The document discusses whether Indian stock markets are driven more by sentiments than fundamentals. It provides background on the Indian stock market and examples of news that elicited emotional reactions from investors. The research aims to quantify the impact of sentiments versus fundamentals on stock prices. A methodology is outlined that identifies sentiment-driven news, compares actual stock price changes to expected changes based on market indexes, and uses statistical tools to analyze the two data samples over time. Preliminary data analysis of Tata Consultancy Services (TCS) stock prices around certain news dates is also presented.

1. Institute of Management Technology, Ghaziabad
Dual Country Program
Business Research Methods
Are Indian Stock Markets driven more
by Sentiments than Fundamentals?
Submitted By:
Akash Jauhari (DCP-056)
Alok Kumar Mishra (DCP-057)
Karan Verma (DCP-072)
Lokesh Chaudhary (DCP-075)
Raghav Agarwal (DCP-087)
Varun Sehgal (DCP-092)
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2. TABLE OF CONTENTS
Introduction -------------------------- 3
Background -------------------------- 4
Research Gap -------------------------- 8
Research Objectives -------------------------- 9
Research Design -------------------------- 10
Methodology -------------------------- 11
Data Analysis -------------------------- 13
Statistical Tools, Interpretation and Conclusion -------------------------- 16
References -------------------------- 18
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3. Introduction:
The Indian Stock Markets are in a way the engines which drive the vehicle of our
democracy by pumping in the much needed capital. Their behaviour and trends have
intrigued many a scholar, many an analyst and many an investor. As time evolved, scholars
and intellectuals propounded various theories and came up with different propositions with
respect to the Stock Markets.
The Efficient Market Hypothesis claimed the rationale that fundamentals determine the
market trends and that the market has 100% informational efficiency. This Hypothesis
however came under severe criticism after the Wall Street Crisis of 1987. Investors &
Analysts also suggested that actually there are certain Cognitive Biases that affect the stock
prices. This school of thought, known as "Behavioural Finance", seemed even more authentic
at times when the context was India. History is replete with instances when a high impact
News elicited a knee jerk reaction from the investors leading to a slew of purchasing or
selling decisions thereby affecting stock prices in an unexpected manner. However there
were also instances where market fundamentals seemed to totally override any sort of
emotional or sentimental wave.
The Indian Stock Markets are mainly affected by two E’s –
1. Earnings/Price Ratio – It is an important factor affecting the stock price of a company. It
gives us a fair idea of company’s share price when it is compared to its earnings. The stock
becomes undervalued if the price of the share is much lower than the earnings of a
company. But if this is the case, then it has the potential to rise in the near future. The stock
becomes overvalued if the price is much higher than the actual earning of the company.
2. Emotions/ Sentiments - They are a huge part of investing. Was it the case that only
earnings drove the Indian Sensex to a high of 21,000 points in January 2008 and a low of
8700 points in October 2008? Not really. Emotions played a big part in both the rise and
fall of the Sensex. When we get positive news about a company, it increases the
buying interest in the market. On the other hand, when there is a negative press release, it
ruins the prospect of a stock to increase in value.
It was this observation & inquisitiveness that led us to the question "Are Indian Stock
Markets driven more by Sentiments than Fundamentals ". This research project is our quest
to find an answer to this question which perhaps effects & intrigues every probable investor
or trader in the various Indian Stock Markets.
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4. Background:
The Indian Financial Markets are one of the most developed and sophisticated capital
markets in the world. Given the role of the Indian financial markets in propelling India’s
economic growth, a proper understanding of the financial scenario becomes extremely
critical.
The Indian Stock Market is one of the oldest in the world. There are two main stock
exchanges:
1. Bombay stock exchange (BSE) – BSE is located on Dalal Street, Mumbai and is the oldest
stock exchange in Asia. The equity market capitalization of the companies listed on the BSE
was US $1.63 trillion as of December 2010, making it the 4th largest stock exchange in Asia
and the 8th largest in the world. The BSE has the largest number of listed companies in the
world. As of December 2010, there are over 5,034 listed Indian companies and over
7700 scrip’s on the stock exchange; also the Bombay Stock Exchange has a significant
trading volume. The BSE SENSEX (SENSitive indEX), also called the "BSE 30", is a widely used
market index in India and Asia.
2. National Stock Exchange (NSE) – NSE is also located at Mumbai, India. It is the 9th largest
stock exchange in the world by market capitalization and largest in India by daily turnover
and number of trades, for both equities and derivative trading. NSE has a market
capitalization of around US $1.59 trillion and over 1,552 listings as of December 2010. The
NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange
Fifty), an index of fifty major stocks weighted by market capitalisation. NSE is the third
largest Stock Exchange in the world in terms of the number of trades in equities. It is the
second fastest growing stock exchange in the world with a recorded growth of 16.6%.
Though a number of other exchanges exist, NSE and BSE are the two most significant stock
exchanges in India and between them are responsible for the vast majority of share
transactions.
News Samples:
News flashing on TV or internet has an effect on the mood of investors. It has a
fundamental component and sentimental component. Fundamentals basically include facts
like EPS, PE ratio, Projects in hand, Expected cash flow and growth prospects. But as we
generally observe, the sentiment component outperforms the economic factors. Here we
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5. state various instances where one can find unexpected changes in the stock prices of
companies as reactions to some sensitive news.
1. Ambani Brothers Agree to Split India's Reliance Group.
By Ravil Shirodkar - June 18, 2005 05:35 EDT
June 18 (Bloomberg) -- Reliance Industries Ltd.'s founding members, the Ambani brothers,
agreed to split the oil-refining, chemicals and cell phone group worth $19 billion, ending a
seven- month ownership feud at India's largest non-state company.
Chairman Mukesh Ambani, 48, will retain control of the flagship, running oil, gas and
chemicals, while younger brother Anil will take the power, cell phones and financial
services businesses. Reliance shares have gained 12 percent since the dispute became public
in November, lagging behind a 21 percent advance in India's benchmark Sensitive index.
The stock, the fourth-worst performer in the index last year, yesterday rose 1.7 percent to
600.85 rupees, giving the company a market value of 839 billion rupees ($19.3 billion).
The group, including unlisted units, had $23 billion of sales in the year ended March 2004.
2. Corporate News (livemint.com)
Cairn, ONGC get government nod for oil pipeline
Mumbai: Cairn India and Oil and Natural Gas Corp. Ltd, partners in the Rajasthan oilfields,
have received permission from the government to build a pipeline to transport crude oil.
Cairn Energy India Ltd, operator of the fields and 70% partner in the joint venture, said that
it has received a letter from the government granting the “right of use” for laying a 500km
pipeline.
Given that Rajasthan crude is waxy in nature and needs to be kept warm for it to flow, the
pipeline will be a heated one and is expected to cost around $780 million (Rs3,167 crore).
ONGC shares fell 0.46% to Rs828.30 each on the Bombay Stock Exchange on Tuesday,
while Cairn’s shares were up 1.47% to Rs159.05 a share.
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6. 3. ICICI Bank Share price fall due to bankruptcy rumors.
Date: 29th September, 2008
Date Open High Low Close Volume Adj Close
29-09-2008 565 569.9 483 493.3 5837100 478.99
ICICI Bank Share price have gone down by a whopping 14 percent on this day.
This has led to serious "mail-rumors" running around across the various IT industry
workers. Few weeks back, when Lehman declared Bankruptcy, people queued up at ICICI
Bank ATM and Bank Branches to withdraw their money. Now again, the IT employees are
getting worried on these rumors. The biggest cause of concern was that most of the
employees are having their Salary account with ICICI Bank. That will mean that majority of
the liquid earnings of the employees will be kept with this bank.
Along with the ICICI officials, everyone hopes that this circus of rumors should come to an
end. Savings bank account holders may not worry, as government will guarantee the return
of their money in the savings account. In the past, around 4 years back, the GTB or Global
Trust Bank had gone burst. It was later taken over by the OBC bank, a government run bank
and all the savings account money was safe.
4. ICICI Bank is coming up with an FPO
ICICI Bank's FPO shares are about to list on the stock exchanges. The company entered the
capital market on December 1 in the price band of Rs 505-545. The stock was issued at Rs
525 per share. It was issued at Rs 498.75 per share to the retail shareholders (The bank
gave 5% discount to retail shareholders).
The issue closed on December 6. It was subscribed 6.78 times.
DSP Merrill Lynch and JM Morgan Stanley were the lead manager to the issue. Karvy
Computershare was the registrar to the issue.
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7. Date Open High Low Close Volume Adj Close
16-12-
2005 560.8 596.95 557.2 587.8 1099200 545.23
5. Carrefour may infuse funds into Future Group: Sources
Sat, May 23, 2009 at 17:47 Updated at Mon, May 25, 2009 at 09:12 Source
: CNBC-TV18
%age %age
Date Open Close change Open Close change
5/26/2009 310 299.9 3.26 13929.84 13589.23 2.45
5/25/2009 301 309.1 -2.69 13988.1 13913.22 0.54
5/22/2009 299 300.35 -0.45 13663.54 13887.15 -1.64
The buzz is picking up in the market that Carrefour is again in talks with Kishore Biyani’s
Pantaloon Retail. This time a deal may have already been struck. The new structure of
Future Group entails that Future Fashion Merchandise, which would be a separate entity
under the holding company Pantaloon Retail and under this will be the retail business
subsidiaries for value and lifestyle retail. Carrefour has already announced its solo cash and
carry plans for India. With Future Group, it could probably look at a backend support tie-
up like a Bharti-Wal-Mart or also a financial partnership. But when we approached Biyani
he refrained from commenting on this issue.
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8. Research Gap:
In the past, there have been a number of studies on the factors affecting the stock markets
around the globe and what leads to the drastic changes in the stock indices. But no research
has actually emphasised on the impact of sentiments/ emotions of the people on the stock
prices and the stock markets in general.
Our research clearly aims to fill this gap and identify if the sentiments affect the Indian
Stock Markets more than the fundamentals; something which has never been done before.
We try to prove the same through qualitative as well as quantitative theories and statistical
tools.
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9. Research Objectives:
1. To study the impact of Sentiments on prices of stock, on account of News as it
appears in real time.
2. To compare the effect of Market Sentiments vis-à-vis the fundamentals of the
industry and economy as a whole.
3. To quantify the above observations and apply statistical tools to test the stated
hypothesis.
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10. Research Design:
1. Research to be Descriptive and Causal in nature. In order to interpret and
understand the impact of sentiments of investors on the movements of the stock
prices, tools like charts, graphs and tables are used. Also to test the hypothesis,
statistical concepts are being used, based on their characteristics and
distribution.
2. The research is an example of Field Study, where the study is conducted from
outside, without interfering or manipulating the subject of interest.
3. The time frame considered is from April 2004 to February 2011, making it a
longitudinal data collection research. The time frame is critically selected in
order to capture the Global crisis and its spill over to Indian Stock Markets.
4. Data Source is Secondary in nature. All the news flashes and articles are taken
from CNBC – money control website. Special care is taken so that accurate date
of first flashing of news is incorporated in the study. The prices of stocks, beta
values and SENSEX Index are taken from official website of Bombay Stock
Exchange.
5. The units considered for research are individual Stock Prices. Selection of stocks
is based on their respective fundamentals like projects in hand, expected cash
flows, EPS ratio and PE ratio. Impact of market sentiments on these strong and
stable stocks is imperative to study as they form base of BSE index. Seven selected
stocks are Infosys, TCS, L&T, RIL, ONGC, Pantaloons and ICICI.
10

11. Methodology:
The entire procedure in course of the research can be divided into following steps:
1. Identifying News flashes
From the selected portfolio of seven stocks, for the time period of April 2004 to
February 2011, we selected about 46 news flashes. Care was taken to choose the
news which is either entirely sentimental in nature or has a larger sentimental than
fundamental component. The date of its first appearance is of utmost importance to
us, since it creates reaction in the market in almost real time. Source of news was
CNBC official website were precise time and date are also mentioned.
11

12. 2. Finding the change in stock for the particular day
The reactions of investors to the new information are best displayed by the
movement of stock prices. In many cases we observed abrupt changes in price,
volume and number of transitions of the stock. As shown by difference of high and
low of the day, one can clearly identify the market sentiments for the developments.
3. Estimating the actual and expected change
Here Sensex is taken as a proxy for the fundamentals of the markets and economy.
Beta for a stock is defined as the relative change of the stock with respect to Sensex.
Thus the multiplication of the beta and Sensex gives expected change in the stock.
Mathematically the above relations can be given by –
Actual % Change in Stock Price = ((closing – opening) * 100) /opening.
Expected % Change in Stock Price = (Beta) * (% Change in Sensex).
4. Comparing the two data sample over the period of time
We obtain the two samples of data – actual and expected changes in stock prices.
The comparison includes Beta values which gives the expected change on the basis
of regression of past 10 years (calculated by BSE) vis-à-vis the actual/ observed
change in prices as shown on the markets. Appropriate statistical tool is chosen
based on the characteristics and distribution of the two samples.
5. Interpretation and Conclusion
Testing the hypothesis using statistical tools and getting to a result enabled us to
interpret the movement of stock prices on account of investor sentiments vis-à-vis
the fundamentals of the concerned company. Also, showing the result through
charts and tables helped to further understand the findings of the research.
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13. Data Analysis:
The following table shows the changes in the stock prices of TCS on account of speculative
news on given dates. For every date of interest, the stock prices and the sensex of one day
before and one day after are also considered. This is because leakage of news may come into
play one day before and spill over effect may continue over the next day as well. The
percentage change is calculated by taking the relative difference between day’s closing and
day’s opening.
TCS
Actual
Date Open High Low Close Volume Adj Close Change
2/12/2009 518 518 503.9 509.2 142200 496.25 -1.70
3/12/2009 450.25 484.7 450.25 475.3 201600 463.21 5.56
3/13/2009 453.35 508.85 453.35 506.55 273800 493.67 11.73
3/16/2009 507 522.5 502.1 519.8 236900 506.58 2.52
4/8/2009 550 612 550 604.8 227500 589.42 9.96
4/5/2010 814 814 799.35 802.6 240700 795.1 -1.40
4/6/2010 804.8 805 791.35 794.75 249000 787.33 -1.25
4/23/2010 730 792 730 779.8 319000 772.52 6.82
6/9/2010 752.5 757 732.9 735.15 363700 728.28 -2.31
7/8/2010 770 778.55 769 776.6 146400 773.31 0.86
2/2/2011 1159 1195.95 1159 1178.9 211400 1178.9 1.72
2/4/2011 1183 1183 1141 1148.1 180200 1148.1 -2.95
2/15/2011 1115.95 1116 1077.35 1096.8 232600 1096.8 -1.72
2/16/2011 1104.75 1110 1081.15 1098.3 133900 1098.3 -0.58
The value in the last column indicates the actual change in the stock price.
The table below gives the percentage change in the Sensex for the same dates. This
percentage change when multiplied by the beta factor gives the expected or theoretical
change in the TCS stock, based on regression of last 10 years. Thus the two columns of
actual and expected change can be compared on head to head basis.
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14. BSE
Expected
Open High Low Close %Change Change
9559.03 9580.13 9445.54 9465.83 -0.97 -0.82
8274.78 8439.71 8274.78 8343.75 0.83 0.70
8480.74 8793.21 8480.74 8756.61 3.25 2.73
8793.89 8955.73 8697.46 8943.54 1.70 1.43
10283.58 10778.11 10171.91 10742.34 4.46 3.75
17693.66 17948.54 17693.66 17935.68 1.37 1.15
17940.32 17991.41 17898 17941.37 0.01 0.00
17533.88 17725.88 17533.88 17694.2 0.91 0.77
16621.12 16817.69 16591.26 16657.89 0.22 0.19
17536.48 17728.37 17536.48 17651.73 0.66 0.55
18216.91 18306 18042.61 18090.62 -0.69 -0.58
18450.07 18542.2 17926.98 18008.15 -2.40 -2.01
18260.08 18361.66 18050.48 18273.8 0.08 0.06
18273.06 18358.84 18216.12 18300.9 0.15 0.13
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15. Graphical Representation:
Graphical representation of the actual vis-a-vis expected movements in the TCS stock price
is shown below.
X-axis = dates of interest
Y-axis = magnitude of change
.
14.00
12.00
10.00
8.00
6.00 actual change
4.00 expected change
2.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-2.00
-4.00
The above graph shows the variation in Actual Change (colored blue) and Expected
Change (colored red) in the TCS stock price, with the magnitude of change on the Y-
axis and dates of interest on the X-axis. Each number on X-axis corresponds to a
date of observing the movement, which can be matched to data file.
It can be clearly observed from the graph that the fluctuations in Actual Change are
much higher or amplified as compared to the Expected Change. Here it is important
to note that the blue line shows the movements due to sentiments and red line is a
proxy for the macro or more fundamental developments. Thus on the given day of
speculative news, the impact of sentiments on the market (given by blue lines) is
greater than impact of fundamental factors (given by red lines).
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16. Statistical Tools, Interpretation and Conclusion:
From the seven individual stock data sheet in excel, we export data to SPSS. Here we
combine all the 46 news flashes with their respective changes and fluctuations. This can be
seen in attached file named – data sheet.sav. Now we have two samples – expected and
actual, and the difference between them.
According to our research model, we consider the null hypothesis as “The impact of
fundamentals on stock market is greater or equal to impact of investor sentiments”. Thus the
alternate hypothesis becomes “impact of Investor sentiments on stock market is greater than
that of the fundamentals”. Difference is defined as the entry of estimated change and actual
change in stock prices.
Ho = Mean of the difference of the sample is greater than or equal to zero. In other words
impact of fundamentals is more than sentiments.
Ha = Mean of the difference of samples is less than zero.
We apply the - One sample, one tailed test
After running the statistical tool, following results are obtained:
One-Sample Statistics
Std. Std. Error
N Mean Deviation Mean
Difference 46 -.3461 3.03282 .44716
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17. Here we can see that there are total 46 entries, mean of actual sample is greater than mean
of expected sample by 0.3461. Standard deviation of the sample of difference is 3.03.
One-Sample t-Test
Test Value = 0
95% Confidence Interval of
Sig. (2- Mean the Difference
T df tailed) Difference Lower Upper
Difference -.774 45 .443 -.34609 -1.2467 .5545
Now we get the significance value as 0.443, which is for two tailed test. To convert it into
one tailed test, we apply following relation.
P-value (one-tailed) = (P-value (two-tailed)/2) ^ 3
Which implies P-value (one-tailed) = 0.0108
Thus at alpha = 5% or 0.05, we get P-value (one-tailed) < 0.05
Which implies that Null hypothesis is rejected.
Which implies that mean of the difference of sample is less than zero.
Hence we can conclude that the impact of Investor sentiments on stock prices is greater
than that of the market fundamentals.
Thus our observation that the Indian Stock Markets are driven more by emotions and
sentiments rather than reasoning, logic and fundamentals is supported and eventually
proved by the statistical analysis.
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18. References:
1. www.bloomberg.com
2. www.moneycontrol.com
3. www.bseindia.com
4. http://in.finance.yahoo.com/
5. http://news.google.co.in/nwshp?hl=en&tab=wn
6. www.investopedia.com
7. www.economictimes.com
8. http://money.rediff.com/
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