In this paper, we experiment with the construction of alternative investor sentiment indices. Further, we evaluate the role of the sentiment-based factor in asset pricing to explain prominent equity ...market anomalies such as size, value, and price momentum for India. Based on the findings, we confirm that our Composite Sentiment index leads other sentiment indices currently in vogue in investment literature. The asset pricing models, including the more recent Fama French 5 factor model, are not fully able to explain the small firm effect which is captured by our sentiment-based factor which seems to proxy for the price over-reactions.
This study examines important aspects of lottery behavior in India using data from December 2001 to March 2021. We experiment with a new measure of lottery along with well-established measures. Our ...lottery measure focusing on more recent information is found to be appropriate for India. MAX has a unique role in predicting returns that is not subsumed by other risk measures. We find MAX, skewness, tail risk, and idiosyncratic volatility as relevant characteristics of lottery stocks. Using these, we construct a lottery factor representing investors’ risk-seeking behavior. This behavior is an outcome of mis-weighing probability of extreme gains or losses and leads to overreaction to attention-catching events. We augment the Fama-French five-factor model with our lottery factor. Our six-factor behavioral asset pricing framework is found to be an appropriate performance benchmark. Lottery behavior is mainly the result of retail investor actions and is linked to several behavioral biases.
This study revisits size effect and its associated issues, in the Indian market, as recent studies question the persistence of size premium in the global context. We use data from NIFTY 200 stocks ...for the period 2005 to 2018 and find size effect to be significant for both market-based and accounting-based measures of size. It is not impacted by any definitional issues as highlighted by Berk (Financ Anal J 53(5):12–18, 1997). Size effect also remains significant despite alternative portfolio constructions i.e. forming quintiles, deciles, scores of portfolios even though the premiums vary. Existing literature on size anomaly does not focus on size drift and survivorship bias. We specifically address these dimensions relating to size effect which have received less attention in prior work. In this study, size effect is found to be sensitive to drift in market capitalization. Historical market capitalization used to categorize medium (large) firms may now be a basis for classifying small (medium) firms in recent time periods. Small sized portfolio adjusted for drift provides substantially higher return compared to unadjusted small sized portfolio. Further, to evaluate survivorship bias, size-based portfolios are redesigned using changing components of NIFTY 200 for each formation period. This leads to considerable weakening of size effect. Investors must take this fact into consideration while creating size based portfolios. However, upon using another stable universe of F&O traded stocks, size effect is found to be significant. The study contributes to size anomaly literature for Indian market and shall be useful for portfolio managers, investors, academia and regulators.
In this paper, we examine the currency market linkages of South Asian member countries using daily data from 6 January 2004 to 31st March 2016. Time invariant and varying Copula GARCH models show ...that South Asian countries, except for India and Nepal/Bhutan, have low levels of currency market linkages which can be ascribed to poor levels of intra-regional trade intensity and portfolio flows. We reconfirm the copula results through Diebold and Yilmaz methodology and document that currency market connectedness is very limited in the South Asian region. The trends of the fundamental determinants of currency co-movements for the South Asian member countries were compared with its neighbouring regional economic bloc in Asia which has a much longer history and a wider membership base i.e ASEAN+6. From a comparative analysis, it was found that South Asia member states have to work on their governance parameters, improve on their trade linkages and trade tariffs and work towards greater degree of capital account convertibility with adequate safeguards to achieve higher levels of currency market linkages.
This study measures time-varying progress of retail banking (to households) interest rates convergence and examines its determinants for twelve countries of the euro area, between 2003 and 2014. ...First, we measure convergence of interest rates using five different time-varying indicators, namely asymmetric dynamic conditional correlation (ADCC), beta convergence, sigma convergence, variance ratio, and dynamic cointegration. We then estimate panel regressions for each type of interest rate to identify the determinants of convergence over pre-crisis and crisis periods. The estimated ADCC is employed as the dependent variable and explanatory variables measure potential macroeconomic, external linkages, industry-specific, institutional and sociological determinants. The results reveal that convergence is weak and heterogeneous across sub-periods (pre-crisis and crisis), economic groups (core and periphery), product type (savings and credit) and products’ maturities (short, medium and long). Among the fundamental determinants, inflation, output correlation, and sociological factors strongly impact convergence, however, the explanatory power of determinants weakens during the crisis period.
Banks are exposed to different types of risks in the process of financial intermediation and maturity transformation. The experience of the extant global financial crisis provided ample evidence of ...interaction among bank risks and perils of ignoring interactions in the changing economic, technological and regulatory environment. In this study, we assess the dynamic interaction among bank risks for the entire banking sector and bank groups based on various bank-specific characteristics in a vector autoregression framework, including variance decomposition and impulse response function analysis. We estimate the market measures of different risks using a multivariate GARCH (1, 1) in mean model. The study uses weekly bank level data from 23 October 2004 to 1 August 2014 for 40 listed Indian banks. The findings suggest that there is a positive interaction between equity risk and all other risks. Credit risk and exchange rate risk have a reciprocal relationship. It has also been observed that equity risk impacts credit risk positively. Interest rate risk seems to be affected by its lagged values and does not appear to be affected by other risks. The study highlights the role of liquidity in reducing bank risk exposures and supports new liquidity standards introduced in Basel III. The results improve the understanding of the interaction among risk exposures, which may enhance the supervisory process in the Basel framework. The risk interactions must be kept in mind for making capital provisioning, and an integrated approach to risk management by banks is more desirable.
We study time-varying interest rate comovement and its determinants for the retail banking sector in the euro area over pre-crisis and during crisis, between 2003 and 2018. The analysis is conducted ...for 11 euro area countries, each classified as either core or periphery. Copula Asymmetric DCC-GARCH is estimated for each country-pair to measure the dynamic interest rate correlations for deposits and loans to households. We then examine the determinants by regressing quarterly correlations on macroeconomic and cross-border linkages, banking, and sociological variables. We also assess the impact of the two crises and of policy initiatives, including negative interest rate, Single Supervisory Mechanism, and Single Regulatory Mechanism. Different panel regressions reveal limited, although varied, influence of determinants on correlations across different products, maturities, and country groups. We conclude that the intrinsic features of the retail banking industry, such as customers' trust, information asymmetry, and political influence, hinder strong interest rate convergence in the euro area.
In this study, we revisit prominent equity market anomalies documented for India, namely size, value, volume and momentum. Using data for NSE 500 companies, we test for the persistence of these ...anomalies for a recent period from July 2005 to June 2016 employing one-factor capital asset pricing model (CAPM) and three-factor Fama–French model as asset pricing benchmarks. We test for the robustness of these anomalies by (a) forming both quintile and decile portfolios and (b) forming univariate and variety of bivariate-sorted portfolios. Corner portfolios based on deciles provide greater return differentials compared to quintile portfolios. Bivariate-sorted portfolios do not seem to outperform univariate-sorted portfolios. The value and momentum anomalies are explained by risk models which is contrary to prior evidence. Size and volume anomalies continue to provide significant returns but seem to have faded substantially over time when compared with the past results. The findings about weakening prominent Indian equity market anomalies shall pose a challenge for portfolio managers who may have to look for other sources of extra-normal profits. Indian market also seems to be informationally more efficient which is in line with recent financial market reforms and growing emphasis on financial inclusion and corporate governance.
Executive Summary
A commodity transaction tax (CTT) of 0.01 per cent is levied on non-agricultural commodity futures trading since 1 July 2013 by the Government of India. This article examines the ...impact of CTT on market liquidity, volatility and government tax revenues for the Indian commodities market. We use daily data of five sample commodities, namely gold, aluminium, copper, zinc and crude oil available from 1 May 2010 to 31 August 2016. It is found that CTT imposition has destroyed the parity of the Indian commodity futures market with the international markets as CTT is absent on COMEX, LME, NYMEX, and so on. Moreover, evidence of trade migration can be found by drawing a comparison across MCX and international exchanges. This argument is further substantiated by observing the decline in liquidity after the imposition of CTT. It should be further noted that parity with the equity market is also lost as the transaction taxes imposed in equity and commodity markets are not in line with the level of volatilities of the two markets. CTT has also failed to curb speculative pressure as average volatility on major commodities has risen significantly by about 33 per cent post its imposition.
Considering the transaction tax, income tax and service tax aspects and decline in the trading volume attributed solely to the CTT imposition, it is found that CTT results in huge revenue loss to the exchequer. It is estimated that at the current CTT rate, government is losing an annual net tax revenue worth ₹30 billion. Even at a lower rate of 0.001 per cent (which is one-tenth of the current rate of 0.01%), the government’s fiscal loss is expected to be about ₹2.50 billion. Even if we make a conservative assumption that CTT accounts for only 25 per cent decline in the trading volumes, the optimal CTT rate, in terms of tax revenue collections, is found at 0.003 per cent, well below the current rate.
There is, therefore, no justification for retaining CTT on the commodity futures trading in India as it leads to a huge revenue loss to the government, owing to reduced trading activity and trade migration. Withdrawal of CTT would be ideal for Indian commodities market development, improving its liquidity and making it more internationally competitive.
We examine prominent market anomalies and evaluate the efficacy of alternative asset pricing models under different financial integration settings. A financial integration index is developed for ...classifying 25 sample markets into high-, medium- and low integration groups. Size is found to be the strongest anomaly in world markets, followed by value and liquidity. Value and profitability effects are larger for low-integrated markets. Highly integrated markets experience short-term momentum while many low-integrated markets exhibit mild reversals. Fama and French five-factor model outperforms capita l asset pricing model (CAPM) and Fama and French three-factor model in explaining returns. International factors augment the role of local factors for more integrated markets. Our study has implications for global investors to design anomaly based investment strategies.
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