This study is an exploration of the Indian stock market,
focusing on the possible presence of momentum trading. One thing,
however, should be noted. While it is true that momentum trading,
which tends to generate speculative bubbles, may result in a
financial market crash, its nature in contrast might depend on the
nature of the economy itself. The study, while exploring the
presence and nature of momentum trading on the Indian stock market
in recent years, seeks to relate it to significant structural
breaks in the Indian or global economy. To be precise, it outlines
a potential correlation between the instability in the stock market
and the speculative trading on the market, exploring the question
of whether it is human psychology that drives financial markets. In
the process, the choice of a significant structural break has been
obvious: the global financial meltdown of 2007-2008 a crisis that
has often been referred to as the worst ever since the crash of
1929. While analyzing the nature of momentum trading on the Indian
stock market with regard to the financial crisis of 2007-08, the
study takes into account two major representatives of the market,
the BSE (Bombay Stock Index) and NSE (National Stock Index), for
the period 2005 to 2012. This study seeks to answer a few important
questions. First of all, it tries to unveil the underlying
structure of the market. In doing so, it examines the following
issues: (i) What was the latent structure of the Indian stock
market leading up to the crisis of 2007-08? Does the structure
offer insights into designing profitable trading strategies? (ii)
Is it possible to construct a profitable portfolio on the Indian
stock market? (iii) Is there any profitable trading strategy on the
Indian stock market? While exploring these issues, the study delves
deeper, breaking the whole period down into two sub-periods, before
the crisis of 2008 and after the crisis. The purpose of this
division is to determine whether there has been any discernible
change in the market structure since the shock.
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