Long-term prior return patterns in stock and sector returns in India

Sanjay Sehgal and Sakshi Jain

Journal of Advances in Management Research, 2014, vol. 11, issue 2, 192-210

Abstract: Purpose - – The purpose of this paper is to analyze long-term prior return patterns in stock returns for India. Design/methodology/approach - – The methodology involves portfolio generation based on company characteristics and long-term prior return (24-60 months). The characteristic sorted portfolios are then regressed on risk factors using one factor (capital asset pricing model (CAPM)) and multi-factor model (Fama-French (FF) model and four factor model involving three FF factors and an additional sectoral momentum factor). Findings - – After controlling for short-term momentum (up to 12 months) as documented by Sehgal and Jain (2011), the authors observe that weak reversals emerge for the sample stocks. The risk model CAPM fails to account for these long-run prior return patterns. FF three-factor model is able to explain long-term prior return patterns in stock returns with the exception of 36-12-12 strategy. The value factor plays an important role while the size factor does not explain cross-section of average returns. Momentum patterns exist in long-term sector returns, which are stronger for long-term portfolio formation periods. Further, the authors construct sector factor and observe that prior returns patterns in stock returns are partially absorbed by this factor. Research limitations/implications - – The findings are relevant for investment analysts and portfolio managers who are continuously tracking global markets, including India, in pursuit of extra normal returns. Originality/value - – The study contributes to the asset pricing and behavioral literature from emerging markets.

Keywords: India; Behavioural finance; CAPM; Fama-French model; Trading strategies; Contrarian strategy; Momentum profits (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jamrpp:v:11:y:2014:i:2:p:192-210

DOI: 10.1108/JAMR-02-2012-0002

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