Investment Strategies for Abnormal Returns An Empirical Study in Indian Stock Market

Abstract

The objectives of the research are to study various investment strategies in the Indian Stock Market, analyze and compare the composition of stocks under different investment strategies, investigate the rank of investment strategies in terms of abnormal returns, and recommend appropriate investment strategies for abnormal returns across industries. The present study reviews more than a century of research on investment strategies in stock markets in the quest for abnormal returns. The study summarizes the previous literature of more than 100 years and identifies the conflicts and the relationships that arise from such a wide variety of existing studies. The period under study is divided into three sub-periods to bring coherence and capture the characteristics of time with a chronological study of events: Classical, Neoclassical and Modern. The classical era is dominated by CAPM, Fundamental analysis, Efficient Market Hypothesis and Random Walk Hypothesis. The neoclassical era marks the renaissance of technical analysis and the Modern era belongs to behavioural finance and technological advances in social media. A flowchart is created to display the evolution process. Two independent analyses, fundamental analysis and technical analysis, are integrated to equip investors to identify value stocks and growth stocks to potentially earn abnormal returns. Price-to-book (P/B) ratio is used as an indicator of fundamental analysis while the indicators, trading volume and past stock returns, are used as technical analysis indicators. The stocks have been divided into four Grids based on the trading volume and past stock returns. The results indicate that four Grids have significantly different mean values of the P/B ratio. This means both analyses can distinguish the value (lowest P/B) stocks and the growth (highest P/B) stocks. Value and contrarian investment strategies are assumed to pick the same stocks even though the approach to picking the stocks is different.