Do the Rich Get Richer in the Stock Market? Evidence from India

Abstract

We collect stock-level data on monthly total returns, market capitalization, and book value from three sources: Compustat Global, Datastream, and Prowess. Prowess reports data from both of India's major stock exchanges, the Bombay and National Stock Exchanges (BSE and NSE). In addition, monthly price returns can be inferred from the month-end holding values and quantities in the NSDL database. We link the datasets by ISIN. 2 To verify reliability of returns data, we compare total returns from the available data sources, computing the absolute differences in returns series across sources. For each stockmonth, we use returns from one of the datasets for which returns match another dataset most closely, where the source from amongst those datasets is selected in the following order of priority: Compustat Global, Prowess NSE, then Prowess BSE. If returns are available from only one source, or the difference(s) between the multiple sources all exceed 5% then we compare price returns from each source with price returns from NSDL. We then use total returns from the source for which price returns most closely match NSDL price returns, provided the discrepancy is less than 5%.After computing total returns, we drop extended zero-return periods which appear for non-traded securities. We also drop first (partial) month returns on IPOs and re-listings, which are reported inconsistently. For the 25 highest and 25 lowest remaining total monthly returns, we use internet sources such as Moneycontrol and Economic Times to confirm that the returns are valid. We also use internet sources to look up and confirm returns for stockmonths where returns are missing and the stock comprises at least one percent of stock holdings for the representative individual investor for either the previous or current month.We follow a similar data verification procedure for market capitalization and book value, confirming that the values used are within 5% of that reported by another source. Where market capitalization cannot be determined for a given month, we extrapolate it from the previous month using price returns. Where book value is unknown, we extrapolate it forward using the most recent observation over the past year.

Household Finance

“…First, while we have earlier discussed the availability of low-cost index tracker funds, this is not widespread. In many economies, low-cost diversification vehicles such as passive index funds or their more sophisticated equivalents simply do not exist, and so households must invest directly in stocks (Badarinza, Balasabramaniam, and Ramadorai, 2019;Campbell, Ramadorai, and Ranish, 2019). This means that in many situations, households must trade to achieve diversified portfolios.…”

Heterogeneity and Persistence in Returns to Wealth

“…A few recent papers study heterogeneity in returns to wealth in relation to the inequality debate, but they are all restricted to a specific assets type (Fagereng, Guiso, Malacrino, and Pistaferri () to financial wealth, Deuflhard, Georgarakos, and Inderst () to bank deposits, and Campbell, Ramadorai, and Ranish () to portfolios of single stocks). In contrast, we provide systematic evidence on individual returns to a comprehensive measure of wealth (as well as its components), and characterize return properties using population data.…”

Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field

“…28 See for instance, Bach, Calvet, and Sodini (2017), Lusardi, Michaud, and Mitchell (2017), Campbell, Ramadorai, and Ranish (2019), and Fagereng, Guiso, Malacrino, and Pistaferri (2020).…”