Prior Return Effect in Indian Stock Market: Some Empirical Evidence

Madras University Journal of Business and Finance, ISSN 2320-5857, Vol 2, No. 2, July 2014, pp 1-22, Publisher _ University of Madras, India.

22 Pages Posted: 23 Jul 2015

See all articles by Vanita Tripathi

Vanita Tripathi

Department of Commerce, Delhi School of Economics,University of Delhi, India; University of Delhi India - Delhi School of Economics - Department of Commerce

Shalini Aggarwal

University of Delhi - Department of Commerce

Date Written: July 1, 2014

Abstract

Prior return effect – momentum and contrarian, is a well documented phenomenon in developed stock markets. This paper examines if there is any prior return effect in Indian stock market, an advanced emerging market in the world. We use daily price data available for stocks forming part of S&P CNX 500 equity index over a total period of five years beginning from July, 2006 to June, 2011.

We find that in Indian stock market, security returns do exhibit predictable patterns following extreme daily price shocks. They exhibit a reversal in their direction during few days subsequent to an event of extreme rise insecurity’s daily closing prices. Conversely, after experiencing an extreme decline in their daily closing prices, they continue to follow the downward journey recording lower prices on few days subsequent to the day of extreme price decline. Evidence from non-overlapping test period days also indicates overreaction for the winner portfolio and under reaction for the loser portfolio. These findings indicate that investors in the Indian Stock Market are overoptimistic. When re-pricing stocks in response to new information, their immediate reaction causes the stock prices to be above their adjusted expected values.

Keywords: Prior Return effect, Contrarian, Stock markets, Stock prices, Under-reaction, Investors

JEL Classification: G12, G14

Suggested Citation

Tripathi, Vanita and Tripathi, Vanita and Aggarwal, Shalini, Prior Return Effect in Indian Stock Market: Some Empirical Evidence (July 1, 2014). Madras University Journal of Business and Finance, ISSN 2320-5857, Vol 2, No. 2, July 2014, pp 1-22, Publisher _ University of Madras, India., Available at SSRN: https://ssrn.com/abstract=2634444 or http://dx.doi.org/10.2139/ssrn.2634444

Vanita Tripathi (Contact Author)

Department of Commerce, Delhi School of Economics,University of Delhi, India ( email )

Department of Commerce, Delhi school of Economics,
Delhi, Delhi 110007
India

HOME PAGE: http://people@du.ac.in~vtripathi/

University of Delhi India - Delhi School of Economics - Department of Commerce ( email )

Department of Commerce
Delhi University
Delhi, 110007
India

HOME PAGE: http://people@du.ac.in~vtripathi/

Shalini Aggarwal

University of Delhi - Department of Commerce ( email )

Department of Commerce
Delhi University
Delhi, 110007
India

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