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Comparative Study of Momentum and Contrarian Behavior of Different Investors: Evidence from the Indian Market

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Abstract

We examine the investment behavior of Foreign Portfolio Investors (FPIs), Domestic Institutional Investors (DIIs), and retail investors based on past returns in the Indian context. Using the quarterly shareholding and return data of Indian firms from 2009 to 2018, this study employs m × n momentum strategy proposed by Jegadeesh and Titman (J Finance 48(1):65–91, 1993). A robust correlation-based comprehensive technique is used to find momentum and contrarian behavior. It is observed that FIIs and DIIs show momentum behavior in the short run in the market whereas retail investors show contrarian behavior. Moreover, Retail investors’ contrarian behavior is found to be stronger in past losing firms. This study also reports that FIIs show the momentum behavior in service-oriented industries while contrarian behavior of retail investor is stronger in firms which require local knowledge. These findings may be useful for policymakers, portfolio managers and academicians in emerging markets economies.

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Notes

  1. Handbook of statistics: Security and exchange board of India (SEBI). Retrieve from https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=4&ssid=32&smid=0.

  2. All figures are initially given in Cr INR which is converted to Billion USD for convenience. Standard exchange rates to convert INR in USD are taken from the World Bank database.

  3. Rouwenhort (1998) reported momentum return in Austria, Belgium, Denmark, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom while Chui et al. (2000) found an evidence of momentum profit in Asian market which includes Hong Kong, Taiwan, Singapore, Malaysia, Korea, Indonesia, and Thailand.

  4. Quarterly shareholding data of Indian firms is available only after 2008 and 2008 was a period of subprime crisis so that we consider data from 2009 onwards.

  5. We categorize all firms in large-cap, mid-cap, and small-cap companies as per the NSE guidelines. To account for firm-specific heterogeneity, we categorized the firms into 16 industries as defined by NSE.

  6. Returns on mid cap and small cap stocks are significantly more than returns on large cap stocks (respective p value 0.039 and 0.043). However Returns on mid cap and small cap stocks are not significant (p value 0.763).

  7. The average return from midcap and small-cap firm are higher than large-cap firm, this observation is consistent with results reported by Banz (1981). Midcap firm firms are producing slightly higher average returns than small-cap firms. This difference is due to the time interval in the dataset as we use quarterly data for our study.

  8. According to Security and Exchange Board of India (FPI) regulation 2014, FPI is a broad category of foreign investors merging three existing class namely foreign institutional investors (FII), sub-account and qualified foreign investors (QFI).

  9. DII consists of mutual funds, banks, and insurance companies.

  10. An m × n momentum strategy is defined as the impact of past mth time return on future nth time return.

  11. Refer to Tables 9 and 10 in "Appendix"1 .

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Authors and Affiliations

  1. Shailesh J. Mehta School of Management, IIT Bombay, Powai, Mumbai, 400076, India

    Bhaskar Chhimwal & Varadraj Bapat

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  1. Bhaskar Chhimwal
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  2. Varadraj Bapat
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Correspondence to Bhaskar Chhimwal.

Appendix 1

Appendix 1

See Tables 9 , 10, 11, 12, 13, 14.

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Chhimwal, B., Bapat, V. Comparative Study of Momentum and Contrarian Behavior of Different Investors: Evidence from the Indian Market. Asia-Pac Financ Markets 28, 19–53 (2021). https://doi.org/10.1007/s10690-020-09315-3

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