| Pub. Date | : October, 2021 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP261021 |
| Author Name | :VDMV Lakshmi |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 9 |
The paper examines if low volatile index acted as a safe haven by exhibiting better performance than high beta index during the recent Covid-19 pandemic. The study period is divided into three sub-periods (pre-Covid, Covid and post-Covid). A portfolio consisting of long position in high beta index and short position in low volatile index (HML) has been formulated during pre-Covid and post-Covid periods. The portfolio has been rebalanced with long position in low volatile index and short position in high beta index (LMH) during Covid-19 period. The study applies Jensen differential return model and Treynor-Mazuy market timing model to assess the performance of the portfolios. The study finds no evidence that low volatile index performs better than high beta index during the crisis period. There is also no evidence that high beta index performs better during stable periods. However, there is clear evidence of benchmark Nifty 50 having significant impact on the two indices and the portfolios.
The recent Covid-19 pandemic not only affected the social lives of people but also resulted in stagnation of economic activity. Historically, crises increased the correlations between the financial assets and financial markets (Forbes and Rigobon, 2002) causing financial contagion. Similarly, the pandemic-driven crisis increased portfolio risk due to strengthening of the co-movements between the assets. This warranted the need for looking for safe investment haven. Traditionally, gold is considered as safe haven. However, the study examines the popular market timing strategy which suggests the inclusion of low beta stocks in the portfolio during market downs and high beta stocks during market ups. The study contributes to the literature by testing the portfolio performance in line with Banz (1981) model, which states that small capitalization stocks provide higher risk adjusted returns than large capitalization stocks. The study constructs a portfolio consisting of long position in high beta stocks and short position in low volatile stocks during relatively stable periods (Pre-Covid and Post-Covid periods) and long position in low volatile stocks