Stock Market Anomalies in Emerging Markets: A Case of India

Abstract

Stock market anomalies are referred to as disruptions of the Efficient market hypothesis, which impacts the direction of the stock’s performance, causing abnormal returns to the market’s participants. Therefore, determination of anomalies is essential, following which the objective of this paper is to explore such market inefficiency variables in emerging markets that are reliably present in developed markets. This paper provides a unique, comprehensive study of different anomalies in emerging markets; with an example of the Indian market, we cover a range of different firm-specific variables. Using past 20 years of monthly and daily data from 2000 to 2020 and 12 market anomalies grouped within eight different groups, we use portfolio sorting to create three sub-portfolios based on every anomaly individually and their high minus low portfolios to check their significance. Following, we also use two-stage Fama MacBeth regressions to support our portfolio sorting results. The findings of this paper focus on two horizons; 1-month and a more extended period focusing on 3 and 6 months, where portfolios are held monthly, quarterly and semester basis respectively. In India, for 1-month, out of 12 anomalies, only 5 predicts returns: size, book-to-market, the coexistence of momentum and reversal, and asset growth. Whereas, for long term holding periods, the coexistence of momentum and reversal continued to be present, with idiosyncratic volatility becoming a significant predictor of returns in longer period horizons. The coexistence of momentum and reversal in the Indian market for 1-month is similar to developed markets; however, continued coexistence in extended holding period returns is an exciting observation found in our research. Moreover, it is also important to note that these findings are limited to inclusion securities present in the market index and whose data is available for the whole sample period. Nevertheless, this study provides recommendations on which anomaly an investor should focus on to form portfolios and gain abnormal, anomalous returns in emerging markets