Are Prominent Equity Market Anomalies in India Fading Away?

Abstract

In this study, we revisit prominent equity market anomalies documented for India, namely size, value, volume and momentum. Using data for NSE 500 companies, we test for the persistence of these anomalies for a recent period from July 2005 to June 2016 employing one-factor capital asset pricing model (CAPM) and three-factor Fama–French model as asset pricing benchmarks. We test for the robustness of these anomalies by (a) forming both quintile and decile portfolios and (b) forming univariate and variety of bivariate-sorted portfolios. Corner portfolios based on deciles provide greater return differentials compared to quintile portfolios. Bivariate-sorted portfolios do not seem to outperform univariate-sorted portfolios. The value and momentum anomalies are explained by risk models which is contrary to prior evidence. Size and volume anomalies continue to provide significant returns but seem to have faded substantially over time when compared with the past results. The findings about weakening prominent Indian equity market anomalies shall pose a challenge for portfolio managers who may have to look for other sources of extra-normal profits. Indian market also seems to be informationally more efficient which is in line with recent financial market reforms and growing emphasis on financial inclusion and corporate governance.

Equity Market Anomalies, VIX and Asset Pricing: Trading Strategies for India

“…Gonenc and Ursu (2018) document the presence of asset growth anomaly among 26 emerging markets, including India. Sharma et al (2019) revisit the size, value and momentum anomaly on data set of 2005 to 2016 and find weak persistence of these anomalies.…”

Firm Attributes, Corporate Fundamentals and Investment Strategies: An Empirical Study for Indian Stock Market

“…They are non-frequent trading, transaction costs, illiquidity, business cycles and the existence of micro-stocks (see Amihud & Mendelson, 1986;Chan et al, 1985;Fama & French, 2008;Roll, 1981;Stoll & Whaley, 1983). Presence of size anomaly is confirmed across various markets (see Alquist et al, 2018;Crain, 2011;Dimson et al, 2017;Leite et al, 2018;Mohanty, 2002;Pandey & Sehgal, 2016;Schwert, 2003;Sharma et al, 2019;Subramaniam et al, 2017).…”

“…According to the volume anomaly (Illiquidity anomaly), stocks with less liquidity command an illiquidity premium and hence provide higher returns compared to high-volume stocks. Various studies in mature and emerging markets have analysed the relationship between stock liquidity and returns and have confirmed the presence of volume anomaly (see Amihud, 2002;Amihud & Mendelson, 1986;Blau et al, 2018;Campbell et al, 1993;Chiang & Zheng, 2015;Lee & Swaminathan, 2000;Pastor & Stambaugh, 2003;Sehgal & Vasishth, 2015;Sehgal et al, 2012;Sharma et al, 2019;Subramaniam et al, 2017).…”

A Riskmas Carol

“…However, the presence of these effects contradicts the efficient market hypothesis (EMH; Malkiel & Fama, 1970), which proclaims the futility of historical prices in predicting future returns (Sharma et al, 2019). The presence of these anomalies is due to the so-called calendar effects.…”