CHAPTER-1

Introduction Over the last two decades, a large body of literature has emerged documenting the profitability of two distinct investment strategies contrarian and momentum strategies. DeBondt and Thaler (1985, 1987), Jegadeesh and Titman (1993) and many other researchers show that stock returns suffer from mean-reversion regularities, the notion that past return information can be utilized to make future abnormal returns. A contrarian strategy or return reversal is the strategy of selling recent winner stocks and buying recent loser stocks. Initially, contrarian profits were thought to be a long-term phenomenon. However, DeBondt and Thaler (1985)(1987), Jegadeesh (1990), Lehmann (1990), Chopra, Lakonishok, and Ritter (1992), and Nam, Pyun, and Avard (2001) show that contrarian profits also exist in both the short-run (weekly) and long-run (3-5 years) horizons. In this strategy, past losers become winners in the long-term. In general, these studies have attributed investors overreaction to market news as the primary source of contrarian profits or return reversal. On the other hand, a momentum strategy is a strategy of buying recent winner stocks and selling recent loser stock. Momentum profits are realized from the tendency of a security to continue movement in a single direction. The momentum strategy has been documented by Jegadeesh and Titman (1993, 2001), and Chan, Jegadeesh, and Lakonishok (1996) who show that investors routinely underreact to market news so that smart investors can exploit the momentum in the stock prices at intermediate terms of 3 to 6 months by buying recent winners and selling recent losers, and, consequently, earning risk-adjusted abnormal returns. In these studies, past winners in the past three to twelve months outperform past losers in the next three to twelve months. Thus the return in the medium-term is the continuation of past performance. In general, these studies have attributed investors underreaction to market news as the primary source of price momentum.

In this study, we evaluate the profitability of momentum strategies in the Indian stock market. More specifically, we evaluate the momentum strategy not only within the common time horizons of short, medium, and long term strategies but also by considering key market factors such as market value and turnover. Our approach integrates behavioral and cultural features of Indian investors as key exogenous variables that partially explain the momentum phenomenon observed on this market. We examine the Indian stock market during the period 2006-2012. Although a large body of literature has emerged over the last twenty years examining contrarian and momentum strategies and their resultant return characteristics, these studies have mainly focused on U.S., European, and some Asian markets. To date, there has been relatively less effort at investigating the existence of such behavioral phenomenon in emerging stock markets such as India. The research on emerging markets has revealed some stylized facts that conclude that these markets (i) are segmented from developed markets, (ii) have higher predictability than developed markets, and (iii) are more volatile than developed markets.2 Furthermore, emerging markets have some stylized characteristics such as lack of liquidity, vulnerability to currency risk, and shortage of qualified analysts and limited participation by institutional investors which make them especially appealing to investigate.
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To date, and to our knowledge, no study has analyzed momentum strategies in the Indian stock market. Although some studies (e.g. Chui, Titman, and Wei (2005) and Griffin, Ji, and Martin (2003)) have covered the Indian stock market as a sample in their research of many other stock markets around the world, we believe that further study will add to the existing body of knowledge of this important emerging market which has unique features and characteristics and a long history in South Asia. Our motivation for studying the Indian Capital market is that the Indian economy is relatively insular. The level of exports, though increasing, has a relatively minor impact on the economy compared to, for example, China, Japan, Malaysia or Hong Kong--countries that have been examined in papers cited earlier. Further, the Mumbai stock market index as a whole exhibits a very low degree of correlation with either the London or the New York stock market indexes, suggesting that overseas market developments have little bearing on the valuation of Indian stocks. These facts suggest that the results of this study are of special interest to academicians, researchers as well as practitioners. It provides an out of sample evidence of momentum profits from investment strategies in the Indian market as documented in US and other markets. These results can be used by investment analysts, mutual fund managers as well as marginal investors in devising investment strategies which promise extra-normal returns. Our major findings are: (i) In general, there are no observed momentum profits or return reversals on the Indian stock market when simple non-overlapping medium-term and long-term strategies and tracking periods are considered; (ii) we find significant momentum profits in higher market value and higher turnover portfolios for 6-6 (6-month formation and 6-month holding period) strategies when firms are sorted by market value and turnover; (iii) we find return reversals of winner-loser portfolios for 3-3 strategies when small and low trading volume firms are sorted by market value and turnover criteria, respectively; and (iv) we also find return reversals for 1-1 short-term strategy for all winner-loser portfolio combinations. That is, last months winner (loser) portfolio consistently becomes loser (winner) portfolio in the following month. Thus an investor could easily devise an investment strategy that would result in abnormal profit by changing the portfolio every month and holding it for one month. The rest of the study is structured as follows: We provide a brief survey of the literature in section 2. Section 3 presents a short description of the Indian capital market and its economy since India undertook liberalization policies in the late 1980s through the early 1990s. Section 4 discusses data and methodology issues. Section 5 analyzes the results and section 6 summarizes and concludes the study.

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CHAPTER-2
Indian Capital Market The Mumbai Stock Exchange, (previously known as the Bombay Stock Exchange or BSE) is the dominant stock exchange in India, with close to 6,000 listings. It was established in 1875, making it the oldest stock market in Asia. It is the 10th largest stock exchange in the world and had a market capitalization of US$1.79 trillion3 as of December 31, 2007. The BSE index (SENSEX) is Indias leading and first stock index that now enjoys an iconic stature and is tracked throughout the world. The index comprises of 30 stocks and represents 12 most important sectors. Between October 8, 1999 and February 6, 2007, the index experienced a dramatic rise and doubled in value from 5,000 to 10,000. The National Stock Exchange (NSE) is also a Mumbai-based stock exchange and was incorporated in 1992. In October, 2007 its market capitalization of listed companies stood at US $ 1.46 trillion.4 The NSEs key index is the S&P CNX Nifty, known as Nifty, an index of fifty major stocks weighted by market capitalization. In 1990, the Indian economy experienced a serious balance of payment crisis which compelled the government to undertake a series of economic policy reforms. These economic reforms were in foreign exchange management, industrial policy, fiscal policy, monetary policy, and international trade. The objective of the reforms was to easy the regulatory environment for foreign investors in order to transform the economy by enabling the private sector and financial markets to play a stronger role in resource allocation. As a result of the reforms, Indias average GDP growth rate rose and ranked among the top 10 in the world (Bhide, 2001). Unfortunately, this high growth rate also exposed India to greater internal and external shocks5 putting the economy at higher risk. Indias main concern became how to sustain high growth while at the same time increasing domestic income (in order to reduce fiscal deficit). To address these issues, the government embarked on a number of policy reforms which included tax rate reduction to achieve desired target, reform of banking sector, and reduction of statutory reserves. The monetary authorities also used open market operations to influence money supply by using the improved market for government securities. In addition, the government reduced external exposure by withdrawing governmental intervention in foreign exchange rate determination. As a part of trade liberalization, tariff and non-tariff trade barriers were also reduced by decreasing duties and import restrictions. There was also relaxation of external capital inflows and elimination of capital market price controls. These policy changes were successful in attracting a large number of foreign institutional investors.

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India experienced approximately 31 percent growth in initial public offerings in 2006. During the period 2000-2005, its market capitalization to GDP ratio rose to 77 percent, reflecting the trend in foreign capital inflows and growth in the domestic investor base (Purfield et al., 2006). Foreign investors held about 10 percent of GDP in equity value. The domestic institutional investor base also expanded during this time. Insurance, pension and mutual funds assets rose to 15 percent of GDP, with significant portions invested in equities (Purfield, 2007). The SENSEX index increased at an annual compound rate of 17 percent with inflows of foreign capital at approximately $26 billion. One explanation for this phenomenon was the low interest rate in the USA and the growing attractiveness of the Indian capital market. During this time, the Indian stock market was relatively stable and effectively shielded itself from experiences such as the Asian financial crisis. The market experienced high investor confidence as illustrated by a P/E ratio of more than 20 for the overall market and a P/E ratio of 30 for the technology sector (Purfield, 2007).

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CHAPTER-3
Literature Review The literature on the profitability of contrarian and momentum strategies portfolios is largely attributed to the seminal work of DeBondt and Thaler (1985) who show that during the period from the 1920s through the 1980s, abnormal profits were obtained in U.S. stock markets from portfolio strategies that bought (sold) stocks that were in the extreme bottom (top) performers during a period of three immediate preceding years. Researchers such as DeBondt and Thaler (1987), Jones (1993), and others attribute such long-horizon contrarian profits to price reversal induced by market overreaction. However, Jegadeesh (1990), Lehmann (1990), Chopra et al. (1992) show that such contrarian profits exist in both short- (weekly) and long- (3 to 5 years) horizon. As for intermediate horizon (3 to 12 months) profits, Jegadeesh and Titman (1993, 2001) show that momentum strategies of buying winners and selling losers yield abnormal returns, which are not explained by the conventional risk-return framework. They attribute the price momentum to investor underreaction to good or bad market news. Fama and French (1996) also confirm this finding by suggesting that their factor model cannot explain momentum profits either. Several studies investigating the presence of momentum profits in international markets have found mixed results. Chang, McLeavey, and Rhee (1995) find short-term contrarian momentum profits in Japanese stock market. Rowenhorst (1998) finds significant momentum returns for the medium-term horizon in developed European markets. Rouwenhorst (1999) finds the presence of momentum returns in six out of twenty emerging equity markets. Hameed and Ting (2000) find short-term momentum profits from contrarian strategies in the Malaysian stock market. Kang, Liu, and Ni (2002) find statistically significant abnormal profits for the Chinese stock market using short-horizon contrarian and intermediate-horizon momentum strategies. Griffin, Ji, and Martin (2003) find that although momentum strategies are profitable in North America, Europe, and Latin America, they are not profitable in Asia. However, Hameed and Kusnadi (2002) find no evidence of momentum profits in six pacific-basin stock markets and conclude that factors that contribute to the momentum phenomenon in developed markets are absent in Asian markets. Chui, Titman, and Wei (2000) also find that momentum profits in Japan and other Asian stock markets are not significant. Studies have also attributed the existence of contrarian and momentum strategies profits to price reversals or market overreaction. In addition to the studies mentioned in the introduction, Conrad and Kaul (1998) argue that momentum returns are due to cross-sectional differences in risk, i.e., expected returns. Moskowitz and Grinblatt (1999) suggest that momentum in industry risk factors explain observed momentum returns. Lee and Swaminathan(2000) show that momentum profits are more prevalent in high-turnover stocks. Hong, Lim, and Stein (2000) find that small firms with low analyst attention have more momentum phenomenon. Griffin, Ji, and Martin (2003) find that macroeconomic risk factors cannot explain resultant momentum profit. They show that momentum profits are economically large and exist in both good and bad states and that profits tend to reverse over 1- to 5-year investment horizon. Chui, Titman, and Wei (2005) suggest that momentum is related to individualism, consistent with existing behavioral theories.

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Behavioral theories have their background in studies by Daniel, Hirshleifer, and Subrahmanyam (henceforth DHS, 1998) and Hong and Stein (henceforth HS, 1999) who show how they could be the reason for the overreaction (momentum) and underreaction (price reversal) in the stock market. DHS assume that investors have private information and that they highly value their stock selection skills. Hence, investors overreact to the information when it actually comes to the market due to their overconfidence. Because of self-attribution bias, investors overreact to market news after the initial overreaction, taking stock prices further away from their fundamental value. In the long-run, investors realize the overpricing of stocks and correct the prices. Thus in the short-run, we may observe price momentum while in the long-run, we may observe return reversals. HS explain the reason for momentum from a different behavioral perspective. They assume that there are two types of investors: news watchers or informed investors and technical or noise traders who use immediate past price information to make investment decisions. In their model, informed investors are assumed to react quickly to market information although the information itself is assumed to travel slowly thus causing underreaction. On the other hand, technical traders are assumed to delay their reaction to market information causing upward movement in stock price, resulting in momentum profit.

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CHAPTER-4
Research Methodology 4.1 Problem Statement: This research has been conducted to investigate the Existence of Momentum and Contrarian profits in Indian stock market. 4.2 Research objectives: There must an objective behind any research. Without objective there is no meaning of research. The purpose of research is to discover answers to questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered yet. As each research has some or the other objectives the following are the objectives of this research: Primary Objectives: To investigate the existence of momentum and contrarian profits in Indian stock market during the period of 2006-2012.

Secondary Objectives: To know the short term investment strategies. To know the medium term investment strategies. To know the long term investment strategies.

4.3 Data Collection: Data collection is the curious elements of research study the research in depend on what data you are going to collect on your research. 1. Secondary Data: When data are collected & compiled in a published nature, it is called secondary data. So far as this research is concerned, Internet & many magazines and the brochures have been referred as secondary data. 2. Primary Data: The data, which are collected for the first time, directly from the respondents to the base of knowledge & belief of the research, are called primary data. The normal procedure is to interview some people individually or in a group to get a sense of how people feel about the topic.

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So far as this research is concerned, secondary data is the main source of information. The data collected is through internet, books and various journals which have been mentioned in bibliography. 4.4 Limitations The main limitation of this research is that the data which has been used is just of Bse Sensex other index have been ignored. Time span of 6 to 7 years may prove wrong to investigate long term investment strategies of to know the effect of momentum or contrarian approach. The other limitation of the study is that the time period taken for research to investigate investment strategies is of 6 to 7 years.

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CHAPTER-5
Data Analysis and Data Interpretation:

MONTHLY BASIS: The data analysis is based on opening and closing of Bse Sensex for the period of April-2006 to March-2012.

25000 20000 15000 10000 5000 0 Dec-07 Apr-06 May-08 Mar-09 Aug-09 Nov-10 Sep-06 Feb-07 Apr-11 Oct-08 Jun-10 Jan-10 Sep-11 Feb-12 Jul-07 Open Close

Interpretation: Here the researcher has taken secondary data to arrive at conclusion and to know the effect of momentum and contrarian approach on investment strategies of the securities of Bse Sensex. The above mentioned Graph shows the investment of securities of every month starting from the period Apr-2006 to Mar-2012. The blue line shows the opening price where as the red line shows closing price of the securities per month. As we can see the price is increasing till Dec-2007 which means people are investing more for that particular month, but after that due to recession in 2008 it has been declined to less than 10,000. The reason to select every month closing and opening is to know the effect of momentum and contrarian approach for Short-Term investment strategies. It can also be said that after 2008 there has been tremendous effect of momentum and contrarian approach on Bse Sensex, because of economic development, timely and speedy information, and greater awareness regarding the inside information of the company. There is lot more ups and downs after 2008 in the investment pattern for Short-Term investment.

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QUARTERLY BASIS:

25000 20000 15000 10000 5000 0 Open Close

May-08

Dec-07

Mar-09

Jan-10

Nov-10

Apr-06

Sep-06

Apr-11

Oct-08

Interpretation: Here the researcher has taken secondary data to arrive at conclusion and to know the effect of momentum and contrarian approach on return of the securities of Bse Sensex. The above mentioned Graph shows the return of securities of every three month starting from the period Apr-2006 to Mar-2012. The blue line shows the opening price where as the red line shows closing price of the securities per month. The reason to choose the return of securities for three month is to know the effect of momentum and contrarian approach for Intermediate-Term investment. From the above graph we can see that the investment for Intermediate-Term started at 12,000, but in the beginning of 2008 it raised maximum and that too above 20,000. It was the time when Bse Sensex market was in boom and it was only for shorter period. The recession of 2008 straight away pulled out the investment of the people and market directly came down to below 10,000. Again after 2009 it started to perform well and it continued to be above 15,000 till todays date.

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Aug-09

Sep-11

Feb-07

Jun-10

Jul-07

YEARLY BASIS:

25000

20000

15000 Open 10000 Close

5000

0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Interpretation: Here the researcher has taken secondary data to arrive at conclusion and to know the effect of momentum and contrarian approach on return of the securities of Bse Sensex. The above mentioned Graph shows the return of securities of one year starting from the period Apr2006 to Mar-2012. The blue line shows the opening price where as the red line shows closing price of the securities per month. The reason to choose the return of securities for three month is to know the effect of momentum and contrarian approach for Long-Term investment. Looking at graph we can see that in Short-Term and Intermediate-Term the investment had been declined which was the period of 2008, but if we look for the entire year i.e for Long-Term we can see that 2008 is the year where the investment was more as compared to previous years. 2009 shows the declining stage for the investment and again going up after 2009.

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CONCLUSIONS AND FINDINGS:

Our objective has been to investigate the existence of momentum and contrarian profits in the Indian stock market during the period 2006-2012 using short-, medium- and long-term investment strategies. Our results show that there are no observed momentum profits or return reversals in the Indian stock market for the period 2006-2012 when simple non-overlapping medium-term and long-term strategies and tracking periods are considered. Our results on firm size and trading volume show that price continuation is stronger for firms with higher trading volume in the 6-months trading strategy. We also find significant momentum profits for 6-months investment strategies when we sort firms by size suggesting that investors process information of large firms slowly. For small firms, we find that investors overreact in 3-months investment horizon resulting in contrarian profits. We also find significant price reversals for 1-month investment horizon. In conclusion, our results are similar to other previous findings in Asian markets.

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Bibliography
(n.d.). Retrieved from http://www.bseindia.com/stockinfo/indices_main.aspx?indi=BSE30%20%20&fromDate=01/01/2012&to Date=29/02/2012&DMY=D http://www.bseindia.com/stockinfo/indices (2/3/2012) http://www.moneycontrol.com/stocks/marketstats/index.php (28/2/2012) http://economictimes.indiatimes.com/indices/sensex_30_companies.cms (8/3/2012) http://www.nseindia.com/archives/archives.htm#top(4/3/2012)

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