Rajesh Pathak

Do the calendar anomalies still exist? Evidence from Indian currency market

Purpose - – The purpose of this paper is to examine the presence of the day-of-the-week (DOW) and January effect in the Indian currency market for selected currency pairs; USD-(Indian rupee) INR, EUR-INR, GBP-INR and JPY-INR, from January, 1999 to December, 2014. Design/methodology/approach - – Ordinary least square regression analysis is used to examine the presence of DOW and January effect to test the efficiency of the Indian currency market. The sample period is later divided into two sub-periods, that is, pre- and post-2008 to capture the behavior of returns before and after the 2008 financial crisis. Further, the authors also use the non-parametric technique, the Kruskal-Wallis test, to provide robustness check for the results. Findings - – The results indicate that the returns during Monday to Wednesday are positive and higher than the returns on Thursday and Friday which show negative returns. The returns during January are found to be higher than the returns during rest of the year. Further, all currencies exhibit significant DOW and January effects in pre-crisis period, however, post-crisis; these effects disappear for all currencies indicating that the markets have become more efficient in the later time. The findings can be further attributed to the increased intervention in the forex markets by the Reserve Bank of India after the crisis. Practical implications - – The results have important implications for both traders and investors. The findings suggest that the investors might not be able to earn excess profits by timing their positions in some particular currencies taking the advantage of DOW or January effect which in turn indicates that the currency markets have become more efficient with time. The results are in conformity with those reported for the developed markets. The results might be appealing to the practitioners as well in a way that they can consider the state of financial market for financial decision making. Originality/value - – The authors provide the first study to examine the calendar anomalies (DOW and January effect) across a range of emerging currencies using 16 years of data from January, 1999 to December, 2014. To the best of the authors’ knowledge, no study has yet examined these calendar anomalies in the currency markets using data which covers two important periods, pre-2008 and post-2008.

Information Content of Derivatives under Varying Market Conditions and Moneyness: The Case of S&P CNX Nifty Index Options

When homogeneous or closely linked securities trade in multiple markets, the market where the price discovery takes place becomes vital. We investigate the information content in equity index options trading using S&P CNX Nifty Index options traded on the National Stock Exchange (NSE), India. We account for different market conditions (for example, Uptrend, Downtrend, Recovery phases) and option’s moneyness which potentially can affect the venue preference of the trader and can bring anomalies in the price discovery process. We use the linear regression method to investigate the contemporaneous relationship and the bi-variate vector auto-regression (VAR) model to study information content of the markets. The contemporaneous relationship between trading activity and spot returns is found to be significant in the cases of the two most liquid contracts based on moneyness, that is, the at-the-money and out-of-the-money options. However, we find a change in magnitude and direction of this relationship when the market cycle is taken into consideration. VAR results suggest that at-the-money options are the favourite contracts of informed traders in the Indian market consistently across periods of study. However, we find the spot market is leading significantly for the in-the-money and out-of-the-money classes and across market trends.

Are exchange rates interdependent? Evidence using wavelet analysis

ABSTRACT We examine the co-movement in daily returns of USD–INR, EUR–INR, GBP–INR, and JPY–INR currency pair futures contracts traded on the National Stock Exchange of India (NSE) using the wavelet cohesion approach. This study contributes to the literature by examining the scantly studied area of co-movement in exchange rates and using the wavelet approach, which allows us to analyse time–frequency-wise co-movement of the time series. The empirical results indicate that the currency futures markets are nearly perfectly integrated in the long run (monthly, quarterly and biannual scales) offering little potential gains from international portfolio diversification. The discrepancies between currency futures markets are small and almost fade away within 3–6 months. Moreover, international currency diversification might offer relatively higher potential gains at intraweek, weekly, and fortnightly time horizons owing to lower correlations among the currencies under consideration. Finally, our multiple-wavelet correlation and cross-correlation analysis shows that GBP acts as a potential leader/follower across scales. The results of our analysis indicate the dynamic pattern of co-movement among the major currency futures contracts, which provides several implications for portfolio managers and international investors participating in the Indian market.

To pay or not to pay: what matters the most for dividend payments?

Purpose The purpose of this paper is to test the stickiness of payout policy across times for Indian firms, by identifying the determinants of dividend payout (for amount of dividends as well as probability of dividends) and examine their predictive consistency through good and bad times, affiliation categories, amid controls for idiosyncratic characteristics. The authors also examine the scantly explored effects of financial constraints on firms’ dividend decisions. Design/methodology/approach The authors use various regression models, i.e. panel, Tobit and logit models; and amid control for firm-specific characteristics throughout the analysis. Findings The authors observe payout levels on average increasing with time for Indian firms. Further, group firms pay higher dividends compared to standalone firms. Firms’ leverage, profitability, non-promoters holdings, growth prospects and dividend event are apparently the important determinants of payout ratio and are mostly, but not always, consistent through times and firms’ categories, for both the amount as well as the likelihood of dividend payments. Financial constraints have an overall negative impact on dividends with significantly varying magnitude across periods of stability, crisis and recovery. Firms’ age and size are positive and significant factors for dividends level decisions in Indian firms, which is consistent with the life-cycle theory. However, inconsistent size and age effect is observed in determining the likelihood of dividend payment. Research limitations/implications This study adds to the growing literature on the changing trends and contributing factors of firms’ dividend payout policy. Originality/value This study provides evidence on predictive consistency of payout policy of firms and its determination with the change in the external economic condition.

Going European from American: does style matter?

Purpose - The purpose of this paper is to examine the cross-sectional predictive power and the information content of volatility smirks for future stock returns using single stock options. Design/methodology/approach - The study uses Fama-Macbeth procedure and portfolio approach to investigate the predictability and informativeness in a setup when options settlement style is changed from American to European. Findings - The study reports that the volatility smirk of European style options, unlike American style options, predict the underlying cross-sectional equity returns. Firms with steepest volatility smirk underperform firms with flatter volatility smirks, by an average of 3.28 and 4.01 per cent annually for American and European options, respectively. The results are robust to the control of idiosyncratic and systematic risk factors. Practical implications - The results confirm that a trader with negative information prefers to trade out-of-the-money put options. The more pronounced results of European options designate the trader’s preference to less risky European style stock options. Results are robust and signify the delay of equity market in incorporating information impounded in the volatility smirk. Originality/value - Very few studies examine smirk and returns relationship and to the best of the authors’ knowledge, no study exists that examine the unique case of change in options style and its role in affecting relationship between smirk and future returns.

Information Content of Implicit Spot Prices Embedded in Single Stock Future Prices: Evidence from Indian Market

This study examines the information content of pricing error, measured by the difference between the implied price computed using the cost of carry model and the spot price of Single Stock Futures (SSFs), traded on National Stock Exchange (NSE), India. The returns of portfolios, based on ranking of such pricing errors, are investigated. The consistency of results is verified by controlling for established risk factors, that is, market, size, value and momentum premium, and idiosyncratic factors such as firm’s liquidity and size. Our study reveals that the pricing error is a priced risk factor that contains incremental information about stock returns of day t, and not beyond. We conclude that implied spot prices from stock futures market are useful for traders to profit in the spot market. JEL Classification: G120, G130

A Review of Momentum as an Investment Strategy

Existing literature claims momentum as a profitable investment strategy. It is widely documented in finance literature that momentum profit has explanatory power, and it provides additional information for explaining the abnormal returns of the stocks. The paper was written with a purpose to report the findings of existing literature to identify decompose and define the dynamics of momentum as an investment strategy. The contribution of the study would broadly be four folded: (a) The outcome of the study fills the void in the existing stocks of literature on momentum investing strategies, (b) the presence of momentum profits may induce the investors to develop momentum investment strategies so as to minimize the vulnerability, and (c) understanding of the drivers of momentum profits in the up market and down market states of the market may help the market participants to devise their trading strategies under momentum investing, (d) the knowledge of volatility behaviour of winners, losers, and momentum profits and the volatility drivers of momentum would contribute to market participants in trading of volatility risk and returns.