Scribd Logo
Upload

Welcome to Scribd!

  • 11 views

    INTRODUCTION

    Uploaded by

    Pavan H.P.
    This document provides an introduction to asset pricing models and their application in India. It discusses pioneering models like the Capital Asset Pricing Model (CAPM) and more recent models like Fama and French's Three Factor Model. While early studies supported CAPM for India, more recent research has found limitations and instead supported the Three Factor Model. There remains conflicting evidence and a need to re-assess the Three Factor Model using recent Indian data, which is the goal of the research described in this document. It will analyze stock market data from 1999-2013 to evaluate the validity and predictive power of the Three Factor Model in India.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    INTRODUCTION

    Uploaded by

    Pavan H.P.
    11 views1 page
    This document provides an introduction to asset pricing models and their application in India. It discusses pioneering models like the Capital Asset Pricing Model (CAPM) and more recent models like Fama and French's Three Factor Model. While early studies supported CAPM for India, more recent research has found limitations and instead supported the Three Factor Model. There remains conflicting evidence and a need to re-assess the Three Factor Model using recent Indian data, which is the goal of the research described in this document. It will analyze stock market data from 1999-2013 to evaluate the validity and predictive power of the Three Factor Model in India.

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document provides an introduction to asset pricing models and their application in India. It discusses pioneering models like the Capital Asset Pricing Model (CAPM) and more recent models like Fama and French's Three Factor Model. While early studies supported CAPM for India, more recent research has found limitations and instead supported the Three Factor Model. There remains conflicting evidence and a need to re-assess the Three Factor Model using recent Indian data, which is the goal of the research described in this document. It will analyze stock market data from 1999-2013 to evaluate the validity and predictive power of the Three Factor Model in India.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    11 views1 page

    INTRODUCTION

    Uploaded by

    Pavan H.P.
    This document provides an introduction to asset pricing models and their application in India. It discusses pioneering models like the Capital Asset Pricing Model (CAPM) and more recent models like Fama and French's Three Factor Model. While early studies supported CAPM for India, more recent research has found limitations and instead supported the Three Factor Model. There remains conflicting evidence and a need to re-assess the Three Factor Model using recent Indian data, which is the goal of the research described in this document. It will analyze stock market data from 1999-2013 to evaluate the validity and predictive power of the Three Factor Model in India.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    INTRODUCTION

    Asset pricing is a central theme in the finance literature, with pioneering work by Sharpe
    (1964), Lintner (1965), and Black (1972) laying the foundation. The Capital Asset Pricing
    Model (CAPM), introduced by Sharpe in 1964, was a groundbreaking equilibrium model that
    established the relationship between expected returns and the risk of capital assets, building
    upon the work of Markowitz (1952). CAPM asserts that expected returns on securities are
    contingent on the market factor, as captured by a stock's beta, which measures its sensitivity
    to market condition changes. This model discerns between two types of risk: systematic and
    unsystematic. Systematic risk, associated with market conditions, is non-diversifiable, while
    unsystematic risk is firm-specific and can be diversified away. CAPM's fundamental insight
    is that the risk premium is primarily influenced by market risk, not unsystematic risk, making
    beta the key factor in its calculation.
    Stock markets hold significant importance in a country's financial system by facilitating the
    flow of savings from deficit sectors to surplus sectors. They are often considered a crucial
    barometer of an economy, reflecting changes and pressures within it. Policymakers,
    economists, and researchers have long been concerned with these markets and their interplay
    with macroeconomic factors. Various models like the Discounted Cash Flows Model
    (DCFM), Capital Asset Pricing Model (CAPM), and Arbitrage-Pricing Model (APM) have
    been developed to establish relationships between stock returns and these factors. However,
    limitations exist, particularly in developing countries like India, where market imperfections
    and unique characteristics render traditional models less suitable. Existing asset-pricing
    theories also fail to specify the fundamental macroeconomic factors influencing security
    prices. Modern financial theory emphasizes the role of macroeconomic factors as sources of
    risk and suggests that the long-term return on assets must reflect changes in these factors.
    This study, through various methodologies, addresses these factors and offers valuable
    insights for policymakers and investors in shaping their investment strategies. It also
    highlights the pressing issue of stock valuation in the Indian stock markets. The paper covers
    a literature review, data, methodology, and data analysis, and concludes with significant
    findings.
    Since the introduction of Fama and French's Three Factors Model in 1993, a global discourse
    has ensued concerning the validity, reliability, and predictive power of the factors they
    identified for asset pricing. In the Indian context, a multitude of researchers have investigated
    this model, yielding conflicting results and conclusions. Some earlier studies, such as those
    by Yalwar (1988), Srinivasan (1988), and Varma (1988), supported the Capital Asset Pricing
    Model (CAPM) as a suitable descriptor of security returns. However, more recent research,
    including Gupta & Sehgal (1993), Vaidyanathan (1995), Madhusoodanan (1997), Sehgal
    (1997), Rao (2004), Dhankar & Singh (2005), Manjunatha & Mallikarjunappa (2006), and
    others, have contested the CAPM's effectiveness, presenting empirical evidence indicating its
    limitations. Ansari (2000) remained cautious, avoiding a definitive rejection of CAPM. On
    the other hand, some studies, like those by Mohanty (1998 & 2002), Sehgal (2003), and
    Cannon & Sehgal (2003), have supported Fama and French's Three Factors Model as an
    improvement over the standard CAPM. The discordant findings across various studies and
    the growing endorsement of the Three Factors Model underscore the need to assess its
    validity using recent data in the Indian context, which is what this study does, drawing on
    data from the period 1999 to 2013

    You might also like