Abstract:
In this paper, we provide evidence of a chronic crisis syndrome that is present in the Indian stock market, in that we find that the opening stock price contains noise on an everyday basis. That is to say, there is a ``crisis'' brewing in the market every morning, because prices have deviated from fundamentals, i.e., from where they ought to be. However, we also find that the impact of noise does get eliminated from prices at the end of the trading day, which says something remarkable about the price discovery process inherent in the trading mechanism at work in India. We show how these seemingly contradictory twin empirical results about the Indian stock market can be reconciled in the framework of the Noise Trading Model proposed by Kyle (1985). Furthermore, we show how to come up with a simple trading strategy that makes use of the noise in opening prices and demonstrate that it is indeed highly profitable.
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