Efficiency, Determinants and Performance of Service Sector Stocks – Evidence from India
Conference Proceedings of 3rd International Conference on “Booming Service Sector: From Achievements to Growth Prospects”, Pages: 23-36, ISBN: 978-93-5254-977-1
18 Pages Posted: 1 Apr 2016
Date Written: February 5, 2016
With its unconventional and unprecedented growth on a sustained basis, the contribution of Service sector to India’s economy in terms of GDP, income & employment generation, international trade and investment flows, improvement in per capita income and standards of living of general Indians has been both tremendous and amazing. In this light, the behaviour of Service Sector in Indian Stock market is also gaining attention. In a one of its kind study, this paper undertakes a comprehensive examination of Indian Service Sector Stocks from various dimensions, viz., Weak Form Efficiency, Determinants and Performance. We study service sector through nine sectoral indices of BSE (Bank, Energy, Finance, Health Care, IT, Power, Realty, TECK and Telecom) and one broad thematic Service Sector Index of NSE using monthly data from September 2005 to October 2015. We measure their adherence to Random Walk Hypothesis (Weak Form Efficiency) through a battery of Unit Root Tests [Augmented Dickey Fuller (ADF), Phillips–Perron (PP) & Kwiatkowski-Phillips-Schmidt-Shin (KPSS)] and Variance Ratio Tests [Lo-MacKinlay, Wright’s Ranks & Wright’s Signs). We further employ proxies for Stock Market [BSE Sensex for Indian Stock Market & MSCI All Country World Index (MSCI ACWI) for Global Equity Markets] and prominent Macroeconomic Variables [Index of Industrial Production (IIP), Inflation (CPI), Interest Rate, Exchange Rate] as Regressors through Multiple Regression Analysis to find out the major determinants of Indian Service Sector Stock Returns. Finally, we also evaluate the performance of these Service sector Indices through three popular Performance measure ratios, i.e., Sharpe Ratio, Treynor Ratio and Jensen’s Alpha. Overall, the Efficiency tests reveal that all Indian Service Sector Indices are indeed following the Random Walk Hypothesis and are I(1). All the Regression models were highly significant with very high explanatory powers and no problem of multicollinearity or autocorrelation. Across the board, Exchange Rate from amongst the Macroeconomic Variables and Sensex from Stock Market Variables came out to be the significant determinants of Indian Service Sector Stock Returns. Performance evaluation measures indicated that almost half of the service sector indices lead by Healthcare could significantly outperform the broader market on risk adjusted basis. These results are relevant and have pertinent implications for a broad range of stakeholders related to the field including policy makers, regulators, investors, academicians and researchers.
Keywords: Indian Service Sector Stocks, Weak Form Efficiency, Service Stock Return Determinants, Stock Performance Evaluation, Multiple Regression Analysis, Unit Root & Variance Ratio Tests
JEL Classification: E44, G12, G14, G15, G18
Suggested Citation: Suggested Citation