Momentum anomaly: evidence from the Indian stock market

Abstract

Purpose The purpose of this paper is to provide insights into the profitability of momentum strategies in the Indian stock market. This study further evaluates whether the momentum effect is a manifestation of size, value or an illiquidity effect. Design/methodology/approach Monthly stock return data of 470 BSE listed stocks over the sample period from January 1997 to March 2013 were used to create extreme portfolios (winner and loser). The returns of extreme portfolios were evaluated using t-statistics and a risk-adjusted measure. Further checks were imposed by controlling for other potential sources of risk including size, value and illiquidity. Findings The study provides support in favor of momentum profitability in the Indian stock market. In contrast to the literature, momentum profitability is driven by winning stocks, and hence, buying past winning stocks generates higher returns than shorting loosing stocks in the Indian stock market. Strong momentum profits were observed even after controlling for size, value and trading volume of stocks. This suggests that the momentum effect in the Indian stock market is not a manifestation of small size effect, value effect or an illiquidity effect. Practical implications From the practitioner’s perspective, the study indicates that a momentum-based investment strategy in the short run is still persistent and can generate potential profits in the Indian stock market. Originality/value There is little empirical evidence on the momentum profitability, especially in the Indian stock market. The study contributes toward the literature by analyzing the momentum profitability even after controlling for size, value and an illiquidity effect. Some aspects of the momentum effect were observed to be dissimilar from those observed in literature for the USA and other countries. Such findings justify the need for testing the momentum profitability in stock markets other than the USA.

Overreaction and underreaction anomalies in the Indonesian stock market: a sectoral analysis

“…For example, the studies on overreaction anomaly have been conducted by Ansari and Khan (2012) and Maheshwari and Dhankar (2017) in India; Subadar Agathee (2012) in Mauritius; Boubaker et al (2015) in Egypt; and Zainudin and Hussin (2015) in the Shenzhen market. Adopting both risk-based and behavioural models, Ansari and Khan (2012) and Maheshwari and Dhankar (2017) found the presence of momentum profits in India during the periods 1995-2006 and 1997-2013, respectively. The presence of the momentum profits was also documented in Mauritius for the 2001-2009 periods (Subadar Agathee, 2012).…”

Time-Series and Cross-Sectional Momentum in Indian Stock Market

“…Sehgal and Balakrishnan (2002) initially observed significant cross-sectional momentum effect in the Indian market. Further, several academic studies confirm these findings (Garg & Varshney, 2015;Maheshwari & Dhankar, 2017;Mohapatra & Misra, 2020).…”

“…Research studies have proved the substantial existence of cross-sectional momentum (relative momentum) across different asset classes and financial markets (Jegadeesh & Titman, 2001;Griffin, Ji & Martin, 2003;Asness, Moskowitz & Pedersen, 2013). Many research studies have proved the profitability of cross-sectional momentum strategies in the Indian market (Sehgal & Jain, 2015;Garg & Varshney, 2015;Maheshwari & Dhankar, 2017). Recently Moskowitz, Ooi and Pedersen (2012) suggested an alternative framework for the selection of financial assets which is based on the absolute performance of financial assets over some past period.…”

Role of leverage and liquidity risk in asset pricing: evidence from Indian stock market

“…Thus, there is a time-lag of six months between the fiscal year-end and the formation of the portfolios. This is a commonly adopted procedure in the asset pricing literature (Miffre and Rallis, 2007;Singh and Yadav, 2015;Maheshwari and Dhankar, 2017). This is generally done because the companies usually take around six months to publish their audited annual statements.…”