication

ANOVA

Source of Variation SS df MS F P-value F crit

Rows 1802.965 15 120.1977 4.835714 0.000121 2.014804

Columns 395.2929 2 197.6465 7.951584 0.001695 3.31583

Error 745.6871 30 24.85624

Total 2943.945 47

8.2. Results of t- tests

Since there is enough evidence that there is significant difference in synchronicity between at least

two sub periods, t tests have been applied pair wise between sub period‟s synchronicity taking two

periods at a time.

In the table 4 results of t test taking period one and period two ( that is pre crisis and post crisis

period) have been reported .The computed t value (-2.3042) is highly significant and negative sign

clearly indicates that synchronicity in crisis period is greater than that of the pre-crisis period.

Table 5 shows the results of t test between synchronicity of crisis period and that of the post crisis

period. Again, the significant t statistic shows that there is a significant difference in synchronicity

in both periods. The positive sign in t statistic also indicates that synchronicity in crisis period is

higher than that of the post crisis period.

Finally, table 6 returns the result of t test between synchronicity of pre-crisis and post crisis periods.

The result shows that there is no significant difference in synchronicities between these two

periods. Hence, it is clear from the above results that synchronicity in crisis period is significantly

different from pre and post crisis periods.

Table 4. t-Test: Two-Sample Assuming Unequal Variances

(between pre-crisis and crisis period)

Pre-Crisis Period Crisis Period

Mean 35.8625 41.96875

Variance 54.3025 58.05696

Observations 16 16

Hypothesized Mean Difference 0

df 30

t Stat -2.304250837

P(T<=t) one-tail 0.014155586

t Critical one-tail 1.697260851

P(T<=t) two-tail 0.028311171

t Critical two-tail 2.042272449


Vol. 6, No.1, pp. 22-31.

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(between Crisis and Post-Crisis period)

Crisis Period Post- Crisis Period

Mean 41.96875 35.9

Variance 58.05695833 57.55067

Observations 16 16


df 30

t Stat 2.257698783

P(T<=t) one-tail 0.015700087


P(T<=t) two-tail 0.031400174



(between Pre-Crisis and Post-Crisis period)

Pre-Crisis Period Post- Crisis Period

Mean 35.8625 35.9

Variance 54.3025 57.55067

Observations 16 16


df 30

t Stat -0.014182968

P(T<=t) one-tail 0.494388956


P(T<=t) two-tail 0.988777912


9. Conclusion

Present study attempted to study the synchronous movements of Public Sector Banks‟ stock with

BSE SENSEX. The study period was sub divided into three sub periods. Pre crisis period, crisis

period (that is period of global meltdown) and post crisis period. It was established that

synchronicity in terms of R² was higher in the crisis period than that of the other sub-periods. The

reason behind this should be researched in a future study.


Vol. 6, No.1, pp. 22-31.

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Documents

Asian Journal of Research in Banking and Finance Asian Research Consortium A Comparative Study on the Synchronicity of Indian Public Sector Banks \" Shares during the Sub-Prime Crisis