Momentum Trading on the Indian Stock Market

Momentum Trading on the Indian Stock Market

Momentum Trading on the Indian Stock Market is an exploration of the Indian stock market, focusing on the possible presence of momentum trading.

Category: Stock

Author: Gagari Chakrabarti

Chitrakalpa Sen

Language: English

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Introduction

This study is an exploration of the Indian stock market, focusing on the possible presence of momentum trading. One thing, however, should be noted. While it is true that momentum trading, which tends to generate speculative bubbles, may result in a financial market crash, its nature in contrast might depend on the nature of the economy itself. The study, while exploring the presence and nature of momentum trading on the Indian stock market in recent years, seeks to relate it to significant structural breaks in the Indian or global economy. To be precise, it outlines a potential correlation between the instability in the stock market and the speculative trading on the market, exploring the question of whether it is human psychology that drives financial markets. In the process, the choice of a significant structural break has been obvious: the global financial meltdown of 2007-2008 – a crisis that has often been referred to as the worst ever since the crash of 1929. While analyzing the nature of momentum trading on the Indian stock market with regard to the financial crisis of 2007-08, the study takes into account two major representatives of the market, the BSE (Bombay Stock Index) and NSE (National Stock Index), for the period 2005 to 2012. This study seeks to answer a few important questions. First of all, it tries to unveil the underlying structure of the market. In doing so, it examines the following issues: (i) What was the latent structure of the Indian stock market leading up to the crisis of 2007-08? Does the structure offer insights into designing profitable trading strategies? (ii) Is it possible to construct a profitable portfolio on the Indian stock market? (iii) Is there any profitable trading strategy on the Indian stock market? While exploring these issues, the study delves deeper, breaking the whole period down into two sub-periods, before the crisis of 2008 and after the crisis. The purpose of this division is to determine whether there has been any discernible change in the market structure since the shock.

Table of Contents

Contents

1 Introduction  1

References  4

2 Trends in Indian Stock Market: Scope for Designing Profitable Trading Rule?   5

2.1 Introduction 5

2.2 Trends and Latent Structure in Indian Stock Market  6

2.2.1 The Market and the Sectors: Bombay Stock Exchange 6

2.2.2 The Market and the Sectors: National Stock Exchange 7

2.3 Detection of Structural Break in Volatility   8

2.3.1 Detection of Multiple Structural Breaks in Variance: The ICSS Test  9

2.4 Identifying Trends in Indian Stock Market: The Methodology  12

2.5 Trends and Latent Structure in Indian Stock Market: Bombay Stock Exchange 14

2.6 Trends and Latent Structure in Indian Stock Market: National Stock Exchange  33

References  51

3 Possible Investment Strategies in Indian Stock Market  55

3.1 Introduction 55

3.2 Investment Strategies in BSE   56

3.2.1 Portfolio Construction in BSE: 2005–2012  57

3.2.2 Portfolio Construction in BSE in the Pre-crisis Period: 2005–2008  59

3.2.3 Portfolio Construction in BSE in the Post-crisis Period: 2008–2012   61

v3.3 Investment Strategies in NSE  63

3.3.1 Portfolio Construction in NSE: 2005–2012 63

3.3.2 Portfolio Construction in NSE: 2005–2008 65

3.3.3 Portfolio Construction in NSE: 2008–2012  66

Reference   68

4 Investigation into Optimal Trading Rules in Indian Stock Market  69

4.1 Introduction 69

4.2 Literature Review  70

4.3 Objectives of the Chapter   71

4.4 Dataset  71

4.5 Finding the Optimum Trading Rule   72

4.6 How the Trading Rule Varies Depending on the Performance of the Economy  72

4.7 Finding the Optimum Trading Rule for BSE Indexes 73

4.7.1 Visual Analysis of Autocorrelation 73

4.7.2 Trading Rule in BSE   78

4.8 Finding the Optimum Trading Rule for the NSE Indexes 89

4.8.1 Visual Analysis of Autocorrelation 90

4.8.2 Trading Rule in NSE  94

4.9 Behavior of Indexes Before and After the Crisis   102

4.9.1 Behavior of NSE Indexes Before and After the Crisis 102

4.9.2 Behavior of BSE Indexes Before and After the Crisis   105

4.10 The Optimal Trading Rule in India: The Epilogue 108

References  110

Reviews

Excerpts

About the author

Dr. Gagari Chakrabarti completed her Masters, M.Phil and Doctorate in Economics at the University of Calcutta and is currently working as an Assistant Professor at the prestigious Presidency University in Kolkata, India. Her area of specialization is financial economics and the application of econometrics in financial economics. She has several national and international publications to her credit.

Chitrakalpa Sen is an Assistant Professor in Economics at Auro University, Surat. He completed his Masters in Economics at Calcutta University and his PhD at the West Bengal University of Technology. Dr. Sen’s area of interest is financial economics, econometrics and the non-linear application of econometrics in financial time series. He has presented his works at several national and international conferences and in journals.

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