Reassessing the Capital Asset Pricing Model in the Indian Equity Market: Evidence from Two Decades of Return Dynamics

Abstract

Structural,institutional,andbehavioralanomalieshavepromptedmuchdiscussionoftheapplicabilityoftheCapitalAsset Pricing Model (CAPM) to emerging markets. The current paper determines the applicability of CAPM to the Indian equitymarketbasedon20yearsofNIFTY50(2005-2025)dataatadaily,weekly,andmonthlyfrequency.Excessreturns are also calculated against the Treasury Bill yield of 91 days and are estimated using heteroskedasticity- and autocorrelation-consistent models. The results show that the frequency-scaled mean returns are negatively skewed, fat-tailed, and have clustered volatility during crisis periods, such as the 2008 global financial crisis and the 2020 COVID-19shock.Robustnesschecksensurethataggregationworkstoremovenoiseandserialcorrelationbutnotpricingerrors, highlighting the weaknesses of a one-factor model. Most importantly, these exceptions are associated with capital structure attributes of Indian companies, such as ownership concentration, leverage practices, and governance frictions, whichexacerbatethesystematicrisksbeyondCAPM.Indiaisthusaglobalcasestudyofatransitionaleconomyinwhich modernization,institutionalimmaturity,andbehavioralinteractionmeettounderminetraditionalassetpricing.Theresults indicate that more sophisticated methods, including mean-Gini preferences, alpha-neutral CAPM and multi-factor or behaviorally informed models, are more explanatory. These findings have important implications on cost-of-capital estimation, policy in emerging markets and the development of future asset pricing models.