Value and Size Anomalies A Study of Indian Stock Market

Abstract

newlineAsset pricing continues to be one of the most investigated topics in finance. The path-breaking contribution in that area was the development of Capital Asset Pricing Model (CAPM). Though CAPM continues enjoying popularity with practitioners, the empirical examinations showed that value stocks and small-sized stocks were commanding excess return that could not be explained by the overall market risk factor. This resulted into posing a serious challenge to the Efficient Market Hypothesis (EMH). In response to it, Fama and French (1993) developed a three-factor model, which conceptualized the size and value as additional factors for explaining the realized returns. However, they inferred the risk from the realized returns, and thus designated the excess return as value premium and size premium . Another group of researchers tried to examine the value and size effect by using the combined measure of risk-return like the Sharpe ratio to investigate any disproportionately higher returns in value stocks and small-sized stocks. This approach not only results into inconsistent findings, but also does not allow comparing the levels of return and risk separately. newlineSince the study of value anomaly and size anomaly is a matter of bifurcating stocks based on the discriminating parameters, the Discriminant Analysis (DA) can be a powerful tool to know whether the excess returns on value stocks and small-sized stocks are due to proportionately associated higher risks that can be labelled as risk premium or simply a manifestation of the pricing anomaly . newlineThe analysis of data is carried out based on two different perspectives, namely the market perspective, and the investors perspective. The market perspective shows mixed results as far as the difference of mean return is concerned. The return remains an important factor to discriminate value and growth stocks. However, the risk turned out to be the important factor in discriminating the small-sized and large-sized stocks. As far as the investor s newlineperspective