Abstract
This paper tests for the profitability of contrarian and momentum trading strategies in the Indian equity markets, in the period 1996-2002, explicitly accounting for transaction costs. Using raw intraday data for order-book from the National Stock Exchange of India Limited, we calculate the actual prices at which trades would take place for an order of INR 10,000, using the price impact of each of the stocks studied. We find that for the Indian market, momentum strategies are profitable in the short-run, but profits fall as the formation period increases. Our methodology eliminates market-microstructure biases, like the bid-ask bounce. We find that profits persist in some strategies even after these effects are taken care of.
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