Validation of Asset Pricing Models with respect to Indian Capital Markets as a Developing Economy

Abstract

The following research study focuses on the Indian capital market as a wider scope of developing economies. We understand the functioning of capital markets in general as well as the structure of the same in the Indian economy. We will look into differences between developing and developed economies. The paper makes a deeper analysis of whether the Capital Asset Pricing Model stands true for the Indian Capital Market over a duration of 10 years’ data. Similarly a hypothetical portfolio was created to assess the validity of the Fama- French model. We also give an analysis of how the market capitalisation to GDP ratio could give any kind of insight to whether the CAPM model gets replicated in that country’s capital market. The paper concludes with a real view analysis beyond the theory of the asset pricing models and verdict on a model which gives better results in the case of a developing economysuch as India. Key words: Asset Pricing Model, CAPM, Fama-French model, Buffett Indicator, Developing economies, Developed economies.