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Multifactor Capital Asset Pricing Model Under Alternative Distributional Specification

25 Pages Posted: 29 Dec 2005  

Diganta Mukherjee

Indian Statistical Institute, New Delhi - Economic Research Unit

Amit Kumar Mishra

Indian Statistical Institute

Abstract

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.


Keywords: Multifactor model, Univariate Kernal smoothing, distribution of returns, capital asset pricing model

Suggested Citation

Mukherjee, Diganta and Mishra, Amit Kumar, Multifactor Capital Asset Pricing Model Under Alternative Distributional Specification. 8th Capital Markets Conference, Indian Institute of Capital Markets Paper. Available at SSRN: https://ssrn.com/abstract=871398 or http://dx.doi.org/10.2139/ssrn.871398

Diganta Mukherjee (Contact Author)

Indian Statistical Institute, New Delhi - Economic Research Unit ( email )

203 B. T. Road
Calcutta, 700 035
India

Amit Kumar Mishra

Indian Statistical Institute ( email )

7 S. J. S. Sansanwal Marg
New Delhi, 110016
India

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