Market State and Investment Strategies: Evidence from the Indian Stock Market

Supriya Maheshwari and Raj S. Dhankar

IIM Kozhikode Society & Management Review, 2018, vol. 7, issue 2, 154-170

Abstract: This study contributes to the growing literature on momentum and overreaction effect by investigating the same within the framework of the Indian stock market. Based on the most adopted methodology that employs monthly data, the empirical results derived confirm the existence of momentum and long-term overreaction effect in the Indian stock market. The overall results from the study are consistent with DeBondt and Thaler (1985) and Jegadeesh and Titman (1993) findings for the US stock market. In addition, we tested the profitability of momentum and contrarian strategies under different market states. The results indicated a strong relationship between the state of the market and momentum profitability, wherein strong momentum profits were observed following an ‘up’ market. On the contrary, long-term contrarian strategies were found to be stronger following a ‘down’ market in the Indian stock market. The market-dependent asset pricing model failed to explain excess momentum profits in the Indian stock market. The evidence from the study provides partial support to various behavioural models to explain these effects in the Indian stock market. However, there exists a need to develop a single behavioural model that could explain these anomalies completely in the emerging markets like India.

Keywords: Momentum; contrarian; Indian stock market; market state; behavioural models (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:sae:iimkoz:v:7:y:2018:i:2:p:154-170

DOI: 10.1177/2277975218769501

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