Issues for Research

Corporate Finance
a. What shapes the cost of capital for firms in India? Do firms with substantial foreign shareholding obtain a lower cost of capital?
b. How do firms in India finance themselves? How do firms choose between debt and equity, and banks and markets? How have their choices been changing over time?
c. How can option pricing be applied to think about the valuation of corporate debt?
d. How do the IPO and SEO markets behave? How can these markets be redesigned to obtain superior outcomes? How can issuance costs be reduced?
e. How can small firms obtain capital from the securities market? What is the appropriate role for venture capital funds as opposed to securities issuance in this regard? What is the minimum size at which the information processing of the securities market is strong enough?
f. What is the appropriate regulatory structure for the primary market for debt and equity?
g. The private placement market is an important and largely unregulated vehicle for fund raising. What are the strengths and weaknesses of the private placement route? Is the regulatory burden lower? Is the incidence of fraud higher?
h. To what extent do alternative institutional channels (banks versus markets, debt versus equity, etc) generate an efficient resource allocation? How does the information processing in these alternative channels compare?
i. How does India's market for corporate control operate? What is the empirical evidence about the impact of control transactions upon valuation and economic efficiency? How can the regulatory framework for this market be improved?
j. What is the evidence about stock market reaction to announcements before the announcement date?
Market Efficiency
a. How is news incorporated into prices in India? To what extent, do prices reflect forecasts of future risk and return, and nothing but future risk and return? Can we measure the speed with which markets incorporate news into prices?
b. What is the evidence on returns forecasting in India? To what extent are the observed pathologies related to under-estimation of transaction costs and data-mining biases? Does the picture change substantially if we use intra-day data?
c. Do returns forecasting strategies become less useful when they become widely known? Does economic research improve market efficiency?
d. Why do we see persistence in volatility models? Is news auto co-related or are markets slow in absorbing information?
e. How do disclosure laws impact on market efficiency? In the past, when disclosure laws (or rules of information publication at the exchange) were changed in India, how did it impact on market efficiency?
f. When the same product is traded on two or more markets, what drives the joint movement of both prices? Are there lead-lag relationships? What is the "no-arbitrage band", and what are its components? What is the "information share"? Does fragmentation of markets help or hurt?
g. How does trading of Indian securities outside India impact upon price formation in India?
h. How does our understanding about the interplay between transactions costs and market efficiency generalise with costs in clearing and settlement?
Financial Markets and the Economy
a. How do banks and markets differ in the quality of their information processing?
b. Are financial market outcomes generating a sound resource allocation?
c. Has the information processing of markets improved owing to the reforms process? Is this yielding a lower ICOR at the level of the economy as a whole?
d. Has there been any change in the spread of equity cult over the last five years? What is the risk taking profile of different types of investors? Does settlement guarantee influence risk taking/trading of investors?
Asset Pricing
a. How should beta be estimated in India?
b. Does the CAPM drive returns in India? To what extent does the single index market model explain portfolio risk?
c. How should factor models be estimated, and how well do they work? How can the covariance matrix of returns on all stocks be estimated? How can intra-day data be used to improve the efficiency of this estimate?
d. How can factor models be used in a process of active management based on security analysis and portfolio optimisation?
e. What is the Indian evidence on asset pricing anomalies such as size, and value versus growth?
f. Is liquidity priced? What is the metric of liquidity, which plays a prominent role in the liquidity premium?
g. How has international integration changed asset pricing in India?
Information Infrastructure
a. How should the stock market index be constructed?
b. What is the impact of stale prices on all applications of the stock market index?
c. How does inclusion or exclusion from the market index impact on the liquidity, stock price and cost of capital for firms?
d. How should reference rates from dealer markets be constructed?
e. What is the impact of the dissemination of sound information products upon market efficiency?
Risk Measurement
a. What are the alternative techniques to implement VaR, and how well do they fare?
b. How can VaR estimators be scaled up to different time intervals, e.g. from one--day VaR to two--day VaR?
c. Should the models for estimating VaR differ across market regulators and market participants?
d. What are the VaR estimators applicable to Indian securities market (equities, foreign exchange, fixed income, commodities)? How would we incorporate derivatives into these implementations?
e. What is a sound VaR implementation for a portfolio of futures on the Nifty? How can the basis risk of Nifty futures be estimated?
f. What are the issues in a VaR estimator for a portfolio of options on Nifty?
g. What is a sound VaR estimator for a portfolio of shares, which incorporates liquidity risk?
h. How can the computational cost of VaR estimation be brought down?
i. How do we measure liquidity risk, and how do we incorporate it into the initial margin of the futures clearing corporation? When the clearing corporation needs to liquidate a position, how best should it do so?
Derivatives
a. What is the impact of derivatives upon market efficiency and liquidity of the underlying?
b. How should we design derivative markets on the equity, fixed income, currency and commodity markets in India?
c. What contract design should be employed on each of the important derivative products in India? How do we incorporate characteristics about the users and about the underlying market into contract design?
d. How should options be valued and hedged on the four underlyings: Nifty, MIBID/MIBOR, the long interest rate and the dollar--rupee? How should this hedging be done if transacting is not frictionless but reflects costs seen in reality? To what extent do large close-to-open moves hinder hedging?
e. How do we optimise arbitrage for index futures and index options?
f. How does the presence of price limits on the equity spot market impact on options and futures on the index, and on options on individual stocks?
g. How should valuation and hedging of more complex derivatives (e.g. futures and options on Defty) be done?
h. What is the appropriate regulatory structure for derivatives markets? How do we address concerns about market manipulation and systemic fragility? To what extent do derivatives destabilise the financial system, and how should these risks be addressed?
The proposal may seek to address specific issues such as,
• Do price limits and trading halts matter in price formation? How should they be optimised?
• Does leverage help or hinder liquidity and market efficiency? What is the evidence about the impact of changing margin regimes on India's equity market?
• How does inclusion or exclusion from the market index impact on the liquidity, stock price and cost of capital for firms?
• How do we optimise arbitrage for index futures and index options?
• How should no-arbitrage models be calibrated on the Indian fixed income market, and how can they be used to value options on interest rates?
• Are the provisions contained in the bye-laws, rules and regulations of the stock exchange adequate to provide desired level of safeguard and protection to investors? Can these be improved?