The Cross-Section Excess Returns:
Risk Factors and Investor Sentiment
-- Mouna Abdelhedi,
Mouna Boujelbène Abbes and Younès Boujelbène
This paper examines competing explanations, based on risk and investor sentiment, for the cross-sectional returns
in the Tunisian stock market. First, we examine the explanatory power of Fama and French
(1993); and Carhart (1997) risk factors in the cross-section of stock returns. We find evidence for pervasive market and size factors; the value and momentum factors
are verified respectively for high book-to-market equity ratio portfolios and
winners' portfolios. Then, we investigate the
relation between institutional investor sentiment and size portfolio returns. The empirical results indicate a significant effect of
sentiment measures on returns and significant effect of returns on change in sentiment. Finally, we document that the addition of
sentiment investor to the pricing model dramatically decreases the magnitude of the market factor. Moreover, the size effect is no
longer significant.
© 2009 IUP. All Rights Reserved.
Response Asymmetry in Return and Volatility Spillover from
the US to Indian Stock Market
-- K N Badhani
Empirical studies show that the return and volatility shocks in the US stock market have significant impact on the return
and volatility dynamics of emerging stock markets
including India. This study examines whether the spillover effects from
the US to Indian stock market display asymmetric
characteristics. Precisely, it addresses the following two issues:
(1) whether the Indian stock market reacts differently towards positive and negative shocks from the US market, and
(2) whether there is a different response pattern
of the Indian stock market towards the return and volatility shocks from the US market during the bear
and the bull market phases. The study is based on daily closing values of S&P 500 (representing the US market) and S&P CNX Nifty
(representing the Indian market) indices from January 1996 to September 2008. The return generating process in both the markets is modeled as
AR (1)-TGARCH (1, 1) process. The model describing return generating process in India is augmented to allow asymmetric return
and volatility spillover effects from the US market. The results indicate that there is significant response asymmetry in spillover
effects both in returns and volatility. Returns in
the Indian stock market are more sensitive to negative shocks in the US market rather
than the positive shocks. While positive shocks in the US market do not affect the volatility in
the Indian stock market, negative shocks significantly increase the volatility.
The study does not observe any significant difference in return and volatility spillover during
the downward and upward trends in the US market; however, there seems some interaction taking place between stock market
trends and asymmetric response to positive and negative shocks.
© 2009 IUP. All Rights Reserved.
Measuring Value Enhancement
Through Economic Value Added:
Evidence from Literature
-- Latha Chari
Shareholder value maximization has become the predominant goal of corporations in India and the world over.
This goal has gained further importance and focus in the recent years because of the demands made by financial institutional
investors, financial markets and competitors on companies to perform and work towards continuous sustainable growth in shareholders'
value. To achieve such goals, it is important for companies to device performance measures that are aligned towards the corporate goal
of shareholder value enhancement. Many consulting firms have come up with different measures of performance such as Economic
Value Added (EVA), cash flow return on investment, and Total Shareholder Return (TSR) to cater to the above need. Of these measures,
EVA has become popular in India. The proponents of EVA, Stern Stewart and Co., claim that EVA is superior to other metrics, as it is
the financial performance measure that comes closer than any other measure, in capturing the true economic profit of an enterprise,
helps managers to make better decisions and motivates them to perform better. A plethora of academic research studies verifying the
claims of the proponents have been conducted. The objective of this paper is to present different performance measures available,
classify empirical studies carried out on EVA, focus on studies that evaluate the superiority of EVA over other measures, its utility and
application, present their findings, and examine the possible reasons for inconsistency in the findings, methodology adopted for study
and suggest avenues for future research in this area. This is done through a review of literature of the
past two decades.
© 2009 IUP. All Rights Reserved.
Parametric Determinants of Price-Earnings Ratio
in Indian Capital Markets
-- Sushil Kumar and D P Warne
The Price-Earnings (P/E) ratio is a widely used measure of the expected performance of companies, and it has almost invariably
been calculated as the ratio of the current share price to the previous year's earnings. However, the P/E of a particular stock is
partly determined by outside influences, such as the year in which it is measured, the size of the company, and the sector in which the
company operates. Thus, the present paper is based on the examination of various parametric determinants of P/E ratio in the Indian
capital market, and it is found that the results of multiple regression model based on standardized variables indicate that `variability in
market price' and `size of the company' were the most important determinants industry-wise as well as in aggregate analysis.
© 2009 IUP. All Rights Reserved.
|
