ANOMALIES IN INDIAN STOCK MARKET AN EMPIRICAL EVIDENCE FROM SEASONALITY EFFECT ON BSEIT INDEX

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1 -Journal of Ars, Science & Commerce ANOMALIES IN INDIAN STOCK MARKET AN EMPIRICAL EVIDENCE FROM SEASONALITY EFFECT ON BSEIT INDEX Dr. Pedapalli Neeraja, M.Com., M.Phil. Ph.D. Assisan Professor Business Managemen Roos Business School, Hyderabad, India. CMA. Poharla Srikanh, M.Com., M.Phil., UGC-NET., ACMA., PGDT.,PGDIBO.,PGDFM., NCFM., (Ph.D.) Assisan Professor Commerce Pos Graduae College, Consiuen College of Osmania Universiy, Secunderabad. A.P., India. ABSTRACT Evoluion of Efficien Marke heory had ushered a significan change in pricing capial asse. Before he developmen of Efficien marke heory by Fama in 1970s, here was no comprehensive heory on pricing of capial asses. Earlier o Fama(1970), various economiss like Louis Bacheliar, Alfred Cowles, Holbrook Working ec have discusses abou Random walk behaviour of sock price movemen, bu hey could no succeed in providing a comprehensive heory on asse pricing. Fama(1970) had come ou wih hree differen forms of Efficien marke hypohesis i.e., Weak form, Semi-srong form and Srong form of efficien markes. Weak form of efficien markes assers ha all he published informaion mus be refleced in sock prices, semi-srong form holds ha all he available informaion mus be refleced ino he sock prices, whereas srong form of efficien markes conends ha all he published and unpublished informaion mus be refleced ino he sock prices. Though, he weak form and srong form of efficien markes do no have much pracical relevance, semi-srong form of efficien markes has is implicaions on he real life world of financial markes. Semi-srong form of efficien markes posulaes ha all he invesors in he marke will discoun he published informaion a he similar level. Bu real life condiions are quie differen, differen invesors have differen levels of undersanding of he available informaion and i leads o esimaion of differen levels of sock prices by differen invesors. Anomalies in sock marke are he imperfecions in discouning he available informaion by he marke paricipans. In he presen sudy, a modes aemp has been made o examine he anomalies presen in he Indian sock marke in he form of seasonaliy effec. The sudy has considered BSEIT Index as a proxy of Indian Informaion Technology secor socks and BSE-Sensex is surrogaed for Indian sock marke. Period of sudy is from april, 1999 o march, The resuls of he sudy highligh he fac ha he Indian IT Secor was experiencing seasonaliy effec. The sudy also concludes ha he BSE-Sensex has significan impac on he volailiy of Indian IT secor. Keywords: Seasonaliy effec, Monh effec, Indian IT secor, GARCH analysis. JEL Classificaion: G10, G12 and G14 Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [109]

2 -Journal of Ars, Science & Commerce INTRODUCTION: School of houghs on capial asse pricing can broadly be divided ino four caegories. Firs school of hough is random walk heory which saes ha movemen in sock price is randomly disribued which means here will be no auocorrelaion in sock prices. The heoreical exension of random walk model is Efficien marke heory which provides a more sysemaic way of undersanding he asse pricing in he conex of informaional efficiency of he markes. Efficien marke heory classifies markes ino hree caegories (i.e., weak form, semi-srong form and srong form) based on he speed of adjusmen of sock prices o marke informaion. Second school of hough is so-called fundamenal analysis which assers ha markes price he socks fairly reflecing he rue inrinsic value of he socks. The fundamenal analyss believe ha i is he performance of he firm, indusry and he economy which influences he sock prices in he marke and hence i is very essenial o an invesor o undersand curren and fuure expeced performance of he firm, indusry and economy on he whole. Pu i differenly, he fundamenal analyss assume ha here will be no possibiliy of imperfecions or anomalies in he marke. All he invesors will have access o he relevan informaion and heir abiliy o analyse he informaion is similar. Third school of hough is echnical analysis which purpors ha he sock prices will follow a rend and his rend can be esimaed in advance. Technical analyss by using chars and graphs, esimae he fuure rend of sock prices and plan heir shor erm invesmen decisions. Technical analysis give imporance o behavioural aspecs in financial decision making. Fourh school of hough is chaoic heory of finance which saes ha movemen of financial markes is oo complex o predic. The zigzag naure of sock price behaviour provides a challenge o he invesors in predicing he marke condiions and hence invesors have o apply very advanced mehods of sock price predicion incorporaing differen facors which could oherwise be no possible. Afer undersanding he cenral enes of he four above menioned heories, a fundamenal quesion would arise ha which heory will dominae he marke. Pas experience clearly provides an evidence ha i is wase of ime o argue on he dominance of one heory on anoher raher i is pruden o undersand he empirical relevance of all he heories and use hem as complemenaries o one anoher in real life financial markes. STOCK MARKET ANOMALIES: Semi-srong form of efficien marke hypohesis conends ha all he publicly available informaion is refleced in sock prices and hence here is no scope for abnormal reurns o an invesor. The only way o ge more reurns is o bear more risk, as here is posiive relaionship beween reurn and risk. Pu i oherwise, an invesor canno expec more reurn han which can be expeced for he given level of risk. However, he empirical findings provide more conroversial resuls of he semi-srong form of marke hypohesis. The fundamenal quesion which need o be answered is wha cause he real life marke siuaion quie dynamic han wha is originally provided in he heory. The researches in his direcion have idenified many imperfecions in he marke which can disor he invesor in discouning he righ informaion a righ ime. Such imperfecions prevailing in he marke are named afer as sock marke anomalies. The empirical sudies discovered many anomalies in he marke like size effec, january effec(or ax selling hypohesis),day of he week effec, P/E raio effec ec., In he presen sudy, he marke anomalies presen in he form of seasonaliy effec is examined. Seasonaliy effec can be undersood as he impac of monh of a year on he sock price behaviour. Seasonally effec implies ha all he monhs in a year do no have similar effec on sock price movemen. Pu i oherwords, some of he monhs in a year have more effec on he sock price movemen han oher monhs in he same year. LITERATURE REVIEW: Proponens of semi-srong efficien marke hypohesis argue ha he sock prices shall immediaely reflec all he publicly available informaion and hence, i is impossible o bea he marke and earn abnormal reurns. However, in real life, here are many imperfecions presen in he sock which cause Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [110]

3 -Journal of Ars, Science & Commerce disorions in asse pricing. Such plausible siuaions are called sock marke anomalies in he finance heory. Non-consan variance of sock reurns over a ime period indicaes he presence of ime effec on sock reurns which can also be called seasonaliy effec. In economeric analysis, his ype of siuaion is called heeroscedasiciy. Sudies like Deepak. R e.al., (2012) have examined he heeroskedasiciy presen in sock reurns and i was proved ha sock reurns are heeroskedasic. Previous sudies show ha seasonaliy effec on sock price reurns can be examined from differen dimensions. Ashish Garg B.S e.al., (2010) have analysed he impac of seasonaliy effec from five differen dimensions like monh effec, semi-monhly effec, monhly effec, Monday effec and Friday effec and he sudy proved he presence of Monday effec on Indian sock marke. I is commonly assumed ha developed markes would experience more informaional efficiency han developing or underdeveloped markes. An aemp in his regard was made by Ashish Garg B.S e.al., (2010) and resuls of he sudy are quie ineresing. Boh Semi-monhly and urn of he monh effec was found in boh developing and developed markes whereas monh effec was no presen in any of he wo markes and hence, i can be inferred ha he degree of seasonaliy effec was more or less he same irrespecive of level of developmen of he markes. I is also worhwhile o see he impac of marke crashes on he seasonaliy effec of sock reurns. Inerplay beween monh of he year effec and marke crash effec was sudied by Mihir Dash e. al., (2011) and he sudy concludes ha seasonaliy effec was reduced due o marke crashes. Seasonaliy effec can also be examined by observing holiday effec on sock reurns. How he socks prices will reac immediaely before and afer holidays is examined by various auhors. January effec or Tax selling hypohesis conends ha invesor sell heir loss making sock in he las week of December and repurchase hem in he firs week of January o show he loss and consequenly reduce he axable income. January effec in China, Brazil, Shanghai, India, Argenina and Turkey was examined by Sevinc Guler (2013) and resuls of he sudy concludes ha January effec was presen on he sock markes of China, Argenina and urkey. The oher dimension of ime effec is day of he week effec on sock reurns. Day of he week effec on Indian sock marke was examined by P. Nageswari e.al.,(2011) and resuls are in favour of Efficien Marke Hypohesis indicaing ha week effec paern was absen in he Indian Sock marke. Secoral analysis of day of he week effec can provide an insigh ino he differences in seasonaliy effec across differen secors. Firs aemp in his direcion was made in he Indian conex by P. Srilah e.al.(2012) and resuls of he sudy provides ha differen secors have experienced day of he week effec on differen ways. Banking secor socks were influenced by Monday and Friday; FMCG secor socks were influenced by only Friday; IT secor socks are influenced by Thursday and Pharma Secor socks were influenced by Monday, Wednesday and Friday. Impac of weekend effec was analyzed by Poharla Srikanh e.al.,(2013) and resuls of he sudy discloses he fac ha socks of Banking secor, FMCG and Pharma were experiencing weekend effec bu he same was no rue in he case of IT secor. Being India is a land of fesivals, examinaion of impac of fesivals on he sock price movemen can help he invesor in planning heir invesmens more effecively in shor erm horizon. Diwali effec on Indian sock marke was sudied by Poharla Srikanh e.al.,(2013) by using even sudy mehodology and resuls of he sudy highlighs ha Diwali effec was no significan on he reurns from Indian sock marke. OBJECTIVES OF THE STUDY: The main objecive of he presen sudy is o examine he anomalies presen in he form of seasonaliy effec on Indian Informaion Technology companies socks. The sudy also analyses he impac of overall Indian sock marke condiions on he Informaion echnology companies socks. HYPOTHESIS OF THE STUDY: Null Hypohesis: There is no seasonaliy effec on Indian Informaion Technology companies socks Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [111]

4 -Journal of Ars, Science & Commerce Alernaive Hypohesis:- There is a presence of seasonaliy effec on Indian Informaion Technology companies socks. METHODOLOGY OF THE STUDY: Daa and Period of Sudy: For he presen sudy, daa on weekly reurns of BSEIT Index is used as a proxy for Indian IT secor companies sock behaviour and weekly reurns of BSE-Sensex is surrogaed for Indian sock marke behaviour. The period of sudy is from april,1999 o march,2013. Analyical framework of he sudy: The prices of BSEIT Index and BSE-Sensex are convered ino log reurns by using he following formula P Ri ln *100...(1) P 1 In equaion(1) P is price of he index a ime and P 1 is he price of he index a ime -1. A he ouse, o undersand he characerisics of he reurns of selec indices he descripive saisics like mean, sandard deviaion, skewness, kurosis, minimum and maximum have been compued. Before applying GARCH model o examine he seasonaliy effec on reurn and volailiy of IT secor socks, he saionariy of indices reurns has been confirmed by employing augmened version of Dickey Fuller(ADF) es. ADF es has been conduced a he level form of reurns wih inercep, bu wihou rend in he series. Trend has no been inroduced in he ADF equaion because he reurns of he indices did no follow any rend over he period of ime. The equaion of ADF is as follows Y Y...(2) 1 1 In Equaion(2) Y is he firs differenced value of weekly reurns from he selec indices; is he consan ; Y 1is one week lagged value of he weekly reurns of he index; is he error erm. To examine he seasonally effec on Indian IT secor companies socks GARCH(1,1) model has been used. The GARCH equaion can be divided wo segmen. One is mean equaion and anoher one is variance equaion. The wo equaions are presened as follows MEAN EQUATION: R i D D D D D D D D D apr may jun jul aug sep oc nov dec D D D +AR(1)+MA(1)+ jan feb mar VARIANCE EQUATION: (4) 1 1 (3) In equaion(3), Ri is he weekly reurn from BSEIT Index; is he consan; D apr o D mar are dummy variables for each monh in he financial year i.e., from april in he curren year o march in he succeeding year; is he weekly reurn from Sensex; AR(1) is firs order auoregression; MA(1) is firs order moving average and is he error erm. 2 In equaion(4) is he squared value of sandard deviaion a ime which is he indicaor of Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [112]

5 -Journal of Ars, Science & Commerce volailiy measured under GARCH model; 2 1 is one week lagged value of squared sandard deviaion; and ANALYSIS OF RESULTS: is one week lagged value of squared error erm; is he marke reurn a ime. 2 1 Table 2 presen he descripive saisics on he weekly reurns from BSEIT index and Sensex. Mean reurn of BSEIT index is nearly 0.003% whereas he mean reurn of Sensex is nearly 0.011% wih a sandard deviaion of nearly 2.518% and 1.504% respecively. Lower mean reurn wih higher sandard deviaion for BSEIT index compared o ha of Sensex indicaes ha reurns of Indian IT secor socks are more volaile han he overall Indian sock marke. Skewness of he disribuion of boh he series of reurns is negaive. However, higher negaive value of skewness of he disribuion of BSEIT Index reurns implies he presence of large number of high values in he disribuion of BSEIT reurns compared o ha of Sensex reurns. Kurosis of he disribuion of boh he series in lepokuric, bu he higher value of kurosis of he disribuion of BSEIT reurns indicaes ha he values in he disribuion are closer o heir mean value. Table 3 presens he resuls of uni roos es conduced based on augmened version of Dickey Fuller Tes. Presence of uni roo or non-saionariy is a common phenomenon in he case of ime series daa. Hence, reurns from he indices are convered ino log values. The advanage of using log values of reurns is ha hey incorporae he compounding effec of reurns and moreover he log reurns end o have saionariy compared o simple reurns. The resuls of ADF es also confirms ha he log reurns of BSEIT Index and Sensex are free from uni roo and hence he daa series is viable for economeric analysis. Table 4 presens he resuls of volailiy esimaion done based on GARCH(1,1) model. The resuls of he analysis are divided ino wo pars i.e., Mean Equaion and Variance Equaion. Mean equaion presens he impac of monhs of he year effec on mean reurns of BSEIT index. I also includes he firs order auoregression and moving average. The resuls of he analysis discloses ha april and march monh reurns have significan negaive impac on he mean reurns of IT secor(p<0.05). Though, July, Augus and January monhs reurns also have negaive impac on average reurn of BSEIT Index, bu i is no significan(p>0.05).all he remaining monhs reurns have posiive impac on average reurns of BSEIT Index reurns, bu he impac is no significan saisically(p>0.05). Sensex which is inroduced as surrogae index for Indian sock marke, has significan posiive impac on he average reurns of BSEIT Index (p<0.05). Firs order auoregression[i.e., AR(1)] has significan posiive impac on he average reurns from BSEIT Index, whereas firs order moving average[i.e.,ma(1)] has significan negaive impac.(p<0.05). I means unexplained shocks which are represened by MA(1) have negaive influence on sock marke. This ype of phenomenon implies ha negaive reurns in sock markes are caused by many unobservable facors which are beyond he expecaion limis of individual invesors. Variance equaion has four componens i.e, consan, one week lagged value of squared error erm(or ARCH), one week lagged value of squared sandard deviaion and Sensex reurns. Resuls of he analysis show ha is posiive. Long erm variance can be obained by dividing wih where is he excess of he sum of and over 1. So, he long erm uncondiional variance is per day and long erm uncondiional volailiy, obained by aking square roo of long erm uncondiional variance, is per day. One week lagged value of squared error erm has significan posiive impac on he volailiy of BSEIT Index reurns which indicaes ha he marke is influenced by recen news impac and movemen of he reurns from he Index in he marke is no random. One week lagged value of GARCH is also posiive and significan indicaing he presence of old news impac. Coefficien of one week lagged squared sandard deviaion is higher han ha of one week lagged squared error erm which clearly indicaes ha he old news has more impac han recen news. I implies ha he movemen of sock reurns is highly exponenial and informaional efficiency of he marke is no so good. Sum of he coefficiens of ARCH and GARCH is almos equal o one which imply srong persisence of volailiy in he reurns from BSEIT Index. Sensex has negaive impac on he volailiy of BSEIT Index. I indicaes ha when Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [113]

6 -Journal of Ars, Science & Commerce overall marke is in favourable condiion, invesors prefer o inves in oher han IT companies socks. I can be due o he fac ha IT secor socks are more vulnerable o inernaional marke condiions raher han o domesic marke condiions. R-squared value which is also called coefficien of deerminaion, is nearly which indicaes ha nearly 42% variaion in he reurns of he BSEIT index can be explained by he so consruced mean equaion. Durbin-Wason saisic value is very closer o wo indicaing he presence of very weak posiive auocorrelaion. FINAL FINDINGS: The era of informaion echnology wih increased imporance for financial secor reforms by he counries governmens has opened up new opporuniies and challenges o he marke paricipans. Accessibiliy o price sensiive informaion has increased rapidly and various research consulancies publish heir analysis resuls which can be accessible o even a common invesor. However, sill i is a common phenomenon in he marke ha someimes invesors over or under reac o he price sensiive informaion and i leads o he coninuous exisence of marke imperfecions. Seasonaliy effec is well esed sock marke anomaly wih large body of lieraure. In he presen sudy, a modes aemp has been made o examine seasonaliy effec specifically on informaion echnology socks. The raionale behind he selecion of informaion echnology secor is socks in his secor always experience high volailiy in he marke and hence need special aenion by invesors. Resuls of he sudy confirms he presence of seasonaliy effec on informaion echnology socks in India. REFERENCES: [1] Ashish Garg., B.S. Bodla & Sangeea, Ch. (2010). Seasonal Anomalies in Sock Reurns: A Sudy of Developed and Emerging Markes. IIMS Journal of Managemen Science, Vol.1, [2] Deepak, R., & Viswanah, N.S. (2012). Seasonaliy and Sensiiviy Of NSE Nify An Economeric Analysis. IJRMEC,Volume2, [3] Mihir Dash, Anirban Dua & Mohi Sabharwal (2011). Seasonaliy and Marke Crashes in Indian Sock Markes. Asian Journal of Finance & Accouning, Vol.3, [4] Nageswari, P., & Selvam, M. (2011). An Empirical Sudy on Seasonal Analysis in he Indian Sock Marke, IJMBS, Vol.1, [5] Srikanh, P., & Srilaha, P. (2013). Sock Marke Anomalies: Empirical Evidence from Weekend effec on Secoral Indices of Indian Sock Marke. Indian Journal of Managemen Science, Vol.III, [6] Srilaha, P., & Srikanh, P. (2012). Day-of-he-week effec on selec Secors of Indian Sock Marke. Gavesana Journal of Managemen, Vol.4, [7] Srikanh, P., & Raghu Ram, M. (2013). Economic Impac of Fesivals: Evidence from Diwali effec on Indian sock marke. Researchers-world: Journal of Ars, Science & Commerce, Vol. IV, [8] Sevinc Guler (2013). January effec in Sock Reurns: Evidence from emerging Markes. IJCRB, Vol.5, Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [114]

7 -Journal of Ars, Science & Commerce APPENDICES Table 1: Monh-wise Descripive Saisics of Weekly reurns of Selec Indices Monh Index N Minimum Maximum Mean Sd. Deviaion Skewness Kurosis April May June July Augus Sepember Ocober November December January February March BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn BSEIT Reurn Sensex Reurn Source: Auhors Calculaions Table 2: Descripive Saisics of Weekly reurns of selec indices of he whole period BSEIT Reurn SENSEX Reurn Mean Median Maximum Minimum Sd. Dev Skewness Kurosis Observaions Source: Auhors Calculaions Table 3: Uni Roos Tes based on Augmened Dickey Fuller Tes Index -saisic P-Value BSEIT Reurn SENSEX Reurn Source: Auhors Calculaions Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [115]

8 -Journal of Ars, Science & Commerce Table 4: Esimaion of Volailiy of BSEIT Index using GARCH(1,1) Model Variable Coefficien Sd. Error z-saisic Prob. Mean Equaion April May June July Augus Sepember Ocober November December January February March Sensex Reurn AR(1) MA(1) Variance Equaion C ARCH(-1) GARCH(-1) Sensex Reurn R-squared Durbin-Wason sa Adjused R-squared Source: Auhors Calculaions Inernaional Refereed Research Journal Vol. V, Issue 3, July 2014 [116]