Multifactor Explanations of CAPM Anomalies: An Evidence for Indian Stock Market

Abstract

We evaluate the ability of alternative asset pricing models in explaining returns on various characteristic (company size and value) sorted and prior return ranked portfolios. Data is employed from January, 1997 to June, 2012 for 488 companies listed on BSE-500 index. We find that Fama-French three factor model performs better than one factor capital asset pricing model in explaining mean excess returns on characteristic sorted portfolios. We also observe that Fama-French model partly explains long term, reversal, and momentum profits. Asset pricing results are found to be vibrant to the alternate versions of company size and value factors and choice of different market proxies as the FF model (in all its versions) outperforms CAPM. We further show that the Carhart four factor model involving an additional momentum factor, does not significantly perform better than FF model for different portfolios except short term momentum profits.