Sobhesh Kumar Agarwalla

Financial Literacy among Working Young in Urban India

The paper reports investigation of a study on the influence of various socio-demographic factors on different dimensions of financial literacy among the working young in urban India. While the influence of several factors such as gender, education and income is similar to what has been reported in other contexts, a few factors specific to India, such as joint-family and consultative decision making process are found to significantly influence financial literacy. The study also investigates the relationship between the dimensions of financial literacy. Adding to the growing empirical understanding of financial literacy across countries, the study provides an analytical basis for enunciating policy for enhancing financial literacy of youth in India.

Mandatory IPO Grading: Does it Help Pricing Efficiency?

The paper examines the market impact of a unique IPO certification recently introduced in India – mandatory grading of IPOs by a credit rating agency. The grading was expected to improve the IPO pricing efficiency by providing comprehensive issue-related information to the market, especially to the retail investors. The results indicate that grading has only a limited influence on the IPO demand of retail and institutional investors. The low grade issues appear to have weaker demand from investors relative to the ungraded IPOs. But there is no evidence to support IPO pricing improvement due to the introduction of IPO grading. This is contrary to the evidence reported by some earlier studies. This suggests the failure of grading as an IPO certification.

Four Factor Model in Indian Equities Market

We compute the Fama-French and momentum factor returns for the Indian equity market for the October 1993 - December 2013 period using data from CMIE Prowess. We differ from the previous studies on this topic, in the Indian market, in several significant ways. First, we cover a greater number of firms relative to the existing studies. Second, we exclude illiquid firms to ensure that the portfolios are investible. Third, we have classified firms into small and big using more appropriate cut-off considering the distribution of firm size. Fourth, as there are several instances of vanishing of public companies in India, we have computed the returns with a correction for survival bias. During the period from January 1994 to December 2014, the average annual return of the momentum factor was 21.9%; the average annual return on the value portfolio (HML was 15.3%; that of the size factor (SMB) was 15.3%; that of the size factor (SMB) nearly 0%; and the the average annual excess return on the market factor (MRP) was 11.5%. This is a revised version of our earlier paper on this topic. The revision is carried out to primarily accommodate the data of firms which are retrospectively added to the prowess database by CMIE. The time series of daily, monthly and yearly returns of the factors and the underlying portfolios are made available at an online data library. The authors would update the library on a monthly basis.

Impact of the Introduction of Call Auction on Price Discovery: Evidence from the Indian Stock Market Using High-Frequency Data

Call markets are claimed to aggregate information and facilitate price discovery where continuous markets may fail. The impact of the introduction of call auction has not been found uniformly beneficial, possibly due to poor design or due to ‘thick market externalities’. This paper examines the reintroduction of opening call auction at the National Stock Exchange of India in 2010. The results suggest that the auctions attract very little volume, the intraday pattern of volume and volatility in the continuous market remains unchanged and a large fraction of price discovery, measured by the Weighted Price Contribution, still takes place in the first 15min of continuous market. However, the market synchronicity has improved after the introduction of the auction. Our findings suggest that the ability to attract volume in the call auction for effective price discovery depends on the institutional settings and the characteristics of liquidity supply in the market.

Betting Against Beta in the Indian Market

Recent empirical evidence from diff erent markets suggests that the security market line is flatter than posited by CAPM. This flatness implies that a portfolio long in low-beta assets and short in high-beta assets would earn positive returns. Frazzini and Pedersen (2014) conceptualize a BAB factor that tracks such a portfolio. We fi nd that a similar BAB factor earns signi ficant positive returns in India. The returns on the BAB factor dominate the returns on the size, value and momentum factors. We also nd that stocks with higher volatility earn relatively lower returns. These findings indicate overweighting of riskier assets by leverage constrained investors in the Indian market.

Size, Value, and Momentum in Indian Equities:

Traditionally, investment management consisted of (a) asset allocation (how much to invest in stocks and how much in safer assets like bonds) and (b) security selection (which stocks to buy and sell). The asset allocation decision can be implemented in a passive way: it is possible to buy an indexed fund that provides exposure to equity market without worrying about individual stock picking decisions at all. The second decision (security selection) is inherently a process of active management which involves taking a view on the prospects of individual companies. In recent decades, considerable attention has been focused on factor investing,1 which is an intermediate between asset allocation and security selection. It takes a more disaggregated view than stocks versus bonds, but it does not go all the way down to individual stocks. It is not quite as passive as buying an indexed fund, but neither is it as active as picking individual stocks. Factor investing is about tilting the portfolio towards (or away from) a large group of stocks (for example, towards small capitalization stocks and away from large capitalization stocks). For institutional investors, this perspective often turns out to be the most important one: in a portfolio of hundreds of stocks, individual stock picks tend to become unimportant (they get diversified), while the systematic tilts in the portfolio (the factor exposures) dominate performance.

Market Timing Ability of Indian Firms in Open Market Repurchases

The paper examines the market timing ability of Indian fi rms engaged in open market repur- chases. The study is primarily motivated by the unique disclosure feature of repurchases in India, where the disclosures are far more frequent than in any other market. We find that the repurchasing firms in India are able accumulate shares at favorable prices similar to the US market. However, the cost savings do not translate into signifi cant wealth creation for the insiders as indicated by the short-run and long-run abnormal returns. This is contrary to the evidence from markets like the US. Further, the cross-sectional variations in the cost savings from repurchase execution in India are explained by the overall market returns and not by firm characteristics. These fi ndings contrast with that of US, where the firm characteristics signi ficantly explain the cross-sectional variation in the savings measure. It appears that the more frequent disclosure of repurchase activity in India cripples the market timing ability by reducing the information asymmetry between the firm and the outsiders. This conclusion is further supported by the irrelevance of the past or concurrent stock returns in explaining the time variation in the repurchase activity of fi rms.

Whether Cross-Listing, Stock-Specific and Market-Wide Calendar Events Impact Intraday Volatility Dynamics? Evidence from the Indian Stock Market Using High-Frequency Data

Using high-frequency stock price data, we investigate the effect of various stock-specific and market-wide events on intraday volatility dynamics in the Indian market. Modeling intraday volatility dynamics using FFF regressions, we examine the effect of – (a) cross-listing, (b) weekends and holidays, (c) scheduled temporary trading halts, and (d) derivatives’ expiry day, on intraday volatility dynamics. We find that Indian stock market exhibits “reverse J” shaped intraday volatility with much higher intraday variation than what has been reported in other markets. The intraday variation is more in the case of large cap stocks relative to small cap stocks. Higher volatility is also observed in the first one-hour of trade after weekends, in the first half-an-hour after the holidays, in the last one-hour of trade before the weekends. Temporary scheduled trading halts cause the volatility to rise when the market re-opens. The stocks, cross-listed elsewhere, exhibit higher volatility in the first 45 minutes of trade relative to other stocks. Volatility of the stocks with derivative contracts increases in the last half-an-hour trade on the expiry day, the time period relevant for estimation of the settlement price of the derivative contracts, but not in other time intervals. While our results are mostly along the lines of previous findings, the use of high-frequency data allows us to locate precisely the time-intervals which are affected by the investigated calendar events.