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An Empirical Test of Capital Asset-pricing Model and Three-factor Model of Fama in Indian Stock Exchange

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  • Nenavath Sreenu

Abstract

This article aims to test the capital asset-pricing model (CAPM) and three-factor model of Fama in Indian Stock Exchange, and it has focused on the recent growth of capital markets in India and the need of practitioners in these markets to determine a stable price for securities, and achieving expected returns has brought into consideration the theories predicting price securities Among different models the CAPM of Sharp. The study uses a sample of daily data and annual average for 54 companies listed on the National Stock Exchange, during the period from 2010 to 2016. The research article’s intention is to find whether the relationship between expected return and risk is linear, if beta is a complete measure of the risk and if a higher risk is compensated by a higher expected return. The results confirm that the intercept is statistically insignificant, upholding theory, for both individual assets and portfolios. The tests do not essentially provide validation against CAPM and Fama; however, other simulations can be built, more close to reality, by improving the model and offering an alternative which also takes into account the specific conditions of the Indian capital market and the global financial crisis consequences.

Suggested Citation

  • Nenavath Sreenu, 2018. "An Empirical Test of Capital Asset-pricing Model and Three-factor Model of Fama in Indian Stock Exchange," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 43(4), pages 294-307, November.
    • Handle: RePEc:sae:manlab:v:43:y:2018:i:4:p:294-307
    DOI: 10.1177/0258042X18797770
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
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    3. Clive Gaunt, 2004. "Size and book to market effects and the Fama French three factor asset pricing model: evidence from the Australian stockmarket," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 44(1), pages 27-44, March.
    4. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    5. Fama, Eugene F., 1996. "Multifactor Portfolio Efficiency and Multifactor Asset Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(4), pages 441-465, December.
    6. Robert Faff, 2001. "An Examination of the Fama and French Three-Factor Model Using Commercially Available Factors," Australian Journal of Management, Australian School of Business, vol. 26(1), pages 1-17, June.
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