Validity of CAPM by Using Portfolios: Evidence from Indian Capital Market
Keywords:
Capital Asset pricing Model, Beta, systematic risk, Security market line
Abstract
This article tests the validity of Capital Asset pricing Model and compares the results of 16 periods including 14 sub periods which comprises 3 years each for the prediction of the expected returns in the Indian capital Market. The tests were conducted on portfolios having different security combinations. By using Black Jenson and Scholes methodology (1972) the study tested the validity of the model for the whole and different sub periods. The study used daily data of the BSE 100 index for the period from January 2001 to December 2010. Empirical results mostly in favor of the standard CAPM model. However, the result does not find conclusive evidence in support of CAPM
References
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Ansari, V. A. (2000). Capital Asset Pricing Model: Should We Stop Using It?. Vikalpa, 25(1), 55-64.
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Bark, H. K. K. (1991). Risk, return, and equilibrium in the emerging markets: evidence from the Korean stock market. Journal of Economics and Business, 43(4), 353-362.
Basu, S. (1977). Investment performance of common stocks in relation to their price‐earnings ratios: A test of the efficient market hypothesis. The Journal of Finance, 32(3), 663-682.
Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. The Journal of Finance, 43(2), 507-528.
Chan, L. K., Hamao, Y., & Lakonishok, J. (1991). Fundamentals and stock returns in Japan. The Journal of Finance, 46(5), 1739-1764.
Chan, Y. C. (1997). Multivariate testing of the capital asset pricing model in the Hong Kong stock market. Applied Financial Economics, 7(3), 311-316.
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1), 3-56.
Fan, S. C. (2004). Have we misinterpreted CAPM for 40 years? A theoretical proof. A Theoretical Proof (September 15, 2004),Working Paper Series, http://www.ssrn.com/.
Gibbons, M. R., & Ferson, W. (1985). Testing asset pricing models with changing expectations and an unobservable market portfolio. Journal of Financial Economics, 14(2), 217-236.
Harris, R. S., Marston, F. C., Mishra, D. R., & O'Brien, T. J. (2003). Ex ante cost of equity estimates of S&P 500 firms: the choice between global and domestic CAPM. Financial Management, 51-66.
Jagannathan, R., & Wang, Z. (1996). The conditional CAPM and the cross‐section of expected returns. The Journal of Finance, 51(1), 3-53.
Jensen, M. C., Black, F., & Scholes, M. S. (1972). The capital asset pricing model: Some empirical tests.
Lintner, J. 1965. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, (47), 13-37.
Madhusoodanan, T. P. (1997). Risk and return: a new look at the Indian stock market. Finance India, 11, 285-304.
Majumdar, S., Bacon, F,W, 2007, “Multi Factor Pricing Model: An Alternative Approach to CAPM”, ASBBS E-Journal, Volume 3, No. 1.
Malin, M., & Veeraraghavan, M. (2004). On the robustness of the Fama and French multifactor model: evidence from France, Germany, and the United Kingdom. International Journal of Business and Economics, 3(2), 155-176.
Manjunatha, T., Mallikarjunappa, T., & Begum, M. (2007). Capital Asset Pricing Model: Beta and Size Tests. AIMS International Journal of Management, 1(1), 71-87.
Michailidis, G, Tsopoglou, S., Papanastasiou, D. and Mariola, E. (2006)“Testing the Capital Asset Pricing Model (CAPM): The Case of the Emerging Greek Securities Market” International Research Journal of Finance and Economics, Vol.4, PP.78-91.
Mohanty, P.(2002). “Evidence of Size Effect on Indian Stock Returns”, Vikalpa, 27(2), pp.27-37.
Mossin, J. 1966. Equilibrium in a capital asset market. Econometrica, (34), 768-783.
Pettengill, G. N., Sundaram, S., & Mathur, I. (1995). The conditional relation between beta and returns. Journal of Financial and quantitative Analysis, 30(01), 101-116.
Rahman, M., Baten, A., & Alam, A. U. (2006). An empirical testing of capital asset pricing model in Bangladesh. Journal of Applied Sciences, 6(3), 662-667.
Rao, N. and Bhole, L,M., ‘Inflation and Equity Returns’, Economic andPolitical Weekly, 26 May 1990, pp.m9l-m96
Roll, R. (1977). A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory. Journal of financial economics, 4(2), 129-176.
Ross, S. A. (1976). The arbitrage theory of capital asset pricing. Journal of economic theory, 13(3), 341-360.
Sehgal, S. (1997). An Empirical Testing of Three parameter Capital Asset Pricing Model in India. Finance India, 11(4), 424-442.
Sehgal, S. (2003). Common factors in stock returns: the Indian evidence. The ICFAI Journal of Applied Finance, 9(1), 5-16.
Sharpe, W. 1964. Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance , (33),885-901.
Srinivasan, S. (1988). Testing of Capital Asset Pricing Model in Indian Environment. Decision, 15(1), 51-59.
Stattman, D. (1980). Book values and stock returns. The Chicago MBA: A journal of selected papers, 4(1), 25-45.
Vaidyanathan, R. (1995). Capital Asset Pricing Model: The Indian Context. The ICFAI Journal of Applied Finance, 1(2), 221-224.
Xu, D., & Yang, X. (2007). Testing the CAPM Model: A study of the Chinese Stock Market. , Master Thesis Essay. Sweden: UMEA School of Business
Ansari, V. A. (2000). Capital Asset Pricing Model: Should We Stop Using It?. Vikalpa, 25(1), 55-64.
Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of financial economics, 9(1), 3-18.
Bark, H. K. K. (1991). Risk, return, and equilibrium in the emerging markets: evidence from the Korean stock market. Journal of Economics and Business, 43(4), 353-362.
Basu, S. (1977). Investment performance of common stocks in relation to their price‐earnings ratios: A test of the efficient market hypothesis. The Journal of Finance, 32(3), 663-682.
Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. The Journal of Finance, 43(2), 507-528.
Chan, L. K., Hamao, Y., & Lakonishok, J. (1991). Fundamentals and stock returns in Japan. The Journal of Finance, 46(5), 1739-1764.
Chan, Y. C. (1997). Multivariate testing of the capital asset pricing model in the Hong Kong stock market. Applied Financial Economics, 7(3), 311-316.
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1), 3-56.
Fan, S. C. (2004). Have we misinterpreted CAPM for 40 years? A theoretical proof. A Theoretical Proof (September 15, 2004),Working Paper Series, http://www.ssrn.com/.
Gibbons, M. R., & Ferson, W. (1985). Testing asset pricing models with changing expectations and an unobservable market portfolio. Journal of Financial Economics, 14(2), 217-236.
Harris, R. S., Marston, F. C., Mishra, D. R., & O'Brien, T. J. (2003). Ex ante cost of equity estimates of S&P 500 firms: the choice between global and domestic CAPM. Financial Management, 51-66.
Jagannathan, R., & Wang, Z. (1996). The conditional CAPM and the cross‐section of expected returns. The Journal of Finance, 51(1), 3-53.
Jensen, M. C., Black, F., & Scholes, M. S. (1972). The capital asset pricing model: Some empirical tests.
Lintner, J. 1965. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, (47), 13-37.
Madhusoodanan, T. P. (1997). Risk and return: a new look at the Indian stock market. Finance India, 11, 285-304.
Majumdar, S., Bacon, F,W, 2007, “Multi Factor Pricing Model: An Alternative Approach to CAPM”, ASBBS E-Journal, Volume 3, No. 1.
Malin, M., & Veeraraghavan, M. (2004). On the robustness of the Fama and French multifactor model: evidence from France, Germany, and the United Kingdom. International Journal of Business and Economics, 3(2), 155-176.
Manjunatha, T., Mallikarjunappa, T., & Begum, M. (2007). Capital Asset Pricing Model: Beta and Size Tests. AIMS International Journal of Management, 1(1), 71-87.
Michailidis, G, Tsopoglou, S., Papanastasiou, D. and Mariola, E. (2006)“Testing the Capital Asset Pricing Model (CAPM): The Case of the Emerging Greek Securities Market” International Research Journal of Finance and Economics, Vol.4, PP.78-91.
Mohanty, P.(2002). “Evidence of Size Effect on Indian Stock Returns”, Vikalpa, 27(2), pp.27-37.
Mossin, J. 1966. Equilibrium in a capital asset market. Econometrica, (34), 768-783.
Pettengill, G. N., Sundaram, S., & Mathur, I. (1995). The conditional relation between beta and returns. Journal of Financial and quantitative Analysis, 30(01), 101-116.
Rahman, M., Baten, A., & Alam, A. U. (2006). An empirical testing of capital asset pricing model in Bangladesh. Journal of Applied Sciences, 6(3), 662-667.
Rao, N. and Bhole, L,M., ‘Inflation and Equity Returns’, Economic andPolitical Weekly, 26 May 1990, pp.m9l-m96
Roll, R. (1977). A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory. Journal of financial economics, 4(2), 129-176.
Ross, S. A. (1976). The arbitrage theory of capital asset pricing. Journal of economic theory, 13(3), 341-360.
Sehgal, S. (1997). An Empirical Testing of Three parameter Capital Asset Pricing Model in India. Finance India, 11(4), 424-442.
Sehgal, S. (2003). Common factors in stock returns: the Indian evidence. The ICFAI Journal of Applied Finance, 9(1), 5-16.
Sharpe, W. 1964. Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance , (33),885-901.
Srinivasan, S. (1988). Testing of Capital Asset Pricing Model in Indian Environment. Decision, 15(1), 51-59.
Stattman, D. (1980). Book values and stock returns. The Chicago MBA: A journal of selected papers, 4(1), 25-45.
Vaidyanathan, R. (1995). Capital Asset Pricing Model: The Indian Context. The ICFAI Journal of Applied Finance, 1(2), 221-224.
Xu, D., & Yang, X. (2007). Testing the CAPM Model: A study of the Chinese Stock Market. , Master Thesis Essay. Sweden: UMEA School of Business
Published
2018-07-25
How to Cite
Yaseer, K., & Shaji, K. (2018). Validity of CAPM by Using Portfolios: Evidence from Indian Capital Market. Indian Journal of Finance and Banking, 2(2), 15-25. https://doi.org/10.46281/ijfb.v2i2.95
Section
Regular Research Article/ Short Communication Article
Copyright (c) 2018 K.M. Yaseer, K.P. Shaji
This work is licensed under a Creative Commons Attribution 4.0 International License.
