Author(s) :

H.V. Jhamb, K.L.Dhaiya, Shikha Menani.

Volume/Issue :

Abstract :

Capital Asset pricing model is one of the oldest models that present a relationship between expected return and market risk. The model states that market risk as measured by beta is able to explain the returns thereby giving it the most important determinant status in asset pricing. Recent empirical studies however present a doubt on the validity of a single beta model and various explanations have been given to justify that a single beta is not significant in explaining the returns of risky securities and/or portfolio as beta itself is not stable over different time periods. The present paper is thus an attempt to find out whether a single beta CAPM as proposed by Sharpe Lintner and Mossin is helpful in explaining the risk return relationship of the stock returns in India using 271 securities listed on BSE 500 for the period Jan 2000 – Dec 2016 or dual beta CAPM taking account of upside and downside risk is more successful in explaining the returns of the securities. Fabozzi and Francis supported the single beta CAPM by suggesting that it is insignificant to use two independent betas one for the bull market and other for the bear market. Apart from descriptive statistics the study uses Unit root test, OLS regression, Dummy analysis to empirical test the validity of single beta and Dual beta CAPM. Results revealed that a single beta CAPM is successful in explaining the stock returns and no significant improvement is found by taking up and down market betas.

No. of Downloads :

8

KEYWORDS:

Dual Beta, Unit root, OLS regression, Dummy Analysis, Capital Asset Pricing Model, Bull and Bear Market

INTRODUCTION & OBJECTIVES:

Capital market plays an important role in bridging the gap between capital scarce and capital abundant sectors/players. To enhance liquidity in the capital market and specifically stock market by bringing in more investors an efficient mechanism is needed where investors are compensated for bearing risk. Risk-return trade off or relationship plays an important role as to how investors make their investment. Researchers have been searching for various risk return mechanisms that can provide whether the returns being generated by a security and/or portfolio justifies the risk being taken. One such model that has been thoroughly researched is the Capital Asset Pricing Model given by Sharpe Lintner and Mossin which states that risk can be divided into two types – systematic and unsystematic and it is only the systematic risk that investor is compensated for as the unsystematic risk can be easily diversified away by holding an optimum portfolio. Systematic risk is measured by using beta that measures the volatility of a stock’s return in comparison to the market return. However time and again empirical validity of the model has been questioned and advanced or reformed versions of the model have been presented that have been claimed to provide better explanation to the risk return relationship like the Fama French three factor model, consumption CAPM, Intertemporal CAPM, and Ross Arbitrage Pricing Theory. However one similarity between all the models is that they use the concept of Beta. Almost all the traditional models use a single beta for all the market conditions and does not differentiate between an up market beta and a down market beta as was done by Fabozzi and Francis (1977) in their seminal paper where they included a dummy variable to test for dual beta and found that there is no significant difference between the two separate market betas. Since then various studies have been conducted to find out the stability of beta and different results have been obtained. Objectives of the study • To find if there is significant difference in the excess returns or alpha of the individual securities in bull and bear market • To find if there is significant difference in the beta of the stock returns in bull and bear market • To empirically test if bear market beta is higher as compared to bull market beta.

DOI:

https://doi.org/10.58426/cgi.v1.i1.2019.101-114