Validity of capital asset pricing method in Indian Stock Market: Black, jensen and scholes and fama and Macbeth methods

A number of empirical studies have been conducted to test the validity of the Capital Asset Pricing Model (CAPM) since its origin. However, few have considered the Indian Stock Market. The purpose of this paper is to test the CAPM to see if it holds true in the Bombay Stock Exchange (BSE). The study uses monthly stock returns from 72 companies listed on the BSE during Nov, 2012 to Nov, 2017. Black, Jensen and Scholes (1972) and Fama and MacBeth methods were used to test the CAPM. We found that the excepted returns and betas are linear related with each other during the study period, which implies a strong support of the CAPM hypothesis. On the other hand, as the CAPM hypothesizes for the intercept, it should equal zero and the slope should equal to the average risk premium, the results from the test support the CAPM that Intercept term of the cross sectional regression is not significantly different from zero. However, the study refutes the CAPM by accepting the hypothesizes that the average excess returns on stocks are not significantly greater than zero and offer evidence against the CAPM. The results from study period show that non-systemic risk has no effect on the return.