The CAPM: Exploring its Empirical Evidence on NSE Nifty-From the Period 2008 to 2023

Abstract

The issue of forecasting or predicting asset returns is fundamental to financial economics and most often the Capital Asset Pricing Model (CAPM) is adopted for estimating the expected rate of return based on systematic risk. This paper focuses on the empirical testing of the CAPM in the Indian market based on the Nifty 50 index from April 2008 to March 2023, which covers the period of the COVID-19 pandemic, the Goods and Services Tax (GST) reforms and demonetisation. In the context of this study, Lintner, Miller and Scholes, Black, Jensen and Scholes tests are used with a new dataset to examine the CAPM. This study examines the empirical validity of the CAPM in the context of the Indian market, more specifically the Nifty 50 index, during a period of significant economic change. Thus, the analysis is centred around the interaction of systematic risk, residual variance and average returns. The study identifies a positive but non-significant relationship between average returns with systematic risk and a slightly higher risk-free return compared to that of Lintner. The variance of residuals also helps to explain average returns, while at the same time, actual returns are higher than market returns. The findings of the current study partially support Lintner, Miller and Scholes’ earlier work while not supporting Black, Jensen and Scholes’(BJS) conclusions. In the context of the BJS methodology, 38 per cent of the securities have significant non-zero alphas, which means CAPM does not operate perfectly in the Indian market. The findings that alphas are non-zero indicate the inefficiency of the National Stock Exchange (Nifty 50), therefore, the need for regulation by agencies such as the Securities and Exchange Board of India (SEBI) arises. Equity analysts and portfolio managers must not only use CAPM for asset valuation blindly without appreciating its empirical flaws. This paper revisits the CAPM with recent data thus enriching the limited literature on the CAPM in the Indian scenario where CAPM has however a very restricted application in explaining asset returns in the context of the Nifty 50.