The study aims in understanding dynamism in the Indian stock market and formulating a model to analyze the dynamic behaviour of investors. To this effect, investment in three different stocks i.e. income, growth, and value are studied. A previous article stated the need for this study. It elaborated that understanding the traits of the stock market is necessary in order to optimize an investor’s financial returns. This article builds on the methodology adopted for empirically analyzing the dynamic behaviour of investors.
Steps in the empirical examination of the dynamic behaviour of investors in the stock market
Step 1: Categorisation of stocks
It consists of categorizing the chosen stocks into three types: income, growth and value stocks based on the following financial ratios:
- Price-to-earnings ratio
- Price-to-book value ratio
- Dividend yield ratio
Step 2: Risk-return analysis
This step pertains to analyzing the risk versus returns of stocks numerically. This evaluation is done using the following methods:
- Risk-return trade-off examination
- Trend based analysis
- Momentum based analysis
- CAPM analysis
Step 3: Formulating the model
This step deals with the presentation of the conceptual model that is formulated to maximize an investor’s returns from the stock market based on minimum risk.
The above-stated methods are selected and then an examination of each of the aspects is done based on the data derived from the secondary sources.
Data collection procedure
Firstly, a sample of 303 BSE-500 index-listed companies was selected for empirical examination for a ten-year period from 2009-2019 to understand the dynamic behaviour of the investors. The names of these companies are as follows.
|3M India||GSFC||Orient Cement||Wockhardt|
|ABB India||Gujarat Alkalies||P&G||Zee Entertainment|
|Abbott India||Gujarat Fluoro Chem||Page Industries||Zydus Wellness|
|Adani ports||Hatsun Agro||Pfizer|
|Adani Transmission||Havells India||Phillips Carbon Black|
|Aditya Birla Fashion||HDFC||Phoenix Mills|
|Aegis Logistics||HDFC Bank||PI Industries|
|AIA Engineering||Heildelberg Cem||Pidlite Industries|
|AllCargo Logistics||Hero Moto corp.||Piramal Enterprises|
|Amara Raja Batteries||HFCL||PNB|
|Ambuja Cements||Himadri Special Chemicals||PNB Housing Finance|
|Apar Industries||Hindalco Industries||PNC Infratech|
|APL Apollo Tubes||Honeywell Automation||Power Finance Corp|
|Apollo Hospital||HPCL||Prestige Estate|
|Asahi Glass India||HUDCO||Prism Johnson|
|Ashoka Buildcon||ICICI Lombard||Quess Corp.|
|Asian Paints||IDFC||Radico Khaitan|
|Astral Poly Tech||IDFC First Bank||Rain Industries|
|AU Small Finance Bank||IFB Industries||Rajesh Exports|
|Avenue Supermarts||IFCI||Rallis India|
|Axis Bank||India Cements||Ramco Cements|
|Bajaj Consumer||India Tourism Development Corp||Raymond|
|Bajaj Finserv||Indiabulls Integrated||RBL Bank|
|Bajaj Hindusthan||Indiabulls Real Estate||REC|
|Bajaj Holdings||Indiabulls Ventures||Relaxo Footwear|
|Bandhan Bank||IndusInd Bank||Reliance Capital|
|Bank of Baroda||Infibeam Avenue||Reliance Communication|
|Bata India||Info Edge India||Reliance Infrastructure|
|Bayer Crop Science||INOX Leisure||Reliance Nippon Life AM|
|BEML||Inox Winds||Reliance Power|
|Berger Paints||Intellect Design Area||S H Kelkar|
|Bharat Dynamics||IOC||Sadbhav Engineering|
|Bharat Financial Inclusion||Ipca Labs||SAIL|
|Bharat Forge||IRB infra||Sanofi India|
|Bharti Airtel||ISGEC Heavy Eng.||SBI Life Insurance|
|Bharti Infratel||ITC||Schaeffler India|
|Biocon||J K Cement||Shankara building products|
|Blue Dart Express||J K Lekshmi Cement||Sharda Cropchem|
|Bombay Dyeing||Jagran Prakashan||Shipping Corporation|
|Bosch||Jain Irrigation||Shoppers Stop|
|Britannia||Jaiprakash Associates||Shree Cements|
|Canara Bank||JB Chemicals||Siemens|
|Carborundum Universal||Jindal Saw||SIS|
|Centrum Capital||Jindal Stainless||SJVN|
|Century Plyboard||JK Bank||SKF India|
|Century Textile and Industries||JK Tyre & Industry||Sobha|
|Cera Sanitary ware||JM Financial||Solar India|
|Cholamandalam Finance||Johnson Control||Somany Ceramics|
|Cipla||Jubiliant Foodworks||South Indian Bank|
|City Union Bank||Jubiliant Life Science||SREI Infra|
|Coal India||Just Dial||Sterlite Tech|
|Cochin Shipyard||Kalpataru Power||Strides Pharma|
|Colgate Palmolive (India)||Kansai Nerolac||Sun TV Network|
|CRISIL||KEC International||Sundaram Clayton|
|Cummins||KEI Industries||Sundram Fastners|
|Dabur India||KIOCL||Sunteck Reality|
|Deepak Fertilizer||KNR Construction||Suprajit Eng.|
|Deepak Nitrite||Kotak Mahindra Bank||Supreme Industries|
|Dewan Housing||L&T Finance||Suven Life Science|
|Dilip Buildcon||L&T Infotech||Swan Energy|
|Dish TV||L&T Technologies||Symphony|
|DLF||Lakshmi Machine Works||Take Solutions|
|Dr Lal Path Lab||Lakshmi Vilas Bank||Tamil Nadu Newsprint|
|Dr Reddys Lab||Lemon Tree Hotels||Tata Communications|
|Edelweiss Financial Services||Linde India||Tata Global Bev|
|Eicher Motors||Lupin||Tata Steel|
|EID Parry India||Magma Fincorp||Tejas Network|
|Elgi equipments||Mahindra CIE||Thomas Cook|
|Emami||Mahindra Holiday||TI Financial|
|Equitas Holding||Mahindra Life||Timken|
|Eris Lifesciences||Mahindra Logistics||Titan Company|
|Escorts||Manpasand Bev||Torrent Pharma|
|Eveready Ind||Marico||Torrent Power|
|Exide Industries||Maruti Suzuki||Trent|
|Federal Bank||MCX India||Trident|
|First Source Solution||Meghmani Organics||TTK Prestige|
|Future Consumer||Merck||Tube Investment|
|Future Lifestyle||Minda Corp||TV 18 Broadcast|
|Future Retail||MMTC||TV Today Network|
|Galaxy Surfactants||Monsanto India||TVS Motor|
|Gateway Distri||Motherson Sumi||Uflex|
|GE Power India||Motilal Oswal||Ujjivan Financial Service|
|GE T&D India||Mphasis||Ultratech Cement|
|General Insurance Corp||Muthoot Finance||Union Bank of India|
|GIC Housing Finance||Narayana Hrudayalaya||UPL|
|Gillette India||Nava Bharat Ventures||Vardhman Textiles|
|Glaxosmith Con||Navkar Corp||Varun Beverages|
|Glenmark Pharma||Nestle India||Vijaya Bank|
|GMR Infra||New India Assurance||Vinati Organics|
|Godrej Agrovet||NOCIL||V-Mart Retail|
|Godrej Consumer||Oberoi Realty||Vodafone Idea|
|Godrej industries||Oil India||Voltas|
|Godrej Properties||Omaxe||WABCO India|
|Grindwell Norto||Oracle Financial Service||Whirlpool of India|
Financial data pertaining to these companies was extracted from online sources of information, such as the official websites of the companies, Moneycontrol.com and Rediffmoney.com. Variables that are considered for the examination are:
- Price-to-earnings ratio (P/E) or Earning Yield (E/P)
- Price-to-book value ratio (P/B)
- Dividend per share
- Opening and closing price of shares
The P/E ratio and dividend per share help in categorizing the stocks into income, growth, and value stocks. The formula for them is as follows.
Furthermore, the opening and closing price data for the BSE 500 listed top 303 companies would be collected from the official website of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). This data would help in comparing the performance of the income, growth, and value stocks for the period April 1, 2000, to March 31, 2020. The formula for calculating return is as follows.
The table below shows the representation of the different variables considered for the stock market analysis and their sources.
|Categorization||Price-to-earnings ratio or earning yield, price-to-book value ratio, dividend per share, and stock price per share||Official websites of moneycontrol.com, yahoofinance.com, Bombay stock exchange and National stock exchange|
|Risk-Return analysis||Opening price, closing price, dividend||Bombay stock exchange, National Stock exchange, and moneycontrol.com|
|Forecasting||Closing price||Bombay stock exchange, and National stock exchange|
Data analysis procedure to understand the dynamic behaviour of investors
The data analysis for the Indian stock market begins by categorising the 303 stocks into income, growth, and value stocks. This categorisation would be based on the P/E, P/B ratios and the dividend yield. The average value of the time period for each stock was calculated first. Criteria for the categorisation of the stock are as follows.
|Income stocks||Dividend yield between 3-6%|
|Growth stocks||P/E ≥ 20|
|Value stocks||P/E ≤ 15 and P/B ≤ 1.5|
Post categorisation, the assessment of the stocks’ returns would be done for examining and comparing the performance of different stocks. For this, the below-stated procedure would be followed:-
Descriptive analysis of the annual average returns for the period April 1, 2000, to March 31, 2020, in 5 groups i.e.
- April 1, 2000 – March 31, 2005
- April 1, 2005 – March 31, 2010
- April 1, 2010 – March 31, 2015
- April 1, 2015 – March 31, 2020
- April 1, 2000 – March 31, 2020
Herein, the comparison across the 5 groups would help in providing more information about the movement of returns.
Trend analysis would be done for assessing the performance of the specific category with respect to the stock market. Herein the annual average return of the stocks would be individually compared with the market return of the BSE-500 index for each of the identified 6 groups.
A paired t-test-based comparison would be done for a stock-wise comparison of the average return for the identified 5 groups. This comparative analysis of the stocks would help in knowing the performance of which stock is better. Herein, below stated hypothesis would be tested.
H01: There is no significant difference in the performance of the stocks
HA1: There is a significant difference in the performance of the stocks
Momentum analysis would measure the rise and fall in stock prices, thus providing information about the opportunity of earning momentum profit. Consisting of the two components i.e. formation and holding period; momentum analysis would be done for the short term and long term. Herein, term formation and holding period are divided into the following:
Momentum would be determined by using the following formula.
A comparative analysis of momentum for the formation and holding period would be done using the paired t-test. This comparison would determine the earning opportunity of momentum profit in the case of each stock. Herein, this below-stated hypothesis would be tested:
H02: There is no opportunity of earning momentum profit
HA2: There is an opportunity of earning momentum profit
In order to depict the performance of the stocks, a comparative analysis among the stocks would be done based on the momentum value. Hereinbelow stated hypothesis would be tested using the paired t-test.
H03: There is no significant difference in the momentum hybrid performance
HA3: There is a significant difference in the momentum hybrid performance
CAPM-based analysis for each of the stocks by determining the value of beta based on the risk-free returns. This would state investor behaviour based on the possibility of risk in the market.
Lastly, for formulating the conceptual model, in order to predict the behaviour of stocks, an examination of the returns for the period April 1, 2000, to March 31, 2020, is done. Herein the below-stated procedure is followed:
- Firstly, in order to formulate the model, the stationarity test is performed. This pre-condition test helps in stabilizing the time series and attains stationarity. Based on the result of the augmented dickey fuller (ADF test), the stationary form of the variable is generated.
- For assessing whether a serial correlation exists in the time series or not, Correlogram is plotted. It helps in determining whether the current value is linked to prior values or not. In presence of autocorrelation, the appropriate lag value of the moving average value is determined.
- Partial correlation presence is assessed by examining the partial correlogram. If the partial correlation is present when selecting the appropriate lag level, auto-regressive order is determined.
- Using the ARIMA model, the linkage between the variation in the stock price and the time trend is built.
- Lastly, based on the model, values for the stock price are predicted.
How will these tests help to understand the dynamic behaviour of investors?
The purpose of applying all the above stated tests in the stock market analysis is stated below.
|Risk-Return analysis||Descriptive analysis||To assess the nature of returns and variation levels across the selected time period|
|Trend analysis||To study the direction of the movement in actual and market returns|
|Paired t-test||To compare the performance of stocks and determine the momentum profit earning opportunity|
|Momentum analysis||To measure the rise and fall in stock prices for a specified period|
|CAPM analysis||To understand the behaviour of investors as per the changes in the market|
|Forecasting||Augmented Dickey-Fuller test||To derive the stationary form of the variable|
|Correlogram||To check the presence of serial correlation in the time series|
|Partial Correlogram||To assess the presence of partial correlation in time series|
|ARIMA model||To build the linkage between the stock price and time trend|
Thus, following the above-stated tests and the specified procedure, an assessment of the movements in the Indian stock market is performed, so that their future performance can be predicted in order to understand the dynamic behaviour of investors and maximize returns.