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Behaviour of asset pricing models in pre and post-recession period: an evidence from India

Sawaliya, Priya and Sinha, Pankaj (2018): Behaviour of asset pricing models in pre and post-recession period: an evidence from India.

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Abstract

The study endeavours to assess empirically the performance of various models of asset pricing employing risk factors such as market premium, book to market equity, size, investment, momentum and profitability and attempts to unearth the effects of value, size, investment, momentum and profitability. It also compares the behaviour of five different asset pricing models: standard capital asset pricing model, three and five-factor model of Fama French, four-factor model of Carhart and six-factor model during the periods of pre-recession, recession and post-recession in the Indian equity market. The study uses constituents of S&P BSE 500 as a sample, traded over the period 1st July 2005 to 31st September 2017. The results exhibit that three-factor model is an effective model which brings a lot of improvements over CAPM and suggests that market premium and size factors are the most effective and strong factors explaining the variation in returns, throughout the study period. Four-factor model performs a little better for few portfolios created based on size-momentum during 2009-17 and 2005-17. Five and six-factor model do not make any further improvement if compare with the three-factor asset pricing model. Size effect is present in all the above models and across all the time periods, however, factors such as the premium for profitability, investment and momentum are found redundant during the study period in the Indian equity market.

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