Interrogation of a Bubble in the Indian Market

Abstract

Emerging markets such as India provide the investors with returns far greater than those in developed markets; taking the average returns from the period 1995 to 2014 the returns are 4.714% to 3.276% of the developed market (US not included). Majority of emerging markets commenced joining with the capital market of the world, thus allowing huge inflow of capital which in turn paved the path for economic growth. Even though the emerging markets provide high returns these may also be an indication of a bubble formation. Detection of a bubble is a tedious task primarily due to the fundamental value of the security being uncertain, the randomness of the fundamentals of the market make detecting bubbles an arduous task. Ratios that foretold the financial crisis of 2007- Market Capitalization to GDP (Buffet Indicator), Price to Earnings Ratio (PE Ratio), Price to Book Value (PB Ratio), Tobin’s Q. Data is collected from the 1999-2000 from various Indian indices such as NIFTY 50, NIFTY NEXT 50, NIFTY BANK, NIFTY 500 S&P BSE SENSEX, S&P BSE 100. The paper utilizes the ratios mentioned above to detect and back track various bubble episodes in the Indian market; methodology used is the Philips et al (2015) right tailed unit test. The paper is also inclined to take steps to mitigate the effects of bubble by amending the financial policies and the monetary liquidity of the financial system.