Momentum and contrarian strategies in the Indian stock market an evaluative study

Abstract

Stock prices are generally governed by rational inputs and irrationality in newlinethe market can cause only daily, weekly and short run fluctuations. While newlineirrationality takes prices away from its intrinsic value, rationality brings it back. newlineContrarian investment strategy is followed under the assumption that typical herd newlinebehaviour leads to overreaction to information and hence stocks which have gone newlineup recently is over valued or vice versa. By taking the opposite position, contrarian newlineexpects profit when the market turns rational. On the other hand, momentum newlineinvestment strategy is followed by moving along with the tide. Here it is found newlineuseful to follow the crowd and be a part of it. But if market is efficient in pricing, newlinethen both these strategies will fail. newlineThe present study is conducted to test the effectiveness of these two newlineinvestment strategies in the Indian stock market. As a first step to this, the newlineresearcher tested the market efficiency of Indian stock market. Indian Market is newlinefound to be Weak-form inefficient and Strong form efficient. However, the study newlinefound out that momentum and contrarian strategies could not deliver any superior newlinereturns to Indian investors during the study period. Separate analysis was carried newlineout by the researcher to test the efficiency o these tools, when Indian markets were newlineseverely hit by global financial crisis. Interdependency of Indian Stock Market newlinewith other leading emerging markets was also part of the study. The results newlineconfirmed the evidence of significant correlation with these markets. The study is newlineexpected to help Indian investors while taking various investment decisions. newlineKey Words: Market Efficiency, Momentum Strategy, Contrarian Strategy, Interdependency of newlineStock Market, Indian Stock Market, Global Financial Crisis.