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Capm Indian Context
Capm Indian Context
Capm Indian Context
29
Table 5.1
Summary Statistics on the Excess Return Total Period
(April 1991 March 2006, 180 Observations)
SENSEX
Portfolio
Mean
BSE100
SD
Mean
SD
Index
0.8399
8.9448
0.8952
9.3240
P1
1.7925
7.9515
1.8174
7.7192
P2
1.7221
9.6958
1.8105
9.3810
P3
1.7554
9.3427
1.7868
9.5401
P4
1.7818
9.7361
1.7798
9.8837
P5
1.7079
10.2951
1.7402
9.9295
P6
1.7532
9.7699
1.7281
9.8389
P7
2.1011
11.2126
1.7070
11.3904
P8
1.7738
11.1016
2.2651
11.1944
P9
1.8415
12.2769
1.8565
12.1522
P10
1.6513
13.2122
1.4120
13.3655
Average
1.7881
10.4594
1.7903
10.4395
Minimum
1.6513
7.9515
1.4120
7.7192
Maximum
2.1011
13.2122
2.2651
13.3655
120
121
Table 5.2
Summary Statistics on the Excess Return Two Sub-Periods
I Half (April 1991- Sept 1998)
SENSEX
Portfolio Mean SD
BSE100
Mean
SD
SD
BSE100
Mean
SD
Index
0.6828 10.4159
0.5219 10.2619
0.9971
7.2371
1.2684
8.3224
P1
0.5478
7.9373
0.5202
7.8989
3.0373
7.8121
3.1146
7.3516
P2
0.2877 10.2330
0.5055
9.9811
3.1565
8.9554
3.1155
8.5982
P3
0.7653
0.5337
9.9837
2.7455
9.1159
3.0399
8.9554
P4
0.6590 10.5205
0.5693 10.5274
2.9045
8.7987
2.9902
9.0930
P5
1.0926 11.2088
1.2225 10.7786
2.3233
9.3149
2.2579
9.0320
P6
1.0130 10.4488
1.0955 10.3291
2.4934
9.0382
2.3607
9.3379
P7
0.5585 11.7567
0.3266 12.4296
3.6438 10.4797
3.0874 10.1288
P8
0.4513 11.1514
0.8623 11.5062
3.0963 10.9537
3.6679 10.7547
P9
0.6659 12.9545
0.5547 12.6278
3.0171 11.5119
3.1582 11.5812
P10
0.6859 12.7921
0.5668 12.5057
2.6167 13.6220
2.2573 14.1930
Average
0.6727 10.8515
0.6757 10.8568
2.9034
9.9603
2.9050
9.9026
0.3266
2.3233
7.8121
2.2573
7.3516
Minimum 0.2877
9.5116
7.9373
7.8989
1.2225 12.6278
122
3.6438 13.6220
3.6679 14.1930
Table 5.3
Summary Statistics on the Excess Return- Three Sub Periods
April 1991- March 1996
SENSEX
Portfolio Mean
SD
BSE100
Mean
SD
SENSEX
Mean
SD
BSE100
Mean
SD
SENSEX
Mean
SD
BSE100
Mean
SD
123
Index
7.9658 -0.2338
9.0968 1.5556
6.6498 1.7634
6.9927
P1
1.3815
8.9609 0.5116
7.2685 0.6467
7.3107 3.4845
7.2781 3.5137
6.5141
P2
8.9621 0.3113
8.4538 3.8273
8.3137 3.7501
8.3520
P3
8.7648 -0.0993
8.6696 3.7427
8.9328 3.8178
8.7848
P4
8.7232 0.3390
8.7767 3.7471
8.5515 3.7745
8.6092
P5
9.1959 -0.4726
8.8001 2.9907
8.5330 3.3950
8.5721
P6
8.6219 -0.1819
8.5037 3.7170
8.8386 3.5089
9.2862
P7
9.7797 -0.3940
9.7226
P8
P9
1.2275 14.3139 1.1372 14.1829 -0.4823 10.3655 -0.3518 10.2452 4.7793 11.4147 4.7840 11.3011
P10
0.7935 14.0631 0.5171 13.4827 0.8118 12.4898 0.5092 13.3069 3.3487 13.0936 3.2098 13.3483
Average
Minimum 0.7935
9.0150 1.2919
9.0150 0.5171
8.9609 -0.4823
9.2722 0.0663
9.3815 3.6723
9.3159 3.6610
9.2621
7.2685 -0.4726
7.3107 2.9907
7.2781 3.2098
6.5141
Maximum 2.1222 14.3139 2.2982 14.1829 0.8118 12.4898 0.6566 13.3069 4.7793 13.0936 4.7840 13.3483
123
124
Table 5.4
Summary Statistics on the Excess Return Five Sub Periods
April 1991- March 1994
SENSEX
Portfolio Mean
Index
P1
P2
P3
P4
125
P5
P6
P7
P8
P9
P10
Average
Minimum
Maximum
SD
BSE100
Mean
SD
SENSEX
Mean
SD
BSE100
Mean
SD
SENSEX
Mean
SD
BSE100
Mean
SD
8.2637 1.3188
8.9883
7.9935 1.9650
8.1378
9.8743 1.8937
9.4020
9.8630 1.3141
9.8244
9.6169 2.1843
9.7478
4.1156 15.0066 4.3971 13.8602 -1.0337 6.6169 -1.1046 6.8893 1.2492 10.2257 0.8060
9.7764
9.2510
9.1844 1.0302
3.7415 15.4203 3.8893 16.5853 -2.2397 7.0529 -2.6219 7.2054 2.3028 10.6291 1.3194 10.4324
3.0331 14.3063 3.4617 14.8824 -2.0967 7.8654 -1.7926 7.5033 1.5898 10.5194 2.8136 11.0758
3.1183 17.2999 3.1731 17.0095 -1.7268 7.9261 -1.9104 7.7097 1.3974 10.3223 1.4642 10.2721
2.1930 16.7897 1.7328 16.0303 -1.3124 7.8501 -1.2640 7.8741 3.8634 12.8570 4.1034 13.0820
3.2380 14.0908 3.2264 14.1065 -1.5144 6.8245 -1.5349 6.7722 1.7172
9.9408 1.8375
9.9991
7.9935 0.8060
8.1378
4.1156 17.2999 4.3971 17.0095 -1.0337 7.9261 -1.1046 7.8741 3.8634 12.8570 4.1034 13.0820
125
SENSEX
Portfolio
Index
P1
P2
P3
126
P4
P5
P6
P7
P8
P9
P10
Average
Minimum
Maximum
Mean
BSE100
SD
Mean
SENSEX
SD
Mean
BSE100
SD
Mean
SD
-1.9157
6.6843
-2.2581
8.0558
3.4067
6.4928
3.6080
6.8968
0.5920
5.9947
0.3892
5.6605
5.0877
7.7996
5.3281
6.5296
-0.1204
7.8659
0.0901
7.3131
5.5038
8.0769
5.3661
8.5548
-0.4339
7.8605
0.2690
7.5404
5.6249
8.9589
5.5856
8.9049
-0.3217
7.4586
-0.5891
7.6535
5.8325
8.7053
5.9226
8.5946
-0.4591
8.0452
-0.4885
7.8291
4.6677
8.7202
5.0909
8.6408
-0.0175
8.1642
-0.1490
8.2275
5.3323
9.1594
5.1740
9.7421
-0.1849
8.7171
0.1121
9.5317
6.8860
10.7409
5.8360
9.6112
-0.6167
10.6776
-0.0847
10.0737
6.9596
9.4073
6.9274
9.6020
-0.3824
12.3071
-0.1980
12.5653
6.8010
10.2640
6.7535
9.8768
-1.3279
15.1865
-2.4304
16.0209
4.8405
10.9245
4.9182
11.1382
-0.4716
8.9965
-0.4852
9.1338
5.5402
9.0227
5.5010
8.9174
-1.3279
5.9947
-2.4304
5.6605
4.6677
7.7996
4.9182
6.5296
0.5920
15.1865
0.3892
16.0209
6.9596
10.9245
6.9274
11.1382
126
Further the volatility of the market has decreased significantly from the 13.5 per
cent level to 6.5 between the initial and final periods of the analysis. This highly
significant positive excess return observed with low levels of volatility can perhaps
be taken as an indication of the growth of Indian economy.
5.2 Seasonality in the Returns
The existence of seasonal patterns in stock returns is against the efficiency
of capital markets, because investors observing seasonal patterns can adjust their
trading pattern to take advantage of abnormal return. In India researchers have
justified several seasonal effects, such as January, March, April and festival effects.
Hence, before conducting the formal empirical tests of CAPM, the data is examined
for the existence of these seasonal effects30. The results of these tests for the whole
period of study reveal that Indian stock markets in general do not exhibit any
seasonal patterns. However, an analysis pertaining to various sub periods provides a
clear picture of the seasonal patterns that existed during the various periods.
It has been observed that the year 2000-01 was a turning point for Indian
stock markets in many respects. From table 5.3 one can easily observe obvious
differences in the pattern of returns that existed up to the year 2000-01 and
thereafter. As far as the January effect is concerned, up to the year 2000-01 January
mean difference was positive by and large, though not statistically significant; but
after the year 2000-01 it became negative. This negative mean difference was at its
peak during the last sub period April 2003 to March 2006 with a majority of the
sample portfolios exhibiting statistically significant negative January mean
differences. (Out of the total 22 portfolios considered in the study, 17 had
30
This has been done by using the simple mean differences and the corresponding t-statistics for
testing if mean returns differ in a given month for the various portfolios considered.
127
statistically significant negative January mean difference). This twist that occurred
in the January effect in 2000-01 can probably be attributed to the surge observed in
the FII inflows after 2000-01 (See Chart 2.1). A vast majority of the FIIs operating
in Indian stock markets use December financial closing; naturally they try to keep
their returns high during December, which in turn produces a correction during
January.
The April effect, analogous to the January effect in the U.S., seems to be
totally absent in India. The sample portfolios have not exhibited any symptom of
April effect for the whole period as well as for the various sub periods analysed.
Thus the tax loss-selling hypothesis does not seem to be applicable in Indian stock
markets.
When the data is analysed after dividing into two equal sub periods,
statistically significant negative March mean differences were observed during the
second half, indicating the presence of March effect. A further subdivision into five
equal periods reveals that the March effect observed during the second half was
specific to April 2000 to March 2003. The March mean differences during this
period were found to be significantly negative for a majority of the portfolios, but
for all the remaining periods it was not significant.
Investigation of the festival effect shows that there is no significant festival
effect in Indian stock markets. An analysis of the festival effect on data pertaining
to various sub periods brings out a very interesting behavioural change; up to the
year 2000-01 the mean difference for the festival months was negative, indicating
increased selling of stocks in these months; but after 2000-01 it became positive,
indicating increased buying in these months. In fact during the period April 2000 to
128
March 2002, the festival months mean difference was found to be significantly
positive for a majority of portfolios considered. This could possibly be interpreted
as an indication of the change in the attitude and consumption pattern of the
investors.
5.3 Stationarity Tests
The stationarity of the time series involved in the present study has been
examined by using Dickey-Fuller Unit Root Test. The test has been carried out for
all the time series involved in the study, both in testing the CAPM and in testing the
Three-Factor model. Two Dickey Fuller regression models, models without trend
and with trend, have been estimated on these portfolios and the corresponding
Dickey-Fuller critical values for testing the hypothesis H 0 : = 0 have been
evaluated. The results of these tests are presented in tables 5.5 to 5.12. The second
and sixth columns of these tables present the estimated values of models without
trend and with trend respectively; column 3 and column 7 provide absolute values
of the Dickey-Fuller31 statistics calculated under the null hypothesis; fourth and
fifth columns provide the coefficient of trend component and the corresponding t
values.
31
The Dickey Fuller critical values are approximately equal to 1.75 times of the one-sided t values
129
Table 5.5
Results of Dickey Fuller Unit Root Test
CAPM Portfolios with SENSEX as Market Proxy
(2)
Portfolio
(3)
(4)
(5)
(6)
(7)
SENSEX
-0.89
11.83*
0.00
0.01
-0.89
11.80*
P1
-0.76
10.45*
0.01
1.07
-0.77
10.51*
P2
-0.83
11.25*
0.02
1.23
-0.84
11.33*
P3
-0.81
11.00*
0.01
0.89
-0.82
11.03*
P4
-0.85
11.43*
0.01
1.04
-0.86
11.47*
P5
-0.87
11.68*
0.00
0.13
-0.87
11.64*
P6
-0.87
11.62*
0.01
0.56
-0.87
11.62*
P7
-0.85
11.47*
0.02
1.18
-0.86
11.55*
P8
-0.85
11.41*
0.02
1.26
-0.86
11.50*
P9
-0.93
12.41*
0.02
1.13
-0.94
12.47*
P10
-0.85
11.42*
0.01
0.65
-0.85
11.42*
130
Table 5.6
Results of Dickey Fuller Unit Root Test
CAPM Portfolios with BSE 100 as Market Proxy
(2)
Portfolio
(3)
(4)
(5)
(6)
(7)
SENSEX
-0.90
12.03*
0.00
0.25
-0.90
11.99*
P1
-0.82
11.07*
0.01
1.33
-0.83
11.17*
P2
-0.81
10.98*
0.01
1.07
-0.82
11.03*
P3
-0.78
10.67*
0.01
0.99
-0.79
10.71*
P4
-0.86
11.57*
0.02
1.08
-0.87
11.63*
P5
-0.86
11.56*
0.00
0.20
-0.86
11.53*
P6
-0.87
11.64*
0.01
0.49
-0.87
11.62*
P7
-0.86
11.52*
0.01
0.87
-0.86
11.54*
P8
-0.84
11.31*
0.02
1.19
-0.85
11.39*
P9
-0.90
11.96*
0.02
1.12
-0.90
12.02*
P10
-0.87
11.63*
0.01
0.67
-0.87
11.64*
131
Table 5.7
Results of Dickey Fuller Unit Root Test
Three Factor Size Portfolios with SENSEX as Market Proxy
(2)
(3)
(4)
(5)
Portfolio
SENSEX
-0.89
11.81*
0.00
0.24
-0.89
11.78*
SMB
-0.94
12.47*
0.01
0.88
-0.94
12.49*
UMO
-0.85
11.52*
0.00
0.20
-0.85
11.48*
SD1
-0.88
11.66*
0.02
0.93
-0.88
11.69*
SD2
-0.88
11.71*
0.02
1.03
-0.89
11.76*
SD3
-0.79
10.89*
0.02
1.25
-0.80
10.97*
SD4
-0.83
11.13*
0.02
1.38
-0.84
11.24*
SD5
-0.82
10.99*
0.01
0.82
-0.83
11.01*
SD6
-0.84
11.22*
0.01
0.71
-0.85
11.23*
SD7
-0.82
10.97*
0.01
0.70
-0.82
10.97*
SD8
-0.85
11.32*
0.02
1.04
-0.86
11.36*
SD9
-0.91
11.97*
0.01
0.99
-0.91
12.00*
SD10
-0.89
11.73*
0.01
0.38
-0.89
11.71*
132
(6)
(7)
Table 5.8
Results of Dickey Fuller Unit Root Test
Three Factor PE Portfolios with SENSEX as Market Proxy
(2)
(3)
(4)
(5)
Portfolio
SENSEX
-0.89
11.81*
0.00
0.24
-0.89
11.78*
SMB
-0.94
12.47*
0.01
0.88
-0.94
12.49*
UMO
-0.85
11.52*
0.00
0.20
-0.85
11.48*
SD1
-0.85
11.58*
0.02
1.10
-0.86
11.63*
SD2
-0.88
11.71*
0.02
1.00
-0.88
11.75*
SD3
-0.87
11.51*
0.02
1.00
-0.87
11.55*
SD4
-0.88
11.76*
0.01
0.81
-0.89
11.77*
SD5
-0.80
10.70*
0.02
1.13
-0.81
10.76*
SD6
-0.84
11.20*
0.01
0.92
-0.84
11.23*
SD7
-0.83
11.02*
0.02
1.23
-0.84
11.11*
SD8
-0.86
11.49*
0.01
0.91
-0.87
11.52*
SD9
-0.88
11.63*
0.01
0.45
-0.88
11.61*
SD10
-0.80
10.78*
0.01
0.80
-0.81
10.79*
133
(6)
(7)
Table 5.9
Results of Dickey Fuller Unit Root Test
Three Factor Double Sorted Portfolios with SENSEX as Market Proxy
(2)
(3)
(4)
(5)
Portfolio
SENSEX
-0.88
11.71*
0.01
0.67
-0.89
11.71*
SMB
-0.94
12.48*
0.01
1.21
-0.95
12.55*
UMO
-0.96
12.92*
0.01
1.55
-0.97
13.06*
P11
-0.85
12.05*
0.03
1.61
-0.86
12.19*
P12
-0.98
12.84*
0.02
1.09
-0.98
12.89*
P13
-0.87
11.55*
0.02
1.27
-0.88
11.64*
P14
-0.85
11.37*
0.02
0.87
-0.86
11.40*
P21
-0.84
11.18*
0.02
1.09
-0.84
11.24*
P22
-0.81
10.90*
0.02
1.06
-0.82
10.95*
P23
-0.83
11.05*
0.02
1.41
-0.84
11.16*
P24
-0.78
10.53*
0.02
1.34
-0.79
10.64*
P31
-0.85
11.33*
0.01
0.87
-0.85
11.35*
P32
-0.85
11.32*
0.02
1.17
-0.86
11.39*
P33
-0.85
11.30*
0.02
0.94
-0.85
11.33*
P34
-0.86
11.41*
0.02
0.96
-0.87
11.45*
P41
-0.88
11.67*
0.02
1.49
-0.90
11.80*
P42
-0.87
11.57*
0.02
1.08
-0.88
11.62*
P43
-0.88
11.66*
0.01
0.84
-0.88
11.68*
P44
-0.90
11.85*
0.00
0.32
-0.90
11.83*
134
(6)
(7)
Table 5.10
Results of Dickey Fuller Unit Root Test
Three Factor Size Portfolios with BSE 100 as Market Proxy
Model without Trend
(1)
(2)
(3)
(4)
(5)
Portfolio
SENSEX
-0.90
11.94*
0.01
0.37
-0.90
11.92*
SMB
-0.94
12.47*
0.01
0.88
-0.94
12.49*
UMO
-0.85
11.52*
0.00
0.20
-0.85
11.48*
SD1
-0.88
11.66*
0.02
0.93
-0.88
11.69*
SD2
-0.88
11.71*
0.02
1.03
-0.89
11.76*
SD3
-0.79
10.89*
0.02
1.25
-0.80
10.97*
SD4
-0.83
11.13*
0.02
1.38
-0.84
11.24*
SD5
-0.82
10.99*
0.01
0.82
-0.83
11.01*
SD6
-0.84
11.22*
0.01
0.71
-0.85
11.23*
SD7
-0.82
10.97*
0.01
0.70
-0.82
10.97*
SD8
-0.85
11.32*
0.02
1.04
-0.86
11.36*
SD9
-0.91
11.97*
0.01
0.99
-0.91
12.00*
SD10
-0.89
11.73*
0.01
0.38
-0.89
11.71*
135
(6)
(7)
Table 5.11
Results of Dickey Fuller Unit Root Test
Three Factor PE Portfolios with BSE 100 as Market Proxy
Model without Trend
(1)
(2)
(3)
(4)
(5)
Portfolio
SENSEX
-0.90
11.92*
0.01
0.58
-0.90
11.90*
SMB
-0.94
12.47*
0.01
0.88
-0.94
12.49*
UMO
-0.85
11.52*
0.00
0.20
-0.85
11.48*
SD1
-0.85
11.58*
0.02
1.10
-0.86
11.63*
SD2
-0.88
11.71*
0.02
1.00
-0.88
11.75*
SD3
-0.87
11.51*
0.02
1.00
-0.87
11.55*
SD4
-0.88
11.76*
0.01
0.81
-0.89
11.77*
SD5
-0.80
10.70*
0.02
1.13
-0.81
10.76*
SD6
-0.84
11.20*
0.01
0.92
-0.84
11.23*
SD7
-0.83
11.02*
0.02
1.23
-0.84
11.11*
SD8
-0.86
11.49*
0.01
0.91
-0.87
11.52*
SD9
-0.88
11.63*
0.01
0.45
-0.88
11.61*
SD10
-0.80
10.78*
0.01
0.80
-0.81
10.79*
136
(6)
(7)
Table 5.12
Results of Dickey Fuller Unit Root Test
Three Factor Double Sorted Portfolios with BSE 100 as Market Proxy
Model without Trend
(1)
(2)
(3)
(4)
(5)
Portfolio
SENSEX
-0.90
11.95*
0.01
0.37
-0.90
11.92*
SMB
-0.94
12.48*
0.01
1.21
-0.95
12.55*
UMO
-0.96
12.92*
0.01
1.55
-0.97
13.06*
P11
-0.85
12.07*
0.02
1.45
-0.85
12.18*
P12
-0.98
12.84*
0.02
0.92
-0.98
12.87*
P13
-0.87
11.57*
0.02
1.10
-0.88
11.63*
P14
-0.85
11.37*
0.01
0.72
-0.86
11.38*
P21
-0.84
11.19*
0.01
0.92
-0.84
11.22*
P22
-0.81
10.92*
0.01
0.89
-0.82
10.95*
P23
-0.83
11.06*
0.02
1.25
-0.84
11.15*
P24
-0.78
10.55*
0.02
1.20
-0.79
10.63*
P31
-0.85
11.33*
0.01
0.70
-0.85
11.33*
P32
-0.85
11.34*
0.02
1.01
-0.86
11.38*
P33
-0.85
11.32*
0.01
0.79
-0.85
11.33*
P34
-0.86
11.44*
0.01
0.80
-0.87
11.46*
P41
-0.89
11.70*
0.02
1.32
-0.90
11.80*
P42
-0.87
11.59*
0.01
0.89
-0.88
11.62*
P43
-0.88
11.69*
0.01
0.64
-0.88
11.69*
P44
-0.90
11.87*
0.00
0.13
-0.90
11.84*
137
(6)
(7)
It can be seen form these tables that all the Dickey-Fuller statistics are
significant at five per cent level of significance, which indicates that the respective
time series are stationary. The t values of the coefficients of the trend component
( 2 ) of the model with trend are not significant at five per cent level. This indicates
that there is no trend component present in the time series. Thus, based on the
background statistical tests, we arrive at the conclusion that the time series data
used in the present study are free from the statistical issues, which are to be taken
care of while using time series regression analysis.
Another very important inference that could be arrived at from this analysis is
regarding the weak efficiency of Indian capital market. It has been observed that the
monthly return series of the various portfolios considered in the study are stationary
for the whole period of analysis, as well as for the sub periods considered.
Stationarity of the return series implies that the original price series is a Random
Walk, which in turn implies Indian stock markets are efficient at least in the weak
sense. This inference, regarding the weak form of market efficiency, seems to be
against the conclusions of some of the recent studies such as Ahmad, Ashraf and
Ahmed (2006), Dhankar and Chakraborty (2005) and Deb (2003). These studies
have rejected random walk hypothesis in Indian capital market. It is to be noted that
these studies use either daily or weekly return series of well-known market indices
of Bombay and National stock exchanges for their analysis. In the present study we
have used monthly return series of well-diversified portfolios. Our results show that
in Indian stock markets the price is completely adjusted to new information at least
within a months time, so that the monthly prices of the stocks are very close to
138
their intrinsic values, which in turn make successive changes in the monthly prices
independent of each other. Further, a latest study by Patrick and Francy (2008) also
show that Indian capital markets are weakly efficient when analysed at the
disaggregated level by using variance ratio test. These results on market efficiency
are very useful for the long-term investors, market regulators and policy makers in
framing long-term policies on investments.
5.4 Tests of CAPM
The results of the CAPM time series regression (4.1) estimated on various
beta portfolios for the different time periods by taking SENSEX and BSE 100 as
market proxies are provided respectively in panels A and B of Tables 5.13 to 5.18.
If the zero-beta CAPM as given by equation (1.2) is empirically valid in India the
market factor im must contribute substantially to the excess return of the portfolios
and at the same time regression intercept i should not be significantly different
from zero. These hypotheses were tested by using significance tests discussed in
section 4.2.2 and the results are discussed below.
CAPM, being an equilibrium model, is to be examined for a sufficiently
long period of time to arrive at conclusions about its empirical validity. In the
present work, the empirical validity of CAPM has been tested by using data taken
between April 1991and March 2006 both for the total period and for dividing the
total period into various sub periods. The results obtained for the total-period
analysis are provided in Table 5.13. The overall significance of the model, as
indicated by the F values, was found to be highly significant for all the portfolios
considered with p values almost equal to zero and the adjusted R2 values ranging
between 59 per cent and 73 per cent. The estimated values have been obtained as
139
significantly positive for all the portfolios indicating that market factor explains a
major portion of common variations in stock returns. Thus, the positive linear
relationship between the expected return and the market beta, as required by
CAPM, has been perfectly established. The multivariate GRS test of Gibbons, Ross
and Shanken (1989) has produced p-values of 0.262 for the SENSEX portfolios and
0.076 for the BSE 100 portfolios. This indicates that the intercept vector is not
significantly different from the null vector. Thus the results based on the present
empirical analysis lead to the conclusion that the CAPM in its zero-beta form has
been valid in India during the Post-Reforms period.
However, the estimated individual intercept values indicate that the model
leaves positive unexplained return, especially on the lower beta portfolios (the
intercept for the lower beta portfolios are found to be significantly positive). As far
as the explanatory power of the two market indices, BSE SENSEX and BSE 100,
are concerned, our results show that both these indices have almost the same
explanatory power. Though BSE 100 is a broad based index consisting of 100
stocks, it has no additional power in describing the market risk of capital assets.
140
Table 5.13
Results of CAPM Time-Series Regressions for Monthly Excess Returns on
Beta Ranked Deciles for the Period April 1991 to March 2006
Rit R0t = i + im [ Rmt R0 t ] + eit
Panel A: Taking SENSEX as Market Proxy
Portfolios
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
1.22
0.99
1.07
1.02
0.90
1.00
1.27
0.93
0.88
0.67
0.68
0.88
0.82
0.90
0.96
0.90
0.99
1.00
1.15
1.17
3.18*
2.31*
2.45*
2.51*
2.11*
2.41*
2.46*
1.90
1.74
1.11
t()
t()
15.94* 18.39* 16.80* 19.83* 20.13* 19.61* 17.26* 18.25* 20.34* 17.44*
AdjR2
F
0.59
0.65
0.61
0.69
0.69
0.68
0.62
0.65
0.70
0.63
254.19 338.07 282.16 393.39 405.24 384.61 297.99 333.01 413.73 304.30
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.63
1.65
1.74
1.70
1.88
1.79
1.66
1.65
1.86
1.74
GRS Statistics
1.251
p(GRS)
0.262
P2
P3
P4
P5
P6
P7
P8
P9
P10
1.24
1.07
1.05
0.98
0.94
0.94
0.78
1.37
0.86
0.34
0.64
0.83
0.82
0.89
0.89
0.88
1.03
1.00
1.11
1.20
3.41*
2.68*
2.46*
2.46*
2.32*
2.32*
1.71
2.92*
1.81
0.62
t()
t()
AdjR2
F
16.50* 19.47* 18.00* 20.94* 20.62* 20.45* 20.97* 19.79* 21.83* 20.24*
0.60
0.68
0.64
0.71
0.70
0.70
0.71
0.69
0.73
0.70
272.30 379.23 324.15 438.62 425.03 418.35 439.86 391.76 476.45 409.53
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.85
1.69
1.60
1.82
1.76
1.74
1.73
1.70
1.80
1.81
GRS Statistics
1.736
p(GRS)
* Significant at 5% level
141
0.076
When the data is analysed after dividing into two equal sub periods of
ninety months each, the results (table 5.14) show that the zero-beta CAPM perfectly
fits in during the first half, April 1991 to September 1998. During this period the
intercept term for all the portfolios has been found not significantly different from
zero based on both the multivariate GRS test and the univariate t tests. The F values
for the overall significance and t values for the beta coefficients of the model have
also been obtained as highly significant. The adjusted R2 values show that the
explanatory power of the model is between 72 per cent and 85 per cent for the
various portfolios during this period. On the other hand, the results for the second
half period (table5.15), between October 1998 and March 2005, were not as
supportive for the validity of the model as for the first period. The p-values of the
multivariate GRS test were obtained as 0.021 for the SENSEX portfolios and 0.003
for the BSE 100 portfolios, indicating rejection of the null hypothesis that the
intercept vector equal to null vector. The univariate tests also indicate that
individual intercept terms are significantly positive at five per cent level, except for
three portfolios, P10 of SENSEX, P5 and P10 of BSE 100. Thus the indications of the
various tests show that the model leaves large amounts of positive unexplained
returns during this period. Though, the F values for the overall significance and t
values for the beta coefficients have been obtained as significant, the explanatory
power of the model was found reduced considerably. The adjusted R2 values were
found to lie between 40 per cent and 60 per cent for the various portfolios, leaving
large amounts of variations unexplained.
142
Table 5.14
Results of CAPM Time-Series Regressions for Monthly Excess Returns on
Beta Ranked Deciles for the First Half Period April 1991 to Sept1998
Rit R0t = i + im [ Rmt R0 t ] + eit
Panel A: Taking SENSEX as Market Proxy
Portfolios
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
0.09
-0.31
0.24
0.04
0.44
0.41
-0.11
-0.20
-0.11
-0.04
0.67
0.87
0.78
0.90
0.96
0.89
0.98
0.96
1.13
1.06
t()
0.23
-0.62
0.44
0.09
0.81
0.79
-0.18
-0.38
-0.18
-0.06
t()
17.01* 18.08* 15.04* 18.70* 18.23* 18.02* 16.47* 18.56* 20.33* 16.24*
AdjR2
F
0.76
0.79
0.72
0.80
0.79
0.78
0.75
0.79
0.82
0.75
289.29 326.91 226.13 349.71 332.27 324.60 271.24 344.45 413.46 263.80
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.61
1.88
1.66
1.91
2.20
1.80
1.94
1.89
2.29
1.85
GRS Statistics
0.579
p(GRS)
0.826
P2
P3
P4
P5
P6
P7
P8
P9
P10
0.16
0.05
0.08
0.08
0.73
0.62
-0.24
0.33
-0.03
0.01
0.69
0.87
0.87
0.95
0.95
0.92
1.09
1.02
1.13
1.07
t()
0.43
0.11
0.17
0.18
1.51
1.37
-0.42
0.64
-0.06
0.01
t()
AdjR2
F
18.93* 18.47* 18.63* 22.29* 20.36* 20.79* 19.48* 20.10* 21.50* 17.45*
0.80
0.79
0.80
0.85
0.82
0.83
0.81
0.82
0.84
0.77
358.23 341.18 347.21 496.78 414.55 432.31 379.55 403.81 462.26 304.32
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.53
2.02
1.80
1.90
1.91
2.01
2.13
2.05
2.24
1.77
GRS Statistics
0.975
p(GRS)
* Significant at 5% level
143
0.471
Table 5.15
Results of CAPM Time-Series Regressions for Monthly Excess Returns on
Beta Ranked Deciles for the Second Half Period October1998 to March 2006
Rit R0t = i + im [ Rmt R0 t ] + eit
Panel A: Taking SENSEX as Market Proxy
Portfolios
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
2.33
2.28
1.85
2.01
1.36
1.57
2.64
2.01
1.84
1.23
0.71
0.88
0.90
0.90
0.96
0.93
1.01
1.09
1.18
1.40
t()
3.69*
3.38*
2.71*
3.17*
2.06*
2.42*
3.27*
2.47*
2.23*
1.25
t()
8.09*
9.50*
9.62*
10.28*
10.55*
10.39*
9.07*
9.76
10.37*
10.37*
0.42
0.50
0.51
0.54
0.55
0.55
0.48
0.51
0.55
0.55
65.40
90.21
92.60
105.59
111.29
107.99
82.20
95.17
107.53
107.55
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.72
1.66
1.84
1.66
1.68
1.82
1.61
1.62
1.72
1.70
AdjR2
GRS Statistics
2.287
p(GRS)
0.021
P2
P3
P4
P5
P6
P7
P8
P9
P10
2.40
2.15
2.10
1.97
1.24
1.31
1.91
2.46
1.79
0.51
0.56
0.76
0.74
0.81
0.80
0.83
0.93
0.95
1.08
1.38
t()
3.95*
3.45* 3.01*
2.99*
1.90
1.94
2.72*
3.16*
2.28*
0.57
t()
7.75*
10.26* 8.90*
10.26*
10.26*
10.29*
11.05*
10.25*
11.50*
12.92*
0.47
0.54
0.54
0.54
0.58
0.54
0.60
0.65
105.34 79.13
105.16
105.28
105.97
122.10
105.02
132.26
167.02
AdjR2
0.40
0.54
60.02
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
2.10
1.60
1.57
1.81
1.68
1.64
1.53
1.61
1.63
1.85
GRS Statistics
2.994
p(GRS)
* Significant at 5% level
144
0.003
The analysis based on the next subdivision of the total period, into three sub
periods of five years each, brings out a clear picture of the behaviour of CAPM in
Indian capital market during the various phases of financial reforms. The results of
this analysis are provided in tables 5.16, 5.17 and 5.18.
inference that could be made from this analysis is that after the initiation of
financial reforms up to the financial year 2000-01, CAPM seems to be a perfect
model to explain the variations in the expected return of assets. The multivariate
GRS test shows that the observed intercept vector is not significantly different
from the null vector until this period. The p values of these tests have been obtained
as 0.395 and 0.195 respectively for the SENSEX and BSE 100 portfolios during
April 1991 to March 1996 and 0.905 and 0.340 during April 1996 to March 2001
for these portfolios. The univariate tests for the significance of individual terms
have also produced a maximum t value 1.32 during this period, which again
confirms the empirical validity of the model.
After the year 2000-01, the model could not be claimed as so perfect in
explaining the expected returns. During this last sub period the individual values
has been obtained as significantly positive for all the portfolios, except for the last
decile P10 indicating the model leaves large amounts of positive unexplained
returns. The multivariate GRS test was also found to be significant at 3.8 per cent
for the SENSEX portfolios and 8.2 per cent for BSE 100 portfolios. However, there
is no reason to reject the model during this last period, because the F values for the
overall significance and t values for the significance of the market factor () were
obtained as statistically significant.
145
Table 5.16
Results of CAPM Time-Series Regressions for Monthly Excess Returns on
Beta Ranked Deciles for the Period April 1991 to March 1996
Rit R0t = i + im [ Rmt R0 t ] + eit
Panel A: Taking SENSEX as Market Proxy
Portfolios
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
0.42
-0.10
0.70
0.15
0.77
0.62
0.17
-0.31
-0.31
-0.70
0.73
0.92
0.78
0.93
1.02
0.90
1.03
1.00
1.16
1.12
t()
0.93
-0.19
1.23
0.29
1.25
1.05
0.24
-0.51
-0.45
-0.96
t()
18.73* 20.46* 15.87* 20.48* 19.04* 17.58* 17.27* 19.09* 19.23* 17.63*
AdjR2
F
0.86
0.88
0.81
0.88
0.86
0.84
0.83
0.86
0.86
0.84
350.66 418.40 251.78 419.27 362.40 309.16 298.18 364.60 369.92 310.74
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.68
1.55
1.62
1.72
2.28
1.78
1.98
1.82
2.58
1.96
GRS Statistics
1.081
p(GRS)
0.395
P2
P3
P4
P5
P6
P7
P8
P9
P10
0.44
0.34
0.61
0.08
1.18
0.78
0.13
0.27
-0.21
-0.75
0.74
0.90
0.89
0.99
0.97
0.93
1.13
1.04
1.17
1.10
t()
1.08
0.65
1.32
0.19
2.13
1.53
0.19
0.48
-0.32
-1.15
t()
R2
F
20.57* 19.76* 21.82* 24.63* 19.92* 20.87* 18.84* 20.87* 20.38* 19.03*
0.88
0.87
0.89
0.91
0.87
0.88
0.86
0.88
0.88
0.86
423.31 390.50 475.88 606.75 396.83 435.48 354.98 435.37 415.16 361.99
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.53
1.79
1.70
1.88
1.94
2.12
2.16
2.34
2.37
1.93
GRS Statistics
1.618
p(GRS)
* Significant at 5% level
146
0.129
Table 5.17
Results of CAPM Time-Series Regressions for Monthly Excess Returns on
Beta Ranked Deciles for the Period April 1996 to March 2001
Rit R0t = i + im [ Rmt R0 t ] + eit
Panel A: Taking SENSEX as Market Proxy
Portfolios
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
0.71
0.50
0.06
0.50
0.32
0.02
0.50
0.04
-0.09
1.25
0.54
0.79
0.75
0.81
0.85
0.83
0.93
0.92
1.07
1.18
t()
0.93
0.60
0.07
0.65
0.40
0.03
0.59
0.05
-0.11
1.17
t()
5.54*
7.52*
7.08*
8.33*
8.19*
8.98*
8.73*
8.39*
11.09*
8.73*
0.34
0.49
0.46
0.54
0.53
0.58
0.56
0.54
0.67
0.56
30.68
56.58
50.18
69.40
67.00
80.70
76.27
70.31
123.05
76.26
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.56
1.78
1.71
1.72
1.84
2.07
1.70
1.57
1.67
1.57
AdjR2
GRS Statistics
0.464
p(GRS)
0.905
P2
P3
P4
P5
P6
P7
P8
P9
P10
0.76
0.47
0.04
0.50
-0.31
-0.02
-0.20
0.86
-0.13
0.80
0.50
0.67
0.60
0.70
0.70
0.71
0.85
0.85
0.93
1.23
t()
1.03
0.62
0.05
0.64
-0.39
-0.02
-0.25
0.99
-0.18
0.85
t()
6.11*
7.99*
6.20*
8.08*
7.97*
8.83*
9.69*
8.83*
11.18*
11.88*
0.38
0.52
0.39
0.52
0.51
0.57
0.61
0.57
0.68
0.70
37.33
63.80
38.40
65.24
63.52
77.99
93.94
78.03
124.87
141.11
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
2.00
1.82
1.42
1.75
1.75
1.82
1.95
1.37
1.91
1.59
AdjR2
GRS Statistics
1.159
p(GRS)
* Significant at 5% level
147
0.340
Table 5.18
Results of CAPM Time-Series Regressions for Monthly Excess Returns on
Beta Ranked Deciles for the Period April 2001 to March 2006
Rit R0t = i + im [ Rmt R0 t ] + eit
Panel A: Taking SENSEX as Market Proxy
Portfolios
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
2.34
2.52
2.23
2.31
1.55
2.21
3.15
2.89
2.93
1.27
0.74
0.84
0.98
0.92
0.93
0.97
0.93
1.10
1.19
1.34
t()
3.25*
3.06*
2.71*
2.90*
1.96*
2.73*
2.85*
2.84*
2.66*
0.99
t()
6.94*
6.94*
8.03*
7.84*
7.93*
8.07*
5.72*
7.32*
7.28*
7.06*
0.44
0.44
0.52
0.51
0.51
0.52
0.35
0.47
0.47
0.45
48.14
48.15
64.53
61.44
62.91
65.17
32.75
53.57
53.02
49.87
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.69
1.59
1.84
1.69
1.62
1.59
1.60
1.76
1.81
1.76
AdjR2
GRS Statistics
2.150
p(GRS)
0.038
P2
P3
P4
P5
P6
P7
P8
P9
P10
2.44
2.18
2.12
2.11
1.67
1.73
2.26
2.74
2.62
0.73
0.61
0.89
0.97
0.94
0.98
1.01
1.04
1.09
1.23
1.40
t()
3.68*
2.92*
2.80*
2.84*
2.40*
2.13*
2.60*
2.89*
2.65*
0.60
t()
6.54*
8.58*
9.16*
9.09*
10.03*
8.96*
8.49*
8.28*
8.85*
8.27*
R2
0.42
0.55
0.58
0.58
0.63
0.57
0.55
0.53
0.57
0.53
42.78
73.58
83.82
82.65
100.50
80.25
72.12
68.48
78.37
68.39
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D-W
1.88
1.44
1.73
1.79
1.67
1.54
1.30
1.81
1.58
1.94
GRS Statistics
1.817
p(GRS)
* Significant at 5% level
148
0.082
Another important inference noticed on the basis of the results is that both
the overall significance and the explanatory power of the model are reduced
considerably after the year 1995-96. The magnitude of the F values for the overall
significance has been reduced from the 252-607 range to 31-141 range and the t
values for the significance of market factor () have been reduced from 16-25 to 512 levels after 1995-96. The adjusted R2 values were also reduced from the 81-91
per cent range during 1991 to 1996 to the 34-70 per cent range with a majority of
them less than 60 per cent (35 out of 40) after 1995-96.
Thus the results obtained on the basis of the empirical analysis conducted on
CAPM are generally supportive of the validity of the model during the PostReforms period 1991-92 to 2005-06. This is contrary to the findings of some of the
recent studies, such as Madhusoodanan (1997), Vipul (1998), Anasri (2000) and
Narayana and Lakshmi (2001). While Madhusoodanan (1997) rejected CAPM for
the period 1987 to 1996, Vipul (1998) argued that CAPM is only marginally
superior to the unit beta preposition for a period between 1986 and 1993. Although
Ansari (2000) did not reject the model, he argued that the relationship between beta
and portfolio returns is very weak for the period 1990 to 1996. Narayana and
Lakshmi (2001) also shows that the relationship between systematic risk and return
is weak in Indian stock market. The basic difference of the present study, as
compared to earlier ones, is that the present study used a long fifteen-year period
data confined to the Post-Reforms period for the analysis. Thus the present study
perfectly reflects the long-term behaviour of Indian stock market after the initiation
of the financial reforms. Also, the findings of the study, when linked together with
the conclusions of the studies stated above, seem to be consistent with the hope
149
expressed by Srinivasan (1988), while rejecting the validity of CAPM as With the
march of information technology, innovation in capital market and economic
rationality in decision making, the empirical line is expected to close into CAPM
line in the long run
However, the large amount of positive unexplained return, reflected in the
intercept term when the model is estimated on the lower beta portfolios for the total
period and the lower levels of adjusted R2 values observed after 1995-96, requires
special attention. The analysis after dividing the data into three equal sub periods of
five years each reveals that during the last sub period Indian stock market has
generated average returns significantly higher than that predicted by CAPM.
In this connection, the first and foremost theoretical issue to be considered
and investigated is the inconsistencies in CAPM, reported from the world markets,
popularly known as CAPM anomalies. Of these, the size-effect and the valueeffect are the two most strongly documented and widely reported studies upon
CAPM anomalies. The existence of these anomalies and the empirical validity of
the Three-Factor Model suggested by Fama and French (1993) were also
examined in the present study and the results obtained are discussed in the next
chapter.
150