Impact of Holding Period on Risk and Return:

A Study of Indian Stock Market

Shelly Singhal
Assistant Professor
Chitkara Business School
Chitkara University,Punjab
Ph-08950213125
E- mail:shelly.singhal@chitkara.edu.in
_____________________________________________________________________________

Abstract: A number of studies have been done on the risk & return relationship of Indian
stock market but they are based on the fundamentals of the company & macro-economic
factors of the economy. Only a few studies have been done on risk return relationship
across various holding period of the securities. This paper examines the impact of the
holding period length on performance of various value strategies in the Indian stock
market during the 2006-2012 periods. Two major stock exchanges of India viz BSE and
NSE have been used as sample in the study. The total time period has been divided into
long & short holding period. The short holding period range from 1 tdr to 5 tdr,10 tdr to
25 tdr,50tdr to 75 tdr while long holding period range from 100tdr to 250 tdr,500 tdr to
750tdr.The present research work has been done to provide an inside to the investors
regarding the relation between holding period & risk & return of the securities. Basic
Statistical properties like mean of returns, standard deviation of returns,skewness and
kurtosis have been used to determine the results. The results of this paper suggests that
the general wisdom of getting best results with “Buy & Hold” strategy over the longer
holding period versus short holding period in security market actually held true in the
Indian Stock Market.
Introduction:

Theory suggests to minimize risk investors should diversify their securities. Diversification is a
mean by which an investor sets portfolio of their securities rather than invest just in a single
stock. Diversification can improve the quality of return and reduce the risk of portfolio. Basically
there are two type of diversification, (1) across securities and (2) across time. On theoretical
grounds it is suggested that diversification across time could reduce risk without decreasing in
investment return. Investors can minimize investment risk by keep their investment longer than
normal holding-period. Riyanto, Atmaja and Coadi (1998); Subrata (2005); Sudana and Janiarti
(2000) conducted research on diversification across time. They found that this type of
diversification could
reduce investment risk effectively. Fischer and Jordan (1995:91) said as investment holding
period increase investors can receive more stable return of their portfolios. In this term, by
holding their portfolio longer, investors can anticipate any change in stocks prices, which could
affect their acceptable return and risk of their.Rousseau and van Rensburg (2004) reported that
the annualized returns of value portfolios formed on the basis of price to- earnings (P/E) ratios
increase as the holding period is extended beyond the most typically used investment horizon of
12 months. Indeed, the authors concluded that it might be more effective to form value portfolios
based on past P/E ratios that are 12 months old than based on current P/E ratios since the
currently low P/E stocks are likely to exhibit poor price momentum. Parallel results are also
reported by Bird and Whitaker (2003) who found that the optimal holding period for value
portfolios formed on the basis of price-to-book (P/B) ratios or price-to-sales (P/S) ratios is
somewhere between 24 and 36 months for the large sample of European stocks.
This paper contributes the existing literature on value investing by examining the impact of the
length of the holding period on the performance fraction portfolios that are formed on the basis
of various valuation criteria.

Review of literature:
A number of studies have been conducted to analyze risk & return relationship of securities.
Merron (1973) suggested that there is equilibrium relationship between market risk premium
and risk in context of a time varying economy. Campell (1993) analytical derived the similar
linear relationship between conditional return and variance. Riyanto, Atmaja and Coadi (1998)
& Subatra (2005) focus their research on reducing risk of investment on stock by diversification
of holding period. They find that Investment return is increasing as the holding-period is
becoming longer, but statistically test shows that the difference in return is not significant. They
indicate that the average standard deviation of investment risk is reducing as the holding-period
is becoming longer. Statistically test on average standard deviation shows that the difference of
standard deviation of investment risk is significant. Gunawan and Wijiyanti (2003) showed
that investors used many tools to understand and to minimize investment risk. Return of
investment is the most important for investors; the problem is how to reduce risk without cost to
return. Fischer and Jordan (1995:91) said as investment holding period increase investors can
receive more stable return of their portfolios. In this term, by holding their portfolio longer,
investors can anticipate any change in stocks prices, which could affect their acceptable return
and risk of their investments. Sudana and Janiarti (2000) focus their research on the effect of
portfolio size on portfolio unsystematic risk. They divide the portfolio into two groups, first,
portfolio consists of stocks from single industry, and the other portfolio consists of stocks from
various industries. They find that in both portfolios, there are no significant effects on reducing
unsystematic risk as the number of stock increasing. While comparing the effects of portfolio
size on level of diversification, they find there is significantly difference between two portfolios.
Objectives of the study:

 To analyze the trend in mean daily return over short & long holding period.
 To analyze the trend in risk as measured by standard deviation of daily returns over short
& long holding period.
 To find pattern if any based on various holding period & to suggest a suitable trading
strategy accordingly.

Data & Methodology:

This paper is based on analytical research as it present analysis of data collected through various
sources. Judgmental sampling technique has been used. Two major stock markets i,e Bombay
stock exchange sensitive index (sensex) and national stock exchange (nifty) have been chosen as
a sample. The data has been collected through various sources like websites, magazines, and
journals. The data has been collected for the period commencing from 1 Jan 2006 to 28 Feb
2012.the total time period has been divided into long & short holding period. The short holding
period range from 1 tdr to 5 tdr,10 tdr to 25 tdr,50tdr to 75 tdr while long holding period range
from 100tdr to 250 tdr,500 tdr to 750tdr.The daily return on the index for a given day of a week
has been calculated by subtracting the closing price on previous trading day from the closing
price on the day then dividing the result number by closing prices on the previous trading day.
Daily return has been computed as follows:
Rt = Pt_Pt-1
Pt-1

Where Rt is the daily return on the share price index for the day “t”, Pt is the closing value of the
index for the day “t” and Pt-1 is the closing value of the index for the proceeding day

Statistical measure like mean, standard deviation, Median has been applied to study the
distribution pattern of stock return across various holding period. Skewness and kurtosis has
been used to measure the normality and the peakedness of the curve. To test whether mean return
across various holding period exihibit any statistically significant difference or not.

Analysis & Interpretation:

Table -1
Statistical summary of daily returns of NSE nifty for various shorter holding periods:

TDR 5 TDR 10 TDR 25 TDR 50 TDR 75

AVERAGE 0.012954 0.012954 0.012951 0.012949 0.012915
STANDARD
DEVIATION 0.008449 0.007421 0.006209 0.005464 0.005464
MEDIAN 0.01082 0.01104 0.011269 0.011925 0.011719
KURTOSIS 5.252077 4.064233 1.546345 0.0888 2.174953
COUNT 309 155 63 32 22
SKEWNESS 1.952926 1.807746 1.248022 0.932051 1.323237

0.014 6
0.012
5
0.01
AVERAGE 4
0.008
3 KURTOSIS
0.006 STANDARD
DEVIATION 2 SKEWNESS
0.004
MEDIAN
0.002 1

0 0
TDR TDR TDR TDR TDR TDR 5 TDR TDR TDR TDR
5 10 25 50 75 10 25 50 75

Interpretation of statistics NSE Nifty: Table -1 represent summary statistics of Nifty for short
holding period. The average return of one trading day is approx.0.012954 while for 75 trading
days is 0.012915. Earlier stated risk return relationship as positive & direct stands true here as
risk is also decreasing with the investment horizon.
The risk percentage of 5 trading days is 0.008449 while the same is 0.0054 for 75 TDR. But if
we look at Standard deviation that is risk per unit of return we find that it is decreasing. The
median of returns approaches to mean return with the increase in holding period. The median for
5 TDR is 0.01082 which got increased to 0.011719 for 75 TDR.

Table -2

Statistical summary of daily returns of BSE Sensex for various shorter holding periods:

TDR 5 TDR 10 TDR 25 TDR 50 TDR 75

AVERAGE 0.013911 0.013882 0.013856 0.013772 0.012606
STANDARD
DEVIATION 0.009525 0.008698 0.007694 0.007024 0.004826
MEDIAN 0.011371 0.011278 0.01075 0.011572 0.011238
KURTOSIS 5.800021 4.085475 3.9093 1.582369 -0.2228
COUNT 301 151 61 31 20
SKEWNESS 2.062715 1.867525 1.740195 1.396764 0.879564

0.016 7

0.014 6

0.012 5
AVERAGE 4
0.01
0.008 3
STANDARD KURTOSIS
0.006 DEVIATION 2
SKEWNESS
0.004 MEDIAN 1
0.002 0
0 -1 TDR TDR TDR TDR TDR
5 10 25 50 75
TDR TDR TDR TDR TDR
5 10 25 50 75
Interpretation: Table -2 represent summary statistics of BSE Sensex for short holding period.
The average return for 5 TDR is 0.13911 & for 75 TDR is 0.012606. Risk which is measured by
standard deviation of 5 TDR is 0.09525 & for 75 TDR the same is 0.004826. So the return and
risk reduces according to time horizon.

Table-3

Statistical summary of daily returns of S&P CNX Nifty for various longer holding periods:

TDR
TDR 100 TDR 250 TDR 500 TDR 750 1000
AVERAGE 0.012883 0.012724 0.012545 0.012425 0.012513
STANDARD
DEVIATION 0.004592 0.003849 0.003173 0.001986 0.002598
MEDIAN 0.011911 0.011792 0.011792 0.012146 0.013136
KURTOSIS -0.01411 3.563375 1.81468 -2.13637 0
COUNT 17 8 5 4 3
SKEWNESS 0.937076 1.573033 1.329421 0.542267 -1.01777

0.014 4

0.012 3
0.01
AVERAGE 2
0.008
1 KURTOSIS
0.006 STANDARD
DEVIATION SKEWNESS
0.004 0
MEDIAN TDR TDR TDR TDR TDR
0.002 -1 100 250 500 750 1000
0 -2
TDR TDR TDR TDR TDR
100 250 500 750 1000 -3

Interpretation:Table-4 represent summary of Nifty for longer holding period. The average
return of 100 TDR is 0.012883 & for 1000 TDR it is 0.012513. Standard deviation for 100 TDR
is 0.004592 & for 1000 TDR it is 0.002598. Result shows that larger the holding period less is
the risk so the investor goes for “Buy & Hold” stategy. The median for 100 TDR is 0.11911 7 for
1000 TDR it is 0.013136.

Table-4

Statistical summary of daily returns of BSE Sensex for various longer holding periods:

TDR
TDR 100 TDR 250 TDR 500 TDR 750 1000
AVERAGE 0.013613 0.012009 0.013584 0.013483 0.012753
STANDARD
DEVIATION 0.006287 0.006984 0.00465 0.002657 0.004924
MEDIAN 0.010644 0.01212 0.012455 0.012617 0.012753
KURTOSIS 0.505564 2.028324 2.51795 0 0
COUNT 16 8 4 3 2
SKEWNESS 1.22739 0.187918 1.34013 1.31041 0

0.016 3
0.014
2.5
0.012
0.01 AVERAGE 2
0.008 1.5
STANDARD KURTOSIS
0.006
DEVIATION 1 SKEWNESS
0.004
0.002 MEDIAN
0.5
0
0
TDR TDR TDR TDR TDR
100 250 500 750 1000

Interpretation:Table-3 represent summary of data of BSE Sensex for long holding period
varying from 100 TDR to 1000 TDR. The average return for 100 TDR is 0.013613 while for
1000 TDR it is 0.01275.Risk for 100 TDR is 0.006287 & for 1000 TDR is 0.004924. Just like
mean return pattern of various holding period median value of return is also increasing with the
increase in investment horizon. The median value of return is approaching to mean return as the
size of holding period increase. It indicates the less volatility of return for longer holding period.

Skewness value in tables show that distribution pattern of return is either positively or negatively
skewed for all shorter or longer holding period. The value of Kurtosis for most of the holding
period is less than 3. It means the returns are not concentrating towards mean value.

Research Findings

Objective -1: To analyze the trend in mean daily return over short & long holding period.

 It is finded that on the basis of daily return holding period it is beneficial for an investor
to invest in BSE because investment in BSE is less risky. As it provides the less return
but it also involves less risk.
 Investment for long holding period is less risky as compared to investment for short
holding period. Mean daily return follows the decreasing trend as the horizon of holding
period increases.
 In short holding period the return decreases from 0.0139 to 0.0126.

Objective -2: To analyze the trend in risk as measured by standard deviation of daily
returns over short & long holding period.

 It was observed that risk which is measured by standard deviation also decreases as the
horizon of holding period increases.
 If the investor invests for short holding period like investment for 1 TDR to 75 TDR then
there is more risk involved in the investment.
 If the investor invests for long holding period like investment for 100TDR to 1000 TDR
then there is less risk involved in the investment.

Objective -3: To find pattern if any based on various holding period & to suggest a suitable
trading strategy accordingly.
  As per the study the average return shows an increasing pattern with longer holding
periods as compared to the standard deviation. This further suggests that the general
wisdom of “Buy & Hold” actually held true practically also in the Indian Stock Market.

Conclusion:
In nutshell risk & return reduces over the long holding period. The growth rate is same
for both the indices. Also the distribution is highly peaked & positively skewed for long
holding period. Therefore long term investment is better for each perspective. In brief it is
better to opt for long term investment if the investor has extra money to invest & want to
earn more returns. Therefore the general wisdom of “Buy & Hold stategy held true
practically also in the Indian Stock Market. An investor can invest in the securities and
can hold it for longer period to get the better return.

Bibliography:

 Black, F., 1993, “Estimating Expected Return”, Financial Analysts Journal Sept-Oct,
pp.36-38

 Blume, M.E., 1974, “Unbiased Estimators of Long-Run Expected Rates of

Return”,Journal of the American Statistical Association 69/347, Sept, pp.634-638

 Campbell, J.Y. & R.J. Shiller, 1988a, “The Dividend-Price Ratio and Expectations of
Future Dividends and Discount Factors”, The Review of Financial Studies 1/3, pp.195-
228

 Campbell, J.Y. & R.J. Shiller, 1988b, “Stock Prices, Earnings, and Expected Dividends”,
The Journal of Finance 43/3, pp.661-676

 Campbell, J.Y., A.W. Lo & A.C. MacKinlay, 1997, “The Econometrics of Financial
Markets”, Princeton University Press, Princeton

 Christoffersen, P.F., F.X. Diebold & T. Schuermann, 1998, “Horizon Problems and
Extreme Events in Financial Risk Management”, FRBNY Economic Policy Review Oct.,
pp.109-118

 Dimson, E. & P. Marsh, 2001, “U.K. Financial Market Returns, 1955-2000”, The Journal
of Business 74/1, pp.1-31
 Efron, B., 1979, “Bootstrap Methods: Another Look at the Jackknife”, The Annals of
Statistics 7, pp.1-26

 Estrada, J., 2000, “The Temporal Dimension of Risk”, The Quarterly Review of
Economics and Finance 40, pp.189-204

 Fama, E.F. & K.R. French, 2001, “Disappearing Dividends: Changing Firm
Characteristics or Lower Propensity to Pay?”, Journal of Financial Economics 60, pp.3-
43

 Kuhlman, Bruce R & Weinraub, HJ.1994.Reducing the Sort Term Variability of Small
Portfolio Betas. Journal of Finance and Strategic Decisions, Volume 7, Number 3, 49-53.

 Pandya, Anil M and Rao, NV.1998.Diversification and Firm Performance: An Empirical

Evaluation. Journal of Finance and Strategic Decisions, Volume 1Number 2, 67-81.

 Reilly, Frank K & Brown, Keith C.2000. Investment Analyses And Portfolio
Management. Sixth Edition. USA. The Dryden Press.
.
 Weinraub, Herbert & Kuhlman, Bruce R.1994.The Effect of Common Stock Beta
Variability on The Variability of The Portfolio Beta. Journal of Finance and Strategic
Decisions, Volume 7, Number 2, 79-84.

 Witkowska, Monika.Fundamentals and Stock Returns on The Warsaw Stock Exchange.

The Application of Panel Data Models. Working paper No.4-06.