Portfolio optimisation risk management and professional bias an empirical analysis of the Indian stock market

Abstract

The study examines the temporal periodicity and sensitivity of the Indian stock market returns. The variance analysis and GARCH analysis of the Indian stock market shows that does the Indian stock market returns do not follow a random walk nor is it insensitive to market movement. Further, by employing the ARDL model, a comparative analysis of the pre- and post-financial crisis period highlights the impact of significant macroeconomic variable (crude oil, interest rate and inflation) on the stock market returns. The interpretation of the temporal periodicity and macroeconomic analysis, led to the formation of optimal portfolio based on the Black-Litterman model, which was compared with CVaR values. The secondary analysis highlights the importance of inclusion of investor s opinion for portfolio optimization. In this regard, the primary analysis on professional biases shows that even the investment advisors are affected by behavioural biases, which in turn impacts the investment decision made by them. newline