Title: Does behavioural risk explain the value premium? A study of Indian equity market

Authors: Saji George; P. Srinivasa Suresh

Addresses: Christ Academy Institute of Law, Sakkalwara Post, Begur-Koppa Road, Bangalore – 560083, Karnataka, India ' Department of Economics, North Eastern Hill University, Shillong-793022, Meghalaya, India

Abstract: This paper, in light of irrational behavioural sentiments, examined value premium anomaly across price to earnings ratio-based portfolios over a period from 2004 to 2016 in the Indian equity market. The study observed excess premium in value stocks with high statistical significance along with higher market portfolio risk in the growth stock portfolios. It refuted the argument of value premium as a compensation for recession related fundamental risk. Sensitivity to behavioural risk found to be negative across both portfolios with lesser impact on the value stocks' excess returns. It observed positive overreaction of trading in the growth stock portfolios and negative overreaction of trading in the value stocks portfolios and also found mispricing both in information day and non information day trading. Erroneous contrarian trading strategies and extent of noise in the prices of stocks of each portfolio cause differences in their behavioural risk exposure, thereby, results in value effect.

Keywords: asset pricing; value premium; market risk; behavioural risk; behavioural error; overreaction; under-reaction; information day trading.

DOI: 10.1504/IJFMD.2022.122348

International Journal of Financial Markets and Derivatives, 2022 Vol.8 No.3, pp.205 - 222

Accepted: 21 Feb 2021
Published online: 21 Apr 2022 *