A Search for Rational Sources of Stock Return Anomalies: Evidence from India

In this paper we investigate the presence of the following asset pricing anomalies viz. size, value, momentum, liquidity, accruals, profitability and net stock issues in India. Size effect is the strongest with a difference of 4.4 % per month between small and big stock returns. A positive relationship is reported between accruals, stock issues and returns and a negative relation between profitability and returns which is in contrast to prior research. CAPM is unable to explain these anomalies with the exception of net stock issues. The Fama French (FF) model is able to capture value, profitability and accruals. While liquidity anomaly is explained by a liquid augmented FF model, the sector and earnings momentum factors do not contribute significantly towards explaining returns. Size and short term momentum are persistent and hence continue to pose challenge to rational asset pricing in India. Our findings shall be highly useful for investment analysts and portfolio managers. The research contributes to asset pricing literature especially for emerging markets.