Stability of Beta in Various Sectors in Different Phases of Stock Market

Abstract

Identifying and measuring risk has been a constant endeavor for identifying assets related to investment. Various theories have been propounded for pricing of assets considering the risk element. The most common and widely accepted method has been the capital asset pricing model (CAPM) model, which takes into consideration the systematic risk of the asset. It linearly measures returns based on beta which in turn measures this risk. However, one of the major point of contention has been the stability of beta over long period of time and change of systematic risk over different phases of market. Besides, there exists dual-beta, which is upside beta and downside beta, depending upon the market movement in the respective direction. It has been observed that there has been a significant difference in upward and downward beta. Furthermore, even dual-beta are not constant over different phases of the market. It is in this context that the current paper explores the stability and duality of beta in 11 Sectors in Indian market, namely auto, banking, capital goods, consumer durable, FMCG, health, IT, metal, oil, power and realty. They were represented by their respective indices of Bombay Stock Exchange in different phases of the market. The study observes that there is a change in systematic risk of most of the sectors over different phases and there also exists a difference in upside and downside beta.

Keywords: Dual Beta, Dummy Variable, Sectoral Indices, Downside Risk, Capital Asset Pricing Model

JEL Classification: G00, G11