Earnings to Price Yield and Stock Market Returns -An Empirical Analysis of Indian Stock Market

Abstract

Using the data on stocks listed on Bombay Stock exchange for the period spanning from 1999 to 2013,the present study intends to examine the relevance of stock selection based on earnings to price yield rule of Benjamin Graham in Indian capital market. This valuation metric is aimed at buying the securities whose earnings to price yield is at least twice the AAA bond yield. The securities so selected have been held for the period of 12 months,24 months holding periods. The returns derived from the stocks meeting the criterion are analyzed using one sample T-test, Wilcoxon signed rank test and capital asset pricing model (CAPM). The results revealed that the portfolio selected on the basis of this criterion provided significantly positive mean market adjusted returns in majority of the years in case of both the holding periods. The significant abnormal returns derived through CAPM model, however, cannot be considered conclusive due to less explanatory power of the model. Never the less, the portfolio showed lessor volatility than the market portfolio thereby implying that the fund managers can use it as an investment tool for risk management due to lessor risk and positive market adjusted returns.