| dc.description.abstract | We study the characteristics of Quality factor (QMJ) in India, which is the sec-
ond largest emerging market. Dimensions of quality factor are impacted by the
weaker enforcement of corporate governance norms in emerging markets. Diversion
of revenues by promoters would result in poor profitability, while tunneling of prof-
its would result in lower payout and lower growth. Therefore, investors are likely
to attach greater significance to the quality dimensions in stock pricing. Consistent
with this hypothesis, the Quality factor is even more important for asset pricing in
India than in developed markets. The QMJ factor earns a four factor alpha of 0.92%
per month, significantly outperforming the other widely employed factors, market,
size, value and momentum factors. A long-only Quality factor earns an alpha of
0.69% per month. The alpha of quality factors is highly significant, judged by the
thresholds recommended by Harvey, Liu, and Zhu (2016). The key drivers of the
alpha are profitability and payout, which are both consistent with the tunnelling
hypothesis. Besides the alpha, the low portfolio churn, lower risk, shorter draw-
downs, and viability of long-only strategies restricted to large capitalization stocks
suggest that portfolios tilted towards high-quality stocks are highly attractive to
institutional and retail investors | en_US |
