Three essays related to behavioral finance issues in the Indian stock market /
Three essays related to behavioral finance issues in the Indian stock market /
No Thumbnail Available
Files
Date
2010
Authors
Chowdhury, Shah
Journal Title
Journal ISSN
Volume Title
Publisher
Middle Tennessee State University
Abstract
This dissertation investigates the behavioral finance issues in the Indian stock market. This consists of five chapters. Chapter two, three, and four present three stand-alone essays on the behavioral issues in the Indian stock market. Chapter one and five provide the introduction and conclusion of the paper, respectively.
The first essay, "Momentum Strategies: Evidence from the Indian Stock Market," investigates the presence of momentum profits on the Indian stock market over the period 1991-2006. I find no observed momentum profits or return reversals when simple non-overlapping medium- and long-term strategies are considered. However, I find significant momentum profits in higher market value and higher turnover portfolios for 6-6 (six-month formation and tracking period) strategies. Results also show return reversals for 33 strategies of winner-loser portfolios when I sort small size and low volume firms by market value and turnover criteria, respectively. Finally, I also find return reversals for 11 (short-term) strategy for all winner-loser portfolio combinations. Thus, it is possible to earn abnormal return in the Indian stock market by using appropriate trading strategies.
The second essay, "Sources of Momentum and Contrarian Profits in the Indian Stock Market," examines the presence and sources of contrarian and momentum profits in the Indian stock market. Results show that there are contrarian and momentum profits in the short- and medium-term investment horizons, respectively. Further investigation reveals that investors can only earn short-term contrarian profits by investing in small and medium size (and low- and medium-volume of trade) firms. In contrast, large firms (and high-volume of trade firms) appear to be correctly priced, leaving no opportunity for contrarian profits. As far as sources of contrarian profits are concerned, firm-specific component is the major source of such profits. The role of firm-specific component as the source of contrarian profits for large size and high trade volume firms is very small and this phenomenon explains why large firms do not contribute to contrarian profits. Firm-specific component plays the major role in contrarian profits for small and medium size and low and medium trade volume firms. However, the good news for the Indian stock market is that the contribution of firm-specific component as a source of contrarian profits has decreased dramatically during the period 2000-2006.
In a large stock market such India, firms are highly differentiated in terms of risk factors or other attributes such as size, volume of trade, market-to-book value ratio. Keeping this mind, the third essay, "Lead-Lag Relationships between Stock Returns in the Indian Stock Market," investigates the presence of lead-lag relationships between stock returns in the Indian Stock market using above-mentioned factors as the basis for portfolio selection. Moreover, this essay examines the speed of adjustment of market-wide information into stock prices. The results of the study show that there is weak evidence of lead-lag relationship between large and small firms on the Indian stock market. This size-related lead-lag effect exists for medium and low volume firms, but not for high volume firms. The lead-lag relationship between high and low volume firms is almost nonexistent for both size-volume and MV/BV-volume portfolios. Results of Dimson beta regression find that high volume portfolios respond to market-wide relevant information faster than low volume portfolios. This result is obtained for medium and low MV/BV sorted portfolios only, implying that high volume firms are more efficient than low volume ones. This finding is consistent with the established theory that volume of trade plays an important role in the speed of information adjustment into stock prices.
The first essay, "Momentum Strategies: Evidence from the Indian Stock Market," investigates the presence of momentum profits on the Indian stock market over the period 1991-2006. I find no observed momentum profits or return reversals when simple non-overlapping medium- and long-term strategies are considered. However, I find significant momentum profits in higher market value and higher turnover portfolios for 6-6 (six-month formation and tracking period) strategies. Results also show return reversals for 33 strategies of winner-loser portfolios when I sort small size and low volume firms by market value and turnover criteria, respectively. Finally, I also find return reversals for 11 (short-term) strategy for all winner-loser portfolio combinations. Thus, it is possible to earn abnormal return in the Indian stock market by using appropriate trading strategies.
The second essay, "Sources of Momentum and Contrarian Profits in the Indian Stock Market," examines the presence and sources of contrarian and momentum profits in the Indian stock market. Results show that there are contrarian and momentum profits in the short- and medium-term investment horizons, respectively. Further investigation reveals that investors can only earn short-term contrarian profits by investing in small and medium size (and low- and medium-volume of trade) firms. In contrast, large firms (and high-volume of trade firms) appear to be correctly priced, leaving no opportunity for contrarian profits. As far as sources of contrarian profits are concerned, firm-specific component is the major source of such profits. The role of firm-specific component as the source of contrarian profits for large size and high trade volume firms is very small and this phenomenon explains why large firms do not contribute to contrarian profits. Firm-specific component plays the major role in contrarian profits for small and medium size and low and medium trade volume firms. However, the good news for the Indian stock market is that the contribution of firm-specific component as a source of contrarian profits has decreased dramatically during the period 2000-2006.
In a large stock market such India, firms are highly differentiated in terms of risk factors or other attributes such as size, volume of trade, market-to-book value ratio. Keeping this mind, the third essay, "Lead-Lag Relationships between Stock Returns in the Indian Stock Market," investigates the presence of lead-lag relationships between stock returns in the Indian Stock market using above-mentioned factors as the basis for portfolio selection. Moreover, this essay examines the speed of adjustment of market-wide information into stock prices. The results of the study show that there is weak evidence of lead-lag relationship between large and small firms on the Indian stock market. This size-related lead-lag effect exists for medium and low volume firms, but not for high volume firms. The lead-lag relationship between high and low volume firms is almost nonexistent for both size-volume and MV/BV-volume portfolios. Results of Dimson beta regression find that high volume portfolios respond to market-wide relevant information faster than low volume portfolios. This result is obtained for medium and low MV/BV sorted portfolios only, implying that high volume firms are more efficient than low volume ones. This finding is consistent with the established theory that volume of trade plays an important role in the speed of information adjustment into stock prices.
Description
Adviser: Franklin A. Michello.