Beta stability - evidence from Indian Market

One of the most prominent and extensively used asset pricing model, the traditional Capital Asset pricing model (CAPM) developed by Sharpe, Lintner and Mossinelucidate asset returns as a linear function of its systematic risk. The model is based on the assumption that higher the systematic risk of an asset, higher will be its returns. Beta, the measure of systematic risk is a popular, simple and useful metrics both in the investment industry as well as academia. The CAPMassumes beta to be constant. The beta stability plays a vital role in portfolio risk management. The correct estimation of beta coefficient is vital for making financing and investment decision. This paper tests the stability of beta across time in the context of Indian Equity market. The stability of beta is tested for twelve prominent sectoral indices of Bombay Stock Exchange (BSE). The results obtained show variation in beta across time in case of many of the cyclical and defensive sectors. Though the significance of time variable is more in case of cyclical sectors whereas the defensive sectors. Mostly the extreme betas (both very high and very low) display higher variation than the in-between range of betas. Therefore, it's extremely advisedto require additional caution by market participants, while using historical beta for predicting future risk of stock and portfolios.