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An Empirical Test of CAPM—The Case of Indian Stock Market

Author

Listed:
  • Debarati Basu

    (Debarati Basu is an alumnus of International Management Institute, New Delhi and currently working with the Indian Institute of Management, Calcutta. E-mail: debaratib19@yahoo.co.in)

  • Deepak Chawla

    (Deepak Chawla is Professor at International Management Institute, New Delhi. E-mail: dchawla@imi.edu)

Abstract

A deluge of tests have been conducted on asset pricing models in literature, more so on the Capital Asset Pricing Model (CAPM), to ascertain their validity, efficiency and efficacy in different markets in explaining asset prices. Such tests have been either individual in nature wherein any one model has been studied or comparative in nature where one model has been compared with another. Many studies have also resulted in the development of new models or extensions to the existing theory. However, majority of the aforementioned tests have been undertaken in developed markets, resulting in a dearth of such tests in emerging markets like India where the risk–return relationship gains more significance. A growing, emerging market is always less analyzed but more volatile and thus, more interesting. The article, thus, applies the fundamental CAPM theory to India. This study examines 10 portfolios, covering 50 stocks, over a 5-year period—from 1 January 2003 to 1 February 2008—to verify the efficiency and efficacy of the model and finds that CAPM fails completely in the Indian context. The intercept term, which is expected to be zero, is found to be significant for all 10 portfolios. The study also finds a negative relationship between beta and excess returns indicating an inefficient capital market. Moreover, residual variance, representing unsystematic risk, is also found significant in certain cases. Moreover, the regressions show poor explanatory power. Thus, it can be concluded that CAPM is not a suitable descriptor of asset prices in India over the chosen sample period.

Suggested Citation

  • Debarati Basu & Deepak Chawla, 2010. "An Empirical Test of CAPM—The Case of Indian Stock Market," Global Business Review, International Management Institute, vol. 11(2), pages 209-220, June.
    • Handle: RePEc:sae:globus:v:11:y:2010:i:2:p:209-220
    DOI: 10.1177/097215091001100206
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    References listed on IDEAS

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    Cited by:

    1. Prashant Sharma & Prashant Gupta & Anurag Singh, 2016. "Pricing Ability of Four Factor Model using Quantile Regression: Evidences from India," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1815-1826.
    2. Monia Ben Ltaifa & Walid Khoufi, 2016. "Book to Market and Size as Determinants of Stock Returns of Banks: An Empirical Investigation from MENA Countries," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(4), pages 142-160, October.
    3. Nida SHAH* & Javaid DARS* & Ambreen ZEB**, 2015. "Market Varying Conditional Risk-Return Relationship," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 25(1), pages 25-43.

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