Sector Index: Do They Tell the Right Story?
XI Capital Markets Conference, 21-22 December 2012, Indian Institute of Capital Markets (UTIICM)
21 Pages Posted: 2 May 2013
Date Written: December 21, 2012
Emerging markets characterized by dynamically changing and fast growing sectors make the already immature capital markets, less efficient. Free float marketcap based index construction has its bases strongly grounded on Efficient Market Hypothesis (EMH) and CAPM. Hence index constructed using free float marketcap weights will be systematically biased due to undervalued/overvalued stocks in an inefficient market. The efficiency of such a sector index to capture the trends of specific sector stocks in the long run in India is examined. Johansen’s Cointegration and Granger Causality test has been carried out on a 10 year (January 2001 to December 2010) daily closing price data, of stocks belonging to four different sectors. Indian market does not have an alternative index while most developed and some developing economics have multiple indices constructed using alternative methods. The efficiency of indices, constructed using alternative methods, in capturing the economic trend of the sectors is evaluated. It is found that the free float marketcap based sector index does not effectively capture the economic trend of all the sectors. Hence a uniform method of index construction for all the sectors do not seem appropriate as efficiency of index constructed using different methods vary with sectors.
Keywords: Sector Index, Cointegration, Long Term Relationship, Alternative Index Construction Methods a Research
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