The Impact of Business Cycles, Stock Market Phases and Crisis on the Value Premium: The Indian Experience

Abstract

Purpose :This paper is an attempt to explore the relationship between the value premium and expected stock returns in the Indian stock market and evaluates whether the value premium disappears or not when the different economic conditions (Boom & Recession), market conditions (Bull & Bear) and 2008 Global financial crisis are considered. Methodology: The annual data of 500 companies belonging to BSE-500 from 1999- 2017 was collected and ten portfolios were constructed and sorted using six valuation proxies (P/B, P/E, D/P/, CF/P, S/P and EV/PBDITA). Standard CAPM and Dual beta market model were employed. Findings: The empirical results confirm that irrespective of market conditions, value stock portfolios surpass growth stock portfolios in the Indian stock market by delivering significant abnormal returns. Practical implications: The paper holds important implications for asset pricing literature and investors. The higher returns generated by value stocks during the crisis and recession period imply that investors can put faith in the value stocks during times of adversity. The future value of an investment is a function of its present price. The lower the price, the higher the returns will be. Therefore, value stocks are good investments whether it is boom or recession, bull or bear, crisis or non-crisis periods. Originality: The paper is first of its kind to study the impact of business cycles, stock market phases and crisis on the value premium in the Indian stock market. The paper contributes to portfolio management and asset pricing literature for an emerging market.