Multifactor Capital Asset Pricing Model Under Alternative Distributional Specification
Indian Statistical Institute, New Delhi - Economic Research Unit
Amit Kumar Mishra
Indian Statistical Institute
8th Capital Markets Conference, Indian Institute of Capital Markets Paper
Arbitrage Pricing Model (APM) assumes the residual to be normally distributed. We empirically checked this assumption in APM. In this paper, an Arbitrage Pricing Model is built on returns from shares in National Stock Exchange (NSE). The APM of returns from shares has four explanatory variables; Market Trend (Market Index), Sector Specific trend in the Market (IT Index), Size of the company (Daily Turnover) and Location factor of the company (Index of Industrial Production). The normal distribution is compared with lognormal and exponential distribution. It has been observed that the exponential distribution performs better than lognormal and normal distributions. Univariate kernel smoothing method is also undertaken for univariate model based on returns dependent on IT Index. It has been observed that Exponential distribution performs better than Kernel smoothing and Normal distributions in Univariate model.
Number of Pages in PDF File: 25
Keywords: Multifactor model, Univariate Kernal smoothing, distribution of returns, capital asset pricing model
Date posted: December 29, 2005
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