Bubble run-ups and sell-offs: a study of Indian stock market

Abstract

PurposeThis paper tries to locate the sectorial bubbles and examines the possibility for investors making extra profit from these bubbles in the Indian stock market.Design/methodology/approachThe authors use two main indicators: (1) asset centrality and (2) relative value. Asset centrality signals crowded trading, which is associated with the formation of a bubble. Relative value separates the crowded trading during the bubble run-up from the sell-off. The authors observe whether these measures can detect the cycle of bubbles in each sector of the Indian stock market for the period 2004–2019.FindingsThe authors show the sectors going through the inflationary phase delivers much better performance than the index, whereas the sectors in their deflationary phase perform quite worse than the index. This provides attractive opportunities to investors, especially the institutional investors, and fund managers of the Indian market.Originality/valueTo the best of our knowledge, there is no study that looks into the idea of locating a sectoral bubble in the Indian financial stock market using the concept of centrality score and relative score. This work helps to locate a bubble and identify its phases successfully. Traders can enter a bubble in their inflationary period gain profit and exit the trade before the sell-off period begins.