Do Telecom Sector Stocks Respond to Index Calls? An Empirical Analysis of Exclusion and Inclusion in Nifty

Abstract

Stock Market Efficiency has been a topic of study for more than a half century and the contention that markets are very efficient in incorporating new information very quickly has been one of the established facts. In the year 2013, E. F. Fama got the Nobel Prize for his contribution to the field of stock market studies termed as Efficient Market Hypothesis (1970) and of the opinion that no investor is smart to make a better return than the market and it is better to run with the market portfolio (Index) and advocated the concept of Index Funds to have a parity of risk with returns when the portfolio manager selects Index Funds for investing. Index Fund Investing is a commonly followed practice worldwide. Investing in index funds is extremely popular among fund manager and the telecom sector is one of India’s fastest-growing industries. It is intended to study the effect of Telecom sector stock exclusion from and inclusion to Nifty index by taking a period of twenty years from inception of Nifty. Event Study Methodology was adopted to observe any abnormality in return generation and it is found that exclusion from Nifty resulted in reduced return generation as a result of reduction in valuations and increased returns were observed in case of inclusion to Nifty to evidence the importance of telecom sector in the index. The non-sustainability of event impact during post event period evidenced semi strong form of market efficiency.