Journal of Contemporary Issues in Business and Government

Abstract

The paper examines sectoral return predictability for eleven sectoral indices of National
Stock Exchange (NSE). The article shows that investors can predict the movement of sectoral
indices using the index valuation ratios of those sectors. A predictive regression using the
index valuation ratios as predictor variables was run for each sector using Generalized
Methods of Moments (GMM). Lagged dependent variables were used as instruments to solve
the problem of endogeneity. The study also uses Newey-West (HAC) correction to get
unbiased coefficients. The index valuation ratios predict the returns in nine out of eleven
sectors for the sample period running from 2005 to 2019. The findings assist individual
investors and fund managers to forecast the sectoral returns and develop an informed trading
strategy to maximize returns and diversify their portfolio to minimize the loss.