Capital Markets and Investment Decision Making (eBook)

Preface 5
Contents 7
About the Author 14
Abbreviations 15
Capital Markets Operation 17
1 Understanding the Behaviour of Stock Market 18
Introduction 18
Preferences 19
Psychological Biases 20
Heuristics 21
Human Tendency or Self-deception 22
Conclusion 23
Annexure: Market Anomalies 24
References 25
2 Clearance and Settlement Process 28
Introduction 28
Literature Review 29
Research Methodology 30
Dematerialization 31
According to ISMR 31
Linkages with Clearing System 32
Integration with Theory 33
Rolling Settlement and Settlement Cycle 33
Straight-Through Processing 35
Integration with Theory 38
Deferral Products 38
Risk Management 40
Integration with Theory 42
Conclusion 43
Appendix 1: Major Redesign Events 44
References 45
3 Stock Market Operations and Long-Run Reversal Effect 48
Introduction 48
Literature Review 49
Empirical Evidence of Long-Run Reversal Effect 49
Alternative Explanation of Long-Run Return Reversal Effect 50
Data and Methodology 51
Data Description 52
Methodology 52
Empirical Results 55
Descriptive Statistics of Portfolios 55
Market-Adjusted Returns and Long-Run Return Reversal Effect 55
Seasonality in Long-Run Contrarian Profits 60
Risk-Adjusted Long-Run Contrarian Profits 60
Other Sources of Risk 61
Multivariate Risk-Adjusted Approach 63
Conclusion and Implications 65
References 67
4 Stock Markets’ Conditions and Investment Decisions 70
Introduction 70
Literature Review 71
Overreaction and Momentum Effect: An Overview 72
Sources of Contrarian and Momentum Profits 73
Data and Methodology 74
Empirical Results 76
Existence of Momentum and Overreaction Effect in the Indian Stock Market 76
Market States and Investment Strategies 77
Market State and Momentum Profits 79
Interaction Between Market State, Size and Investment Strategies 86
Market-Dependent Risk-Adjusted Returns 88
Discussion 93
Conclusion 94
References 95
5 Stock Markets Overreaction 98
Introduction 98
Literature Review 100
Overreaction and Momentum Effect 100
Rational Sources of Contrarian and Momentum Profits 101
Behavioural Finance: A New Approach 102
Data and Methodology 104
Empirical Results 105
Existence of Momentum and Overreaction Effect in Indian Stock Market 107
Robustness Test 110
Evaluation of Behaviour Explanation for Momentum and Overreaction Effect 116
Conclusion 119
References 120
Global Markets and Investment Decisions 123
6 Calendar Anomalies in Stock Markets 124
Introduction 124
Data and Methodology 126
Empirical Findings 127
Day-of-the-Week Effect 128
Conclusion 132
References 133
7 Stock Market Return Volatility 135
Introduction 135
Review of Literature 136
Research Methodology 137
Empirical Findings 138
Preliminary Results 138
Test for Cross-Relation in Stock Returns 138
Forecasting of Volatility Fitting of GARCH(1,1) Model 140
Diagnostic Testing 142
Measurement of Asymmetric Volatility 142
Relationship Between Stock Returns and Conditional Volatility, and Standardized Residuals 143
Summary and Implication of the Study 143
References 144
8 Stock Markets’ Instability, Integration and Volatility 146
Introduction 146
South Asia: Current State of Art 149
An Overview of South Asian Stock Markets 149
Data Source, Methods and Properties of Data 151
Data Source 151
Return Estimation 154
Properties of Data 155
Model Formulation and Empirical Findings 155
Determining the Financial Instability 156
Model Formulation and Specifications 156
Empirical Results 157
Conclusion and Implication of the Study 161
References 162
9 Indian and American Stock Markets’ Volatility 165
Introduction 165
Review of Literature 167
Data and Research Methodology 168
Measurement of Conditional Volatility 169
Empirical Findings 170
Preliminary Results 170
Unit Root Test 170
Forecasting of Conditional Volatility in US and Indian Stock Market 171
Testing the Relationship Between Conditional Volatilities of two Markets 172
Granger Causality Test 174
Conclusion and Implication of the Study 175
References 176
10 Dependences in Stock Markets of South Asia 178
Introduction 178
Some Background Information on Stock Markets in South Asia 180
Research Methodology 181
Data 182
Test Procedure 182
Empirical Findings 187
Stochastic Characteristics of the Market Return Series 187
Test for Correlated Increments (VR Test) 187
Test for Nonlinear Dependence 189
Concluding Remarks 189
References 191
Capital Structure, Value of Firm and Investment Strategy 194
11 Cost of Capital, Capital Structure, Dividend Policy and Value of Firm 195
Introduction 195
Pre-MM World 195
MM World 196
Cost of Capital and Financing Decisions 196
Capital Structure 197
Dividend Policy 199
Value of Firm 201
Conclusions 202
References 203
12 Optimal Capital Structure and Investment Decisions 205
Introduction 205
Review of Literature 206
Objectives 208
Research Methodology 208
Empirical Results 210
Conclusions 216
References 218
13 Investor Sentiment and Returns 219
Introduction 219
Data and Methodology 222
Dissection of Sentiment into Sentiment States 222
Analysing Group Level Impact of Sentiment States 223
Persistence of Sentiment 223
Results and Discussion 223
Conclusion 227
References 231
14 Momentum and Contrarian Strategy 234
Introduction 234
Literature Review 235
Data and Methodology 237
Sample Data 237
Methodology 237
Empirical Results 238
Conclusion and Implications 248
References 249
15 Private Equity Investment 251
Introduction 251
Theoretical Framework 252
Literature Review 253
Dependent Variable 257
Independent Variables 257
Hypothesis 258
Econometric Specification 258
Data 259
Empirical Results 260
Estimation Results 261
Conclusion 263
References 264
Emerging Issues in Finance 266
16 Islamic Banking and Finance 267
Introduction 267
Islamic Banking and Growth of the Economies in the World and Gulf Cooperation Council (GCC) 269
Research Objectives and Importance 269
A Critique of the Relationship Between Islamic Banking and Growth of Economy: Part One 271
A Critique of the Relationship Between Islamic Banking and Financial Stability: Part Two 273
Liquidity Ratio Results 273
Capital Adequacy Ratio Results 276
Critique of the Second Empirical Part 279
Conclusions 279
References 280
17 Mutual Funds and Risk Management 282
Introduction 282
Mutual Funds (MF) in India 283
Literature Review 285
Tracking Error 287
The Inside Story in an Asset Management Company 287
Conclusion 291
References 292
18 Behavioural Finance 294
Introduction 294
Momentum Effect: An Overview 295
Rational Sources of Momentum Effect 296
Behavioural Finance: A New Approach 297
Momentum is Generated by Initial Overreaction 297
Momentum is Generated by Initial Under-Reaction 298
Momentum and Disposition Effect 299
Inferences 300
Scope for Further Research 300
Conclusion 301
References 302
19 Forecasting Exchange Rate 303
Introduction 303
Review of the Literature 305
Trends of Foreign Exchange Rate 306
Methodology 310
Analysis of Output 312
Conclusion 322
References 323
20 International Financial Reporting Standards 325
Introduction 325
IFRS Around the World 326
IFRS in CHINA 326
IFRS in JAPAN 327
IFRS in INDIA 328
What it means to Convergence with IFRS in India? 329
Accounting Standards (ASs)—Legal Recognition 330
Converged Standards 332
IFRS in KOREA 336
IFRS in INDONESIA 336
IFRS in BANGLADESH 337
IFRS in BHUTAN 338
IFRS in NIGERIA 339
IFRS in EGYPT 339
IFRS in SOUTH AFRICA 340
IFRS in USA 341
IFRS in CANADA 343
Publicly Accountable Enterprises in Canada 343
Private Enterprises in Canada 344
Government Entities in Canada 344
Not-for-Profit Organizations in Canada 345
Pension Plans in Canada 345
Local Accounting Standard Setter in Canada 345
IFRS in BRAZIL 346
Convergence of BR GAAP and IASB IFRS 346
IFRS in ARGENTINA 346
IFRS in RUSSIA 347
IFRS in GERMANY 349
IFRS in France 350
IFRS in AUSTRALIA 350
IFRS for SMEs 351
Local Accounting Standard Setter 352
Implementation and Compliance 352
Conclusion 352
Appendix 353
References 353
Index 355