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The IUP Journal of Financial Risk Management
An Empirical Study on Stability of Beta in Indian Stock Market with Special Reference to CNX Nifty 50
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This paper investigates the stability of beta in Indian stock markets using 15 years of daily data of CNX Nifty 50 from 2000 to 2015. The Capital Asset Pricing Model (CAPM) beta is computed by using market model regression. Chow breakpoint test is used to examine the impact of the 2008 subprime crisis on the stability of beta. Unknown breakpoints are investigated in the beta series using multiple breakpoint tests on both individual stocks and portfolios. Subsequently, the CUSUM test is adopted to check for the sequential changes in the computed beta series. The results indicate that 2008 subprime crisis does not have much influence on the structure of the beta series. However, a few unknown break points are observed in different time periods. The results show that betas of portfolio as well as individual stocks vary across the study period. The beta stability plays an important role while estimating portfolio returns and the individual stock returns and in devising winning strategies. Therefore, it is highly recommended that the market participants, while using historical betas for predicting future risk of the stock and portfolio, need to be extra cautious.

 
 
 

The two key determinants for holding any financial instrument is its expected reward (return) and risk. Rational investors prefer those financial instruments that have low risk and high returns. That means the securities that have more market risk should offer higher returns to entice the investors. Market risk derives from the accidental changes in the prices of financial assets. How to predict market risk is very vital for the market participants. In common parlance, risk is the chance of financial loss. Assets having greater chances of loss are viewed as riskier than those with lesser chances of loss. Therefore, one can define risk as the variability of the actual return from the expected returns associated with a given asset/investment. The greater the variability, the riskier the security (e.g., shares) is said to be.

The modern theory of portfolio analysis dates back to the seminal work of Harry Markowitz. In this theory, Markowitz advocated that all rational investors select among portfolios on the basis of two parameters: the expected risk (variance) and the expected return associated with that portfolio.

 
 
 

Financial Risk Management Journal, An Empirical Study, Stability of Beta in Indian Stock Market, CNX Nifty