CONTRARIAN AND MOMENTUM STRATEGIES IN THE INDIAN STOCK FUTURES MARKET: A STUDY ON BANKING SECTOR

CONTRARIAN AND MOMENTUM STRATEGIES IN THE INDIAN STOCK FUTURES MARKET: A STUDY ON BANKING SECTOR

This thesis tries to investigate the contrarian and momentum strategy can help the investors to lay down the major guidelines for undertaking any derivative transaction. Contrarian strategies are based on the reversal pattern in stock returns and imply buying past losers and selling past winners. On the contrary, Momentum strategies are based on the continuation pattern in stock returns and imply buying past winners and selling past losers. For the purpose of analysis, the stock returns for the Indian stock futures market segment for Indian banking sector for the period from July 1, 2005 to June 30 2011 by using the Fama and French multifactor model. The Fama-French model involves the use of three factors for explaining common stock returns: the market factor proposed by the CAPM, and factors relating to size and value. The company used in this research consists of 16 Banks which were ranked in an ascending order based on their average returns. The ranked securities are then used to form five equal portfolios. While portfolio P1 contains the bottom 20 per cent securities and is called "losers' portfolio," portfolio P5 contains the top 20 per cent securities and is termed as "winners' portfolio." The findings suggests that the stock-return behavior in banking sector for short-term momentum profits and long term contrarian profits exist in this case. Further, the contrarian trading strategy based on long term returns provides moderately positive payoffs and short-term returns show a continuation pattern and the investment strategy based on momentum effect provides significantly high returns. Finally, the study generally supportive of the Fama-French model applied to Indian futures stock market related to banking sector. Keywords: Contrarian, Momentum, Stock Returns, CAPM, Fama-French Model JEL Classification: C12, C22, E43, G11

CHAUDHURY SUDHIN ANUMITA

Management Studies