Soul in the Game

Such is the extant of IPO under-performance in India that in a sample of 77 IPO’s during 1994-2015 there is a growth of only 2.26%. The sum of their offer prices per share is ₹18559 and the sum of their market prices as on 31 st March 2016 is ₹18977 which translates to only a marginal growth of 2.26%. This is known as “Hot Issue” market phenomenon where companies take the advantage of a short “window of opportunity” in the form of overoptimistic investors as first reported by Ritter (1991). This long-term under-performance is contrasted by the short-term under-pricing where prices rise substantially on the listing day as compared to offer prices which is generally known as “IPO under-pricing”. In other words, IPO subscribers who get allotted shares earn a substantial profit on average in just a single day (around 15%) which if they keep holding those stocks instead of selling would decline only in the long-term (3-5 years). This doesn’t’ look right. Isn’t it? So beware of over-

We began with constituent stocks of S&P BSE TASIS 50 index.( The list can be downloaded from here ). The following screens are applied: 1.  We apply a criterion based on Profit after Tax from Operations. 2 stocks are deleted in this stage. Interestingly all of the remaining stocks have a positive PAT. 2. Next, using annual sales growth, stocks having any negative growth in the preceding three years based on the latest available sales figure (in PROWESS database) have been screened out. After this screen, we are left with 28 stocks. 3.  Finally, we applied the next stringent criteria; the BM ratio. Stocks having book values less than 1/5 th of their market price are excluded. The list of stocks remaining after the screening of already screened stocks (based on business and financial ratios requirements of Shariah), we are left with the following 14 stocks: S.No. Stocks BM Beta a 1 C E S C Ltd. 0.980 0.75 2 Cr

One thing that puzzles many in quantitative finance is when log return is appropriate and when simple return should be used. Simple Return Formula:                    Log Return Formula:                           While there are several benefits of using log returns like log-normality, time additiveness, approximate raw-log equality and mathematical ease, a common fallacy is to use is at places where it is not appropriate. The most important difference between simple and log returns is the features of time-additivity and asset-Additivity. Simple returns are asset-additive : Portfolio return is the weighted average of the stocks in the portfolio.  where weights are the proportion of an individual stock in the portfolio and the sum of the weights is 1. Therefore, if an investor puts an equal amount of money in each stock it will be called “equally-weighted” portfolio. The return of an equally-weighted portfolio is just the average return of all stocks in t

The empirical regularity that stocks provide a higher return than government bonds is known as “equity premium” puzzle, a term first coined by Mehra and Prescott (1985). The most intuitive answer that stocks are riskier than Bonds is not a sufficient explanation for this observed puzzle. Moreover, this equity risk premium (ERP) epitomizes the investor risk aversion. A person if given a choice between a low but sure payoff and a high but uncertain payoff would choose the guaranteed payoff if he is risk-averse. Given the expected utility of both the scenarios are same, a risk-neutral person would be indifferent between the choices. However, the presence of equity risk premium (ERP) exemplifies that investors are largely risk-averse. Because arbitrage by investors should have eliminated (or reduced) the return difference between these two investment opportunities which is not the case in the present case. Table-Equity Risk Premium in India 2000-2016 Year BSE500