Validity of the Capital Assets Pricing Model: Evidence from the Indian Companies – The NSE India

27 Pages Posted: 14 Sep 2013

See all articles by Muthucattu Paul

Muthucattu Paul

Papua New Guinea University of Technology

Fosuhene Akua Asarebea

UT Properties LTD Ghana

Date Written: September 12, 2013

Abstract

Capital Asset Pricing model (CAPM) is widely researched, tested, and paradoxically both generally accepted and rejected model of asset pricing. From its beginning (1964) it has occupied the pride of place among the financial economist’s research, and still part of the text books on finance in the leading business schools all over the world. The study covered monthly data of Indian companies’ from the 'National Stock Exchange' (NSE) for the period 2005 to 2009. In our first model, betas are estimated where the risk free rate is the intercept term. The results show that for the State Bank of India (SBIN), HDFC bank, and Tata Motors, the betas are more than one and significant, and for the Reliance, it is near one, and for Infosystch, it is less than one and statistically significant. The second model of 'Jen’s alphas' results show that for only SBIN, and Reliance group, 'Jensen’s alpha' is positive, and for other three companies, it is negative. For positive values of 'Jensen’s alpha', the conclusion is that those companies earned return more than the companies of similar betas, and for negative values, those companies earned less than the companies of similar betas. Over the sample period, for SBIN, HDFC, and Reliance companies, the actual return is are greater than the required returns, and for Tata Motors, and Infosystch, the actual return is less than the required returns. There is an equity risk premium for many of the Indian securities during the sample period. On the whole, the CAPM model could satisfactorily explain the risk-return relationship in the Indian Stock market.

Keywords: Capital Asset Pricing Model (CAPM), Required Return, Betas, Risk modeling, Indian Companies, Stock markets, Risk and Returns

JEL Classification: G11, G12, G32

Suggested Citation

Paul, Muthucattu and Asarebea, Fosuhene Akua, Validity of the Capital Assets Pricing Model: Evidence from the Indian Companies – The NSE India (September 12, 2013). Available at SSRN: https://ssrn.com/abstract=2324767 or http://dx.doi.org/10.2139/ssrn.2324767

Muthucattu Paul (Contact Author)

Papua New Guinea University of Technology ( email )

Department of Business Studies , PNG University of
Lae 411, Morobe 411
Papua New Guinea
00675 75481138 (Phone)

HOME PAGE: http://http:www.pnguot.ac.pg

Fosuhene Akua Asarebea

UT Properties LTD Ghana ( email )

Accra
Ghana

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