Are Prominent Equity Market Anomalies in India Fading Away?

Abstract

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.