Returns to Anomalies and who trades on them Indian Evidence

Abstract

In this thesis, my first research objective is to examine which firm-level factors explain the cross-section of stock returns (CSR) for Indian stocks. Specifically, I evaluate the ability of thirty-five anomalies drawn from the study by Linnainmaa and Roberts (2018), hereafter, LR (2018), to predict stock returns in Indian markets from 2000-2020. I present five types of measures to answer this question - equally weighted (EW) portfolio returns, value-weighted (VW) portfolio returns (VW), EW portfolio returns for three size portfolios, three-factor alphas, OLS regression-based t-statistics, and LASSO (least absolute shrinkage operator) regression based t-statistics. Thus, I compute eight t-statistics for each anomaly. My findings related to the first research objective are as follows. I find that two anomalies, Momentum and Altman s Z-score (Z-score), produce t-statistics gt 3 (the standard for assessing significance proposed by Harvey, Liu, and Zhu (2015), hereafter, HLZ (2015)) for all eight tests. Four Profitability anomalies Operating profitability, Return on equity (ROE), Return on assets (ROA), and Operating margin produce t statistics gt 3 in six of the eight tests. Two composite anomalies, Piotroski s F-score (F-score) and Quality-minus-junk (QMJ) also produce t-statistics gt 3 in six tests. Surprisingly, two Growth anomalies Sustainable growth and Growth in sales minus growth in inventory have t-statistics lt 3 in all eight tests. Book-to-market (BM), Asset growth, Sales-to-price (SP), and Sales growth have t statistics lt 3 in seven tests. Overall, the evidence indicates that the premium anomaly Momentum and the distress anomaly Z-score continue to generate abnormal returns in the Indian markets several years after the publication of these anomalies in academic journals. The persistence of these anomalies in a hold-out sample contradicts the data-snooping explanation. The second research objective of this thesis is to examine whether different types of owners hold stocks based on anomalies.