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Cross-sectional returns predictability for emerging market banks: A study on Indian banking system

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  • Sabyasachi Mohapatra
  • Arun Kumar Misra

Abstract

Using Indian bank-level data, we examine the cross-sectional returns predictability for banking stocks in view of the distinct industry parameters prevalent in the financial services space. We find the existence of abnormal returns in banking stocks. We also observe that the celebrated Fama–French (1992) 3-factor model could not explain the abnormal returns, primarily due to very high leveraged banks’ balance sheets. Thus, we extend the Fama–French 3-factor model and Carhart 4-factor model alongside bank-specific conditioning information in the form of asset quality variables, operational efficiency variables and solvency variables to articulate the existence of abnormal returns. With the inclusion of conditioning information, the study predictability of abnormal returns improved significantly.

Suggested Citation

  • Sabyasachi Mohapatra & Arun Kumar Misra, 2019. "Cross-sectional returns predictability for emerging market banks: A study on Indian banking system," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1586078-158, January.
    • Handle: RePEc:taf:oaefxx:v:7:y:2019:i:1:p:1586078
    DOI: 10.1080/23322039.2019.1586078
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