An empirical investigation of return spillover and volatility dynamics of Indian sectoral indices

Abstract

This research delves into the interconnectedness and volatility dynamics within sectoral indices amid the COVID-19 pandemic, to determine the most appropriate model for elucidating these dynamics. It addresses the burgeoning interest among investors in comprehending sectoral dynamics within India’s stock markets. Leveraging five years of daily closing price data (April 2017 to December 2021) sourced from the National Stock Exchange’s official website for 16 sectoral indices and the Nifty50 index, the study employs the Diebold-Yilmaz Spillover 2012 framework alongside four GARCH models (E-GARCH, T-GARCH, FIE-GARCH, and FE-GARCH). Empirical analysis underscores that the mid-small financial sector is the riskiest sector among others, advocating for the inclusion of the pharmaceutical sector to mitigate portfolio risks. Furthermore, the research underscores the persistence of volatility across sectors and identifies the TGARCH model as the appropriate model to capture the volatility for most sectoral indices.