Graduation Year

Spring 2013

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Thomas Willett

Reader 2

Lisa Meulbroek

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2013 Rohan Kothari

Abstract

Since 1992, India has grown as a global player in the finance world. In spite of its success, India has not been able to rid itself of potentially harmful practices. One such practice is the issuing of Participatory Notes (PN) to foreign investors, so that they can anonymously purchase securities or derivatives listed on the Indian Stock Exchanges. This instrument came into public view when it accounted for approximately 50% of all foreign portfolio assets in India. Since then, the laws regarding PNs have evolved to become a more transparent version of the old rules. Although PN levels are not close to as high as 2007, a rising trend in PNs has been observed from September to November 2012. Regulation may have helped figure out who the end PN holder is, but it has not helped mitigate the inherent volatility that some scholars argued PNs had. This paper follows previous researchers claims to try to resolve the issue using rigorous econometric analysis. It uses the Vector Auto Regression (VAR) Model to find the coefficient of change in Participatory Note volume when regressed against the U.S. Dollar Indian Rupee Nominal Exchange Rate. Although the model’s results are interpreted, a problem of serial correlation existed in the model, thus impairing the results.

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