International Indexed & Referred Research Journal, October,2012. ISSN 0974-2832, RNI- RAJBIL 2009/29954; VoL.

IV * ISSUE- 45

Research Paper - Philosophy

The Estimation of Beta and The Relationship Between Share Return and Beta in the Emerging Market of India
October ,2012 * Scholar Doctor of Philosophy in the faculty of Management, CMJ University ,Meghalaya A B S T R A C T
The capital market theory and stock price behavior is extensively tested in various developed markets, but most of the early studies support the validity of CAPM, while the later studies found that beta is not the sole determinant of share returns. The major objective of this study is to investigate the relationship between risk and return in the emerging market of India. This paper attempts to examine whether there is a significant positive relationship between beta and share return in the Bombay Stock Exchange (BSE) for the period of 1999 - 2010. The empirical results suggest that the overall market movements do not influence share returns. Keywords: CAPM, Industrial Sector, Capital market, systematic risk

* Vaibhav Vishal

Introduction Indian Capital Market has a long tradition and is one of the oldest in Asia and the history records back to nearly 200 years ago. The first stock exchange in India is the Bombay stock exchange which begins its operation in organized form the year 1875. Indian capital market growing and so far it is one of the developed markets in the world. The growth of the capital market in India witnessed unique changes in the last two decades and there was an unprecedented growth, in terms of the number of companies listed, total market capitalization, number of brokers and also in the number of participants. In India, Capital market is one of the most important parts of the financial system and the stock exchanges plays an important role in the economic growth and the growth in the stock market is symbolised as a barometer of economic growth. Currently there are 23 stock exchanges and one over the counter exchange operating in India. Out of which the National Stock Exchanges (NSE) and the Bombay Stock Exchange (BSE) are the biggest in number of companies listed and also in the market capitalization. The capital market is an interface, where investors can buy and sell stocks and other selected financial instruments. In India the growth of technology brought indefinite opportunities and opened an arena for investors particularly in the capital market. Today a cursory glance provides wildering collection of securities from the market and also a numerous number of financial instruments and the stock market becomes an investment avenue for FII's, Institutional investors as well as individual investors. Today the investment arena is very complex and the capital market is over flooded with many financial instruments and large number of securities

Further the Indian market is highly volatile and selecting suitable securities became a quite complex exercise. The investors are risk averse and he expects additional return for the risk he bears. The market is highly complex, highly volatile and unpredictable and a simple mistake and lack of attention may lead to loss of money. The investor should be very alert and a suitable model which will help the investor to pick the best investment option or one which is helpful for analyisng the various alternatives will be useful in decision making. Today investors and analysts are practicing different techniques and models to find out the best investment opportunity which will help reduce the risk and bag more return. In early of 1970s, the extensive tests of the SLB (Sharpe, 1964; Lintner, 1965; and Black, 1972) or Capital Asset Pricing Model (CAPM) by Black et al. (1972), Sharpe and Cooper (1972), and Fama and Macbeth (1973) suggest that expected return is positively related to market beta and beta is the only measure of risk to explain the cross-section of expected returns. But over the past two decades, a number of studies have provided evidence, which contradicts these predictions by showing that the relationship between systematic risk and return is not always significant (e.g., Reinganum, 1981; Lakonishok and Shapiro, 1986; Fama and French, 1992; and Jagadeesh, 1992). The key objective of this study is to investigate the relationship between risk and return in the emerging market of India. The rest of the paper is organized as follows: section 2 incorporates the literature review of this study; data and methodology describes in section 3. Section 4 presents the empirical findings of this study; and concluding remarks are reported in section 5.

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International Indexed & Referred Research Journal, October,2012. ISSN 0974-2832, RNI- RAJBIL 2009/29954; VoL. IV * ISSUE- 45

2.literature Review The most well known measure of financial risk is the systematic risk measured by beta. The importance of beta is also derived from the fact that it creates a link between the stock market (primarily thought investors' expectations) and firm's decisions. The assumption is that when a firm makes a wrong decision, it affects the investors' expectations about the value of its stock. Therefore, stock price changes result in changes in firm's systematic risk. This is the reason behind the interest in systematic risk. The high systematic risk affects the value of the stock negatively However so many studies have been conducted on the validity of CAPM and most of them are on US data.. The studies which tested the CAPM for different countries include: Guy (1977) on the German Stock Exchange; Hawawini and Michel (1982) on the Belgian Stock market; Sareewiwatthana and Malone (1985) on the Thailand Stock Exchange; Green (1990) on the UK market, Bark (1991) on the Korean Stock market, Zhang and Wihlborg (2003) on the Polish Stock Exchange and Dhankar and Kumar (2007) on the Bombay Stock Exchange. Guy (1977) and Dhankar and Kumar (2007) supported the validity of CAPM on the German Stock Exchange and Bombay Stock Exchange. Similarly, Hawawini and Michel (1982) can not reject the hypothesis that the pricing of common stocks on the Brussels Stock Exchange conforms to the capital asset pricing model. On the other hand, Sareewiwatthana and Malone (1985) and Zhang and Wihlborg (2003) reported that beta is linearly related with share returns but both systematic risk and unsystematic risk appears to have positive significant relationship with share return for the Securities Exchange of Thailand and Polish Stock Exchange. Green (1990) also tested the CAPM on the UK private sectors data and found that the CAPM did not hold. In addition, Green (1990) and Bark (1991) evidenced that the CAPM is not valid in UK and Korean markets. There are some findings, which also deviate from the validity of CAPM model and support other explanatory variables of share return. Cohray et al. (1988 found other risk factors such as total risk, unsystematic risk and skewness positively significant with the share return. But Sauer and Murphy (1992) investigated the CAPM on German Stock market data and confirmed that the CAPM was considered as the best model in describing stock returns. Claessens et al. (1996) found evidence against the CAPM by the fact that only nine out of nineteen emerging countries beta were significant, one of which (Pakistan) was negative. Iqbal and Brooks (2007) supported Claessenset al. (1996) that the risk-return relationship is significant

non-linear in the Karachi Stock Exchange. Nevertheless the early studies support the validity of CAPM, most of the later studies found that beta is not the sole determinant of share returns or beta has a little or weak relationship with the share returns. However, a few of the studies support the validity of CAPM despite imperfect nature of those markets arise a conflict in empirical investigation (e.g., Guy, 1977; Hawawini and Mitchel, 1982; Sauer and Murphy, 1992; and Amanulla and Kamaiah, 1998). Gupta and Sehgal (1993) failed to establish a linear risk-return relationship in the Indian market. Similarly, Cheung et al. (1993) and Mobarek and Mollah (2004) reported that in general CAPM is not applicable in the emerging Asian markets. Hence, the pricing mechanisms around the world need to examine for the evaluation of international asset pricing. 3. Data and Methodology This study attempts to investigate the risk and return of different sectors in the emerging market of India. This research investigates whether the coefficient of beta is significantly positive and whether beta is the complete measure of risk to explain share returns. Hence, residual risk does not affect returns in a well-diversified portfolio due to limited supply of securities and concentrated ownership patterns in India. Data of companies has been obtained from the Prowess software. This study includes all main board companies listed on the Bombay Stock Exchange for the period of 1999 - 2010. Daily data for this period forms the sample of this study. In the first stage betas of individual securities are calculated. The following formula is used for calculating the value of Beta. Beta = Coveriance Security with market Variance Market

Alternatively

Where Covariance is a measure of how two variables change together or is related and Variance is a statistical measure of the dispersion of values from the mean.

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International Indexed & Referred Research Journal, October,2012. ISSN 0974-2832, RNI- RAJBIL 2009/29954; VoL. IV * ISSUE- 45

Average Cross-section models:

Both Scholes and Williams (1977) and Dimson (1979) reported that beta is biased upward for frequently traded securities and downward for thin trading. Different types of adjustment process are used for beta estimation. Among them, Scholes and Williams (1977) and Dimson (1979) are widely used. 4. Empirical Analysis This section covers the results of different statistical analyses includes regression analysis. The summary statistics presents mainly the mean and standard deviation of all the variables over the whole sample of 262 companies for period of January1999 to June 2010. For this study, the average share return of sample return varies from 0.12% to 9.91% at a average return of 3.70% with a standard deviation of 1.65% so there is a huge deviation in the return across the different companies. However in case of Beta sample return varies from 0.243% to 2.2581% at a average return of 1.044% with a standard deviation of .338% so there is a huge deviation also in case of Beta across the different companies The average beta of more than one indicates that the individual securities return depends perfectly on market movements and the investors holds a diversified portfolio.

Variables Average Return(Ri) Beta

Table 1: Descriptive Statistics of The Variables Mean Standard Minimum Deviation 3.70960367 1.65778345 0.12717391 1.044255237 0.338314715 0.243644525

Maximum 9.91110294 2.258194944

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