Inefficiency of the Indian capital market
Abstract
Efficient pricing of securities and
maintenance of parity between risk
and return are absolutely essential
for a well-functioning capital
market. In this paper, S K Barua and
V Raghunathan discuss a clear .case
of observed inefficiency in the
Indian capital market. They show,
taking the case of Reliance, that an
investor can earn returns incommensurate
with the degree of risk
assumed by operating on rights
issues of shares and convertible
debentures simultaneously in forward
and cash markets. Although
the government policy of granting a
low premium on rights shares and
convertible debentures aids inefficiency,
the market is also to be
blamed since it is unable to adjust
quickly the prices of securities so
that the returns earned are in line
with the risks assumed.
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