Price Impact of Block Trading on the Bombay Stock Exchange

--Amitabh Gupta

This paper examines the effect of block trades on equity share prices. We use a standard event study methodology taking the block deal date as the event date. We hand-collect a sample of 125 block deals transacted on the Bombay Stock Exchange during the period 2006 to 2012. Extant empirical literature suggests that block trades are usually accompanied by positive abnormal stock price performance. We also find evidence in support of the literature. Our results indicate that stock prices generally increase on average around 1.32% on the date of block deals. On the day of the block trade, a substantial percentage of companies, i.e., 77%, have a positive abnormal return which is by far the highest in the total event window period of 41 days. We also look at the persistence of abnormal returns around the date of block deals and find that cumulative average abnormal returns for smaller window periods are significantly positive. Therefore there appears to be a price run up before the block deals are transacted. This may be due to the market having prior knowledge about the block deals before they are actually transacted thus leading to insider trading. Since we find a very significant positive abnormal return on the transaction of block deals irrespective of whether it is buyer or seller initiated, we conclude that the Indian stock market perceives the transfer of a large chunk of shares to be value enhancing in as much as such transactions have a strong positive informational content probably because it envisages better monitoring of the firm by the block purchaser.

© 2015 IUP. All Rights Reserved.

Pricing Efficiency and Performance of Exchange Traded Funds in India

--Harsh Purohit and Nidhi Malhotra

Exchange Traded Funds (ETFs) are a remarkable example of financial innovation that provides the investors with unique inherent feature of a mutual fund and an ordinary corporate stock. The present study is motivated by the need to examine the performance, index tracking capabilities and pricing efficiency of ETFs. The purpose of the study is to address three objectives: (i) do the ETFs fully replicate the returns of the underlying benchmark; (ii) is there any pricing deviation between trading price and NAV of the respective ETFs studied; and (iii) the magnitude and persistence of premium/discounts in the market. The results of regression show that selected Indian ETFs do not follow full replication strategies and beta estimates deviate from unity with statistically insignificant alpha. Due to imperfect tracking ability of ETFs, there is presence of tracking error with significant magnitude. The difference between market price and NAV of ETF reveals the presence of discount (excess of NAV over market price) and pricing inefficiencies. The premium/discount persists in the market for an average period of three days but exceptional persistence of five days was observed for two ETFs.

© 2015 IUP. All Rights Reserved.

Developing a Nonlinear Model to Predict Stock Prices in India: An Artificial Neural Networks Approach

--Taufeeque Ahmad Siddiqui and Yusuf Abdullah

The researchers have been working on determining predictable patterns to forecast stock prices. But owing to nonstationary and nonlinear patterns of the data, the detection of new models and forecasting techniques have become an extremely intricate task. Artificial Neural Network (ANN) models are highly flexible functional algorithms, developed using machine’s cognitive learning. In recent years, there has been an exponential increase in neural network applications in finance for the tasks such as pattern recognition, classification and time series forecasting. ANNs provide a considerably accurate means to examine nonlinearity in stock prices. However, large numbers of parameters need to be selected in order to develop an appropriate neural network forecasting model. The present study aims at predicting the stock prices of CNX Nifty 500 using assorted independent variables using ANNs. The variables used in the study are USD-INR exchange rate, crude oil price and major stock indices of USA (S&P 500), Euro Zone (Euro Stoxx 50), China (Shanghai Composite Index) and Japan (Nikkei 225). The paper considers daily data from January 2004 to December 2013. The series have been divided into training data and testing data to arrive at the most accurate model to be further used for predicting the stock prices for the next 10 months. The frequency of the given variables is daily, hence it would provide for a more efficient model incorporating smaller details such as daily volatility effect. The stock exchange data from foreign stock markets which open before and after the stock markets in India provide for change in market sentiments overnight. The preliminary data testing yielded encouraging results for the model. The predicted values of stock have a testing accuracy of more than 85%.

© 2015 IUP. All Rights Reserved.

Equity Risk Premium Puzzle: The Case of Indian Stock Market

--Rajni Kant Rajhans

Equity has always remained an instrument of long-term wealth creation. India being a developing nation with low average age group and rising per capita income, investment in equity may provide a significant wealth creation opportunity, provided Equity Risk Premium (ERP) is significant enough. ERP also helps in identifying the cost of equity and cost of capital of the business, and hence provides valuable insights for project appraisal decisions. This paper answers the question, “Is the ERP offered by Indian stock market justifiable?”

© 2015 IUP. All Rights Reserved.

Mergers and Value Creation: Evidence from the Indian Context

--Debi Prasad Satapathy and K P Kaushik

The paper tries to explore the relationship between mergers and corporate performance. Mergers and acquisitions have been adopted as one of the important strategies of corporate finance to create wealth to the shareholders. There are a plenty of studies abroad pertaining to value creation to shareholders through mergers and acquisitions. The literature depicts that there is a mixed view with regard to wealth creation to shareholders. However, there is a dearth of studies in the Indian context as to whether mergers create value to shareholders. The objective of this study is to find out whether mergers and acquisitions generate abnormal return to the shareholders of the acquiring firms. The paper tries to figure out whether any positive return is generated by the firm because of mergers and acquisitions in short run by using event study methodology. The study considers domestic mergers for the period 2004-2014 to analyze the effect of merger on shareholder wealth by using BSE listed companies.

© 2015 IUP. All Rights Reserved.

Inter-Linkages Between Movement of the Indian Rupee and BSE Sector-Specific (IT) Index: An Empirical Investigation

--Rakesh Shahani, Udit Sharma and Moulik Wadhwa

The paper analyzes the relation between the movement of Indian rupee and movement of BSE IT sector index over the five-year calendar period (2009-2013) by taking monthly closing returns over the study period. The BSE IT Index is a sector-specific index of BSE and includes leading IT companies from India. The tools used for the purpose of studying this relation include Granger Causality (F Wald) restricted-unrestricted approach test which has been done bilaterally, Dickey-Fuller tests for stationarity of variables, Engle Granger Cointegration and Vector Error Correction Model to establish the long-term relation between the variables and variance decomposition of the error term. The model uses an autoregressive regression and has a number of lags and therefore optimal lag length has been determined using AIC and SIC criteria. The results of the study clearly show that BSE IT Index is causing movement in rupee, however, this is only from 4th lag onwards. On the other hand, the results could not establish a reverse relation or rupee causing movement in BSE IT Index for the period of study. The AIC and SIC results for model testing showed that the 4 lag model was the most appropriate model under study out of the 8 lags that were considered. The coefficient of the error term in ECM regression was negative, showing stable long-run equilibrium. Moreover, the result also showed that adjustment mechanism was backwards.

© 2015 IUP. All Rights Reserved.

Market Risk Exposure: Evidence from Indian Banking Industry

--M V Shivaani, Surendra S Yadav and P K Jain

That risk measurement is the key to effective and efficient risk management needs no emphasis. This paper examines sensitivity of stock returns of 30 Indian banks (included in CNX500 index) to three risk factors—interest rate, inflation rate and fluctuation in exchange rate. The study uses monthly data for the period April 1, 2005 to March 31, 2014. By applying ‘pooled regression technique’, the study indicates that returns of Indian banks are statistically (significantly) impacted by the above-mentioned risk factors as well as overall market returns. With the exception of short-term interest rates, all the risks are positively related to banks’ returns. A disaggregative analysis based on public sector banks (16) and private sector banks (14) reveals somewhat similar findings. This analysis of banks’ risk exposure is expected to be of immense practical use in framing/designing operational policies as well as risk management in Indian banks.

© 2015 IUP. All Rights Reserved.

Capital Adequacy Frontier of Indian Commercial Banks: An Alternative Viewpoint

--Ram Pratap Sinha and Swapna Samanta

The present paper compares the capital adequacy of Indian commercial banks from a different angle: the Core Capital in relation to their Risk Weighted Assets by constructing a capital adequacy frontier and computing capital adequacy efficiency of the in-sample commercial banks by using Bilateral Model of Comparison. The sample has been categorized into two groups as Public Sector Banks and Non-Public Sector Banks (comprising Private Sector and Foreign Banks). The distribution of the efficiency scores for the two groups has been found to be significantly different, and the results revealed that the Non-PSU Banks consistently outperformed their PSU counterparts in terms of capital adequacy. In the second phase, the study has attempted to quantify the performance of the banks and identified four important performance indicators through Principal Component Analysis and tried to see through Spearman’s rank correlation test and a left censored Tobit Model how capital adequacy is linked to these four principal components

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