Multivariate Analysis to get an Estimate of the Indian Stock Market Nifty Index

The Indian stock market S and P CNX Nifty Index (Nifty) is a well diversified index of 50 companies. Foreign Institutional Investors (FII’s), wield significant influence over daily trading volumes in both the spot and derivative segments in the Indian markets. This tends to impact market volatility and returns. This study attempted to study the effect of FII transaction amounts, derivative turn over amounts and volatility on the performance of the Nifty index. A strong correlation was observed between derivative turnover and the Nifty but the correlation was relatively weaker between the Nifty and FII transaction amounts and Volatility. FII and F&O activity established important tops ahead of major tops in the Nifty. Volatility remained low during periods of significant upside in the stock market but spiked up during market declines. Linear and Non-linear models using multivariate analysis were fit to estimate the Nifty from the respective independent variables. A non linear model involving all three variables provided the best fit and the least deviation from actual values suggesting that interplay of these and other factors drive the performance of the index.
Keywords: Nifty, FII transaction amounts, F&O turnover, Volatility, Nifty forecasting, Linear and Non Linear Models.