Stability of Beta over Market Phases
International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 50 (2010)
© EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/finance.htm Stability of Beta over Market Phases: An Empirical Study on
Indian Stock Market
Koustubh Kanti Ray
Assistant Professor, Financial Management at Indian Institute of Forest Management (IIFM),
Bhopal, India.
E-mail: raykk@iifm.ac.in
Abstract
The significant role played by beta in diverse aspects of financial decision making has forced people from small investors to investment bankers to rethink on beta in the era of globalization. In the present changing market condition, it is imperative to understand the stability of beta which augments an efficient investment decisions with additional information on beta. This study examined the stability of beta for India market for a ten year period from 1999 to 2009. The monthly return data of 30 selected stocks are considered for examining the stability of beta in different market phases. This stability of beta is tested using three econometric models i.e. using time as a variable, using dummy variables and the Chow test. The results obtained from the three models are mixed and inconclusive. However there are 9 stocks where all the three models reported similar signal of beta instability over the market phases.
Keywords: Stability of Beta, Phase wise beta, Indian Market Beta, Dummy Variable,
Chow Test
1. Introduction
The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964), Lintner (1965) and Mossin
(1966) has been the dominating capital market equilibrium model since its initiation. It continues to be extensively used in practical portfolio management and in academic research. Its essential implication is that the contribution of an asset to the variance of the market portfolio - the asset’s systematic risk, or beta risk - is the proper measure of the asset’s risk and the only systematic determinant of the asset’s
return.
ISSN 1450-2887 Issue 50 (2010)
© EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/finance.htm Stability of Beta over Market Phases: An Empirical Study on
Indian Stock Market
Koustubh Kanti Ray
Assistant Professor, Financial Management at Indian Institute of Forest Management (IIFM),
Bhopal, India.
E-mail: raykk@iifm.ac.in
Abstract
The significant role played by beta in diverse aspects of financial decision making has forced people from small investors to investment bankers to rethink on beta in the era of globalization. In the present changing market condition, it is imperative to understand the stability of beta which augments an efficient investment decisions with additional information on beta. This study examined the stability of beta for India market for a ten year period from 1999 to 2009. The monthly return data of 30 selected stocks are considered for examining the stability of beta in different market phases. This stability of beta is tested using three econometric models i.e. using time as a variable, using dummy variables and the Chow test. The results obtained from the three models are mixed and inconclusive. However there are 9 stocks where all the three models reported similar signal of beta instability over the market phases.
Keywords: Stability of Beta, Phase wise beta, Indian Market Beta, Dummy Variable,
Chow Test
1. Introduction
The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964), Lintner (1965) and Mossin
(1966) has been the dominating capital market equilibrium model since its initiation. It continues to be extensively used in practical portfolio management and in academic research. Its essential implication is that the contribution of an asset to the variance of the market portfolio - the asset’s systematic risk, or beta risk - is the proper measure of the asset’s risk and the only systematic determinant of the asset’s
return.
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