Long run commonality in Indian stocks: empirical evidence from national stock exchange of India
Journal of Indian Business Research
ISSN: 1755-4195
Article publication date: 19 May 2020
Issue publication date: 10 December 2020
Abstract
Purpose
The purpose of this paper is to investigate long-run commonality in liquidity using multiple proxies computed from limited order book data of NIFTY50 stocks. The findings indicate the existence of systematic liquidity or commonality on NIFTY50 market and comprising industries.
Design/methodology/approach
The sample comprises all intraday transactions corresponding to NIFTY 50 stocks for April 2015. The study runs firm by firm time series regressions to test the concept of long-run commonality, while controlling other effects.
Findings
Strong evidence is found in support of long-run commonality across three liquidity measures. On the basis of significance (10%) of long-run commonality beta (βLR), the strength of long-run commonality is found to be highest in natural resources and infrastructure sector. Portfolios having greater exposure to these sectors will face diversification risk to a great extent.
Practical implications
Knowledge of long-run commonality helps portfolio managers in formulating diversification strategies and reshuffling the portfolio over the period. Commonality risk being non-diversifiable is a policy concern for regulators and central bankers. Its empirical evidence will assist in managing exchange organization and thus preventing market crashes because of sudden liquidity evaporation.
Originality/value
Although there are recent studies documenting commonality in short run, little empirical work has been done on commonality in the long run and in emerging markets such as India. This research contributes to the literature by testing concept of commonality in long-run on NIFTY50 stocks using detailed transaction data from National Stock Exchange.
Keywords
Acknowledgements
The authors would like to thank area editor Prof CP Gupta (Department of Financial Studies, University of Delhi) and anonymous reviewers of Journal of Indian Business Research (JIBR) for their contribution in reviewing, revising and drafting the final version of the article. The initial draft of the article benefited from the presentation at 5th International Conference on Empirical Issues in International Trade and Finance (EIITF), IIFT Kolkata (India), December 2016.
Citation
Kumar, G. and Misra, A.K. (2020), "Long run commonality in Indian stocks: empirical evidence from national stock exchange of India", Journal of Indian Business Research, Vol. 12 No. 4, pp. 441-458. https://doi.org/10.1108/JIBR-09-2016-0091
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited