Testing the Stability of Beta Over Market Phases

An empirical study in the Indian context

Sromon Das
Student
International Management Institute
New Delhi
India
das.shromon@gmail.com

Abstract
The capital asset pricing model (CAPM) is the standard risk-return model used by
most academicians and practitioners. The underlying concept of CAPM is that
investors are rewarded for only that portion of risk which is not diversifiable. This
non-diversifiable variance is termed as beta, to which expected returns are linked.
The objective of the paper is to test the stability of betas of individual stocks over a
pre-determined period of time using two econometric tests. The author has used data
pertaining to 39 stocks listed on the NSE Nifty, for a period of 104 months (February
1999 to September 2007), and sub-divided the sample period into 3 sub-periods, two
bullish and one bearish. The author found that under one method (regression using
time as a variable), 85% of the stocks had a stable beta, while using the second
method (regression using dummy variables), 65% of the stocks had stable betas. The
reader should note that the results are subject to the sample period chosen and the
basis on which the sample period is classified.

This paper was initially written as a part of course-work for the Applied
Econometrics course. I am grateful to Prof. Deepak Chawla for guiding me through
this paper.

Contents
Abstract .......................................................................................................................... 2
Motivation and Theoretical Underpinnings ................................................................... 3
Data and Methodology................................................................................................... 5
Calculating returns ..................................................................................................... 6
Estimating beta........................................................................................................... 6
Testing the stability of beta ........................................................................................ 7
Use of time as a variable ....................................................................................... 7
Dummy variable regression ................................................................................... 8
Results ............................................................................................................................ 9
Estimating beta over time periods.............................................................................. 9
Testing the stability of beta using time as a variable ................................................. 9
Testing the stability of beta using dummy variable regression................................ 10
Concluding remarks ..................................................................................................... 10
Appendix I: Beta values of individual securities ......................................................... 11
Appendix II: Estimates of regression equation using time as a variable ..................... 14
Appendix III: Estimates of regression equation using dummy variables .................... 17
Appendix IV: NIFTY performance over sample period .............................................. 20
Appendix V: Cumulative Wealth Index for Nifty ....................................................... 21
References .................................................................................................................... 23

Testing the Stability of Beta Over Market Phases

An empirical study in the Indian context

Abstract
The capital asset pricing model (CAPM) is the standard risk-return model used by
most academicians and practitioners. The underlying concept of CAPM is that
investors are rewarded for only that portion of risk which is not diversifiable. This
non-diversifiable variance is termed as beta, to which expected returns are linked. The
objective of the paper is to test the stability of betas of individual stocks over a predetermined period of time using two econometric tests. The author has used data
pertaining to 39 stocks listed on the NSE Nifty, for a period of 104 months (February
1999 to September 2007), and sub-divided the sample period into 3 sub-periods, two
bullish and one bearish. The author found that under one method (regression using
time as a variable), 85% of the stocks had a stable beta, while using the second
method (regression using dummy variables), 65% of the stocks had stable betas. The
reader should note that the results are subject to the sample period chosen and the
basis on which the sample period is classified.

Motivation and Theoretical Underpinnings

Every security or portfolio comprises of two types of risks, systematic and
unsystematic. The systematic risk (or market risk), denoted by beta in the field of
finance and economics, is the risk which is inherent in a stock, and cannot be
diversified away. It is the unsystematic risk, or alpha, which can be diversified away
by various methods. Further, the capital asset pricing model (CAPM), one of the most
established theorems in finance, is based on the premise that a rational investor should
not take on any unsystematic risk, and thus is rewarded for the systematic risk of a
stock, or its beta.
The logical reason why beta cannot be diversified away is because it is correlated with
the return on other assets that are there in the portfolio. Beta can also be interpreted as
financial elasticity, or the sensitivity of the assets returns to market returns. Further,
the beta value also gives some idea on the volatility and liquidity of a stock. One can
roughly denote a stock as volatile if its beta value is more than 1, though there is no
rigid definition as such.
By definition, beta can take the following values:

Negative: This means that the stock and the market move in opposite directions,
which is theoretically possible, but not observed in reality.

Zero: This implies that in whichever direction the market moves, the stock
remains static. Practically examples of such stocks may be rare, but cash comes
closest to having a beta of zero.

Between zero and one: Many stocks can be expected to fall in this range. Stocks
having a beta in this range are said to have volatility lower than the market.

One: Stocks having a beta of one move in tandem with the market. By definition,
the market has a beta of one.

Greater than one: such stocks are said to be volatile. In a bull run, such stocks
prove to be very profitable. However, being volatile, they also take the maximum
hit in the course of a bull run.
The beta value of a stock is an important, but not conclusive, factor to consider in the
course of investing. Investors often try to draw a parallel between the beta and their
risk appetite, since beta is also a measure of risk, or volatility of a stock. However,
beta is calculated on historical data, and there is no way to calculate a leading value of
beta. However, one can get a fair idea of the volatility of a stock from its beta value.
Further, while testing for the stability of beta, one should note that there is probably
no econometric test to determine whether a beta is stable or unstable in absolute
terms. The results of any such test will greatly depend upon the sample time period
chosen and on the basis these time periods are classified.
In this paper, the author has chosen a sample period of 104 months, ranging from
February 1999 to September 2007. NSE Nifty index has been taken as a proxy as a
market index, and the returns on individual securities are regressed with the return
on the Nifty.
3

Beta is generally computed by regressing the return on a stock on the market return.
However, while it is theoretically possible to calculate beta by taking a very long time
series, it may not serve the purpose. This is because the beta may not be stable over
periods of rising, declining or sideward trend.
Since the objective of the paper is to test the stability of the beta across bull and bear
runs, the entire sample period of 104 months, has been further divided into three subperiods.
Period 1: February 1999 to February 2000: Bullish phase. Return on Cumulative
Wealth Index was 72%.
Period 2: March 2000 to April 2003: Bearish/Consolidation phase. Return on
Cumulative Wealth Index was -49%.
Period 3: May 2003 to September 2007: Bullish phase. Return on Cumulative Wealth
Index was 372%.
Though the sample size of 104 months may seem to be small, it was done keeping in
view the fact that the composition of the NSE Nifty keeps changing from time to time.
The stocks selected by the author were included in the index for a major part of the
entire sample period.
Further, beta can be calculated for individual securities as well as portfolios. In this
paper however, the author has considered only individual securities.
The concept of beta has gained prominence largely due to the pioneering works of
Sharpe, Lintner and Mossin. In his 1971 paper, Jerome Baesel investigated the impact
of the length of the estimation interval on the stability of beta estimated. He found that
the stability of beta increases substantially as the length of estimation period
increases. Further, Fabozzi and Francis (1977) employed standard econometric
significance tests to determine the stability of NYSE stocks over bull and bear runs.
The analysis was conducted for individual securities, and the authors concluded that
alpha and beta values are unaffected by market phases. On similar lines, Gooding and
OMalley (1977) examined the stationarity of beta over market phases, though their
focus was on portfolio betas. They are of the opinion that most portfolios are
significantly affected by market trends, and are thus non-stationary. Levy similarly
found that beta is stationary for large portfolios, less stationary for smaller portfolios
and unpredictable for individual securities. He is also of the opinion that predictability
improves as the length of the forecast period increases.

II

Data and Methodology

For the purpose of the study, the author has considered monthly data for 39 stocks
listed on the National Stock Exchange, for the period January 1999 to September
2007.
FIRM
INDUSTRY
ABB
Electrical Equipment
ACC
Cement and Cement Products
Apollo Tyres
Tyres
Asian Paints
Paints
Bajaj Auto
Automobiles: 2&3 Wheelers
Bank of Baroda
Bank
BEL
Industrial Electronics
BHEL
Electrical Equipment
BPCL
Refineries
GAIL
Gas
Glaxo
Pharmaceuticals
Grasim
Cement and Cement Products
HDFC
Financial Institution
HDFC Bank
Bank
Hero Honda
Automobiles: 2&3 Wheelers
Hindalco
Aluminium
HPCL
Refineries
ICICI Bank
Bank
IDBI
Bank
IFCI
Financial Institution
Indian Hotels
Hotels
Infosys
IT
ITC
Cigarettes
L&T
Engineering
M&M
Automobiles: 4 Wheelers
MTNL
Telecommunication
Nicolas Piramal
Pharmaceuticals
ONGC
Oil E&P
Reliance Capital
Financial Institution
Reliance
Refineries
SAIL
Steel and Steel Products
Satyam
IT
SBI
Bank
SCI
Shipping
Sun Pharma
Pharmaceuticals
Tata Chemicals
Chemicals
Tata Power
Power
VSNL
Telecommunication
Wipro
IT

Since closing stock prices are available daily, the monthly averages have been
calculated to get monthly closing values of each of the 39 stocks.

Calculating returns
In this analysis, the author is more concerned with monthly returns than merely
closing prices.
The monthly return on each stock has been computed by the following formula:
rj,t = ln (Pj,t/Pj,t-1)
Where,
Pj,t = Average price of stock j in month t.
Pj,t-1 = Average price of stock j in month t-1, or the previous month.
rj,t = Return of jth stock in month t.
Similarly, the monthly market return has been calculated as:
mt = ln (Nt/Nt-1)
Where
Nt = Average value of NSE-Nifty in month t.
Nt-1 = Average value of NSE-Nifty in month t-1, or the previous month.
mt = Market return in month t.
Our original data consisted of 104 data points (January 1999 to September 2007).
However, while calculating monthly returns, the first observation had to be forgone.
Thus, the sample period for the purpose of our analysis is from February 1999 to
September 2007, i.e. 103 data points.

Estimating beta
In order to estimate the beta values of the individual stocks, the author used the
regression model mentioned below:
rj,t = Bo + B1*mt + U
Where,
rj,t = Return on scrip j at time period t.
mt = Market rate of return at time period t.
U = Random error term.
Bo = Constant term.
B1 = Sensitivity of stock return to market return, or the beta of the stock.

Using the above regression, the beta for every stock has been estimated. In fact, the
author has divided the sample period in three periods.
February 1999 to February 2000: Short bullish phase.
March 2000 to April 2003: Consolidation/bearish phase.
May 2003 to September 2007: Prolonged bullish phase.
The beta for every stock has thus been calculated for each of these sub-periods as well
as for the entire sample period. Thus, for every stock, the author has estimated 4 beta
values, each corresponding to a specific sample period or sub-period.

Testing the stability of beta

The main purpose of this paper is to test the stability of beta over a period of time.
Estimating beta is one thing; what is more important from a practical perspective is
whether it is significant and whether it remains stable over a period of time or not.
In this paper, the stability of beta has been tested by two methods:
- Use of time as a variable.
- Use of dummy variable to measure the change in beta over time.

Use of time as a variable

The stability of beta, or the slope term in a simple regression model, can be tested by
introducing a new variable, which we shall denote as time. As the author had
mentioned above, the entire sample period had been divided into 3 sub-periods. This
new variable, time, will take a unique value for each of these periods. Thus:
For entire period 1 (February 1999 to February 2000), t = 1.
For entire period 2 (March 2000 to April 2003), t = 2.
For entire period 3 (May 2003 to September 2007), t = 3.
The regression model used has been modified accordingly to incorporate the new
variable, time, as shown below:
rj,t = Bo + B1*mt + B2*(t*mt) + U
Where,
rj,t = Monthly return on stock j for period t.
mt = Monthly return on market.
t = Value of time variable (1, 2, or 3, depending upon the period).
U = error term.
Bo, B1, B2 = Coefficients to be estimated.

The above regression equation can be re-framed as below:

rj,t = Bo + (B1 + B2*t)*mt + U
To test for stability of beta, we basically have to see whether the expression B2 is
significant or not. If it is significant, it is implied that the sensitivity of stock return to
market return i.e. (B1 + B2*t)*mt changes with time, and hence, beta is not stable. If
B2 is not significant, (B1 + B2*t)*mt will get reduced to B1*mt , implying that B1, or
the beta of stock, does not vary with time and is thus stable over time.
The statistical significance of B2 can be tested either using the t-statistic or the pvalue.

Dummy variable regression

Another method to test for beta stability is to use dummy variables in the regression
model. The re-defined model is shown below:
rj,t = Bo + B1*mt + B2*D1*mt + B3*D2*mt + U
Where,
D1 = 1, for period 2 (March 2000 to April 2003).
D1 = 0, otherwise.
D2 = 1, for period 3 (May 2003 to September 2007).
D2 = 0, otherwise.
rj,t = return on stock j in period t.
mt = return on market in period t.
U = error term.
Bo, B1, B2, B3 = coefficients to be estimated.
Now, the equation for period 1 would be:
rj,t = Bo + B1*mt + U
The equation for period 2 would be:
rj,t = Bo + B1*mt + B2*D1*mt + U, or
rj,t = Bo + (B1+ B2)*mt + U (Since D1=1 for period 2)
Clearly, the beta would be stable over these two periods if the term B2 is insignificant.
The equation for period 3 would be:
rj,t = Bo + B1*mt + B3*D2*mt + U, or
rj,t = Bo + (B1 + B3)*mt + U (Since D2 = 1 for period 3)
Clearly, the beta would be stable over these two periods if the term B3 is insignificant.
Thus, to see if the beta of a particular stock is stable over time, we need to test the
significance on the terms B2 and B3. This can be done using either the t-statistic or the
corresponding p-values. Even if one of the two terms is significant (B2 or B3), then the
beta of the stock would be deemed unstable over time.

III

Results
As has been mentioned above, the beta of the stocks have been estimated using the
OLS technique of regression. In fact, in a simple linear regression model, beta is
simply the slope coefficient of the equation.

Estimating beta over time periods

It has been mentioned earlier that the beta for the 39 stocks have been computed for
the entire sample period as well as for the sub-periods.
For entire sample period (February 1999 to September 2007), 36 out of the 39 stocks
had betas significantly different from zero at a 5% confidence level.
For sub-period 1 (February 1999 to February 2000), only 9 stocks out of 39 had a beta
significantly different from zero at a 5% confidence level.
For sub-period 2 (March 2000 to April 2003), 30 stocks out of 39 had a beta
significantly greater than zero at a 5% confidence level.
For sub-period 3 (May 2003 to September 2007), 34 out of 39 stocks had beta
significantly greater than zero at a 5% confidence level.

Testing the stability of beta using time as a variable

The regression used to test the stability of beta using time as a variable was:
rj,t = Bo + B1*mt + B2*(t*mt) + U
The significance of B2 will tell us whether beta is stable over the time periods or not.
The logic is that if B2 is insignificant, the equation reduces to rj,t = Bo + B1*mt + U,
thus implying that beta does not vary with time.
The results from the exercise seem to be robust. Out of the 39 stocks, only 5 had a
significant B2, implying that for 34 stocks, B2 was insignificant (equal to zero). On
further analysis, the author also found that out of the 36 stocks that had a significant
beta over the entire sample period, 33 of them had stable betas.

Testing the stability of beta using dummy variable regression

The regression used to test the stability of beta using dummy variables was:
rj,t = Bo + B1*mt + B2*D1*mt + B3*D2*mt + U
The significance of B2 and B3 will tell us whether beta is stable over the time periods
or not. The logic is that if B2 and B3 are insignificant, the equation reduces to:
rj,t = Bo + B1*mt + U, thus implying that beta is stable over time.
Also, for the beta to be truly stable over the entire period, both B2 and B3 should be
insignificant.
The results show that out of the 39 stocks, 10 had either a significant B2 or B3.
Further, the author also found that out of the 36 stocks that had significant betas over
the entire sample period, 25 of them had stable betas.

IV

Concluding remarks
One can see from the results that most of the securities displayed stable betas over the
sample period. The findings also seem to be pretty robust, with 31 stocks having
stable betas under both the methods.
However, the results are largely dependent on the time period chosen and the basis on
which they are classified. We might have obtained different results had we taken a
different sample period or sub-periods. There is no established econometric test which
allows us to test the stability of beta on an absolute basis. Thus, given the sample
period the author has chosen, the hypothesis that betas are stable is valid for a major
proportion of the stocks.

10

Appendix I: Beta values of individual securities

Stock

Beta Values
All Periods

Period 1

Period 2

Period 3

ABB

1.0528
0.0001

1.2892
0.1116

1.2684
0.0001

1.1897
0.0151

ACC

0.6713
0.0679

-3.1103
0.3262

1.7973
0.0000

0.8834
0.0000

Apollo Tyres

1.1769
0.0050

2.3323
0.0992

0.9226
0.0254

1.4194
0.0619

Asian Paints

0.3981
0.0073

1.3479
0.0971

0.1303
0.6346

0.3464
0.0492

Bajaj Auto

0.6301
0.0000

0.5601
0.2780

0.8022
0.0050

0.7178
0.0000

Bank of Baroda

1.0052
0.0000

1.8689
0.0594

1.0598
0.0016

1.1559
0.0001

BEL

1.1696
0.0000

2.9500
0.0471

1.1809
0.0207

0.9225
0.0000

BHEL

1.1123
0.0000

2.2258
0.0248

1.2343
0.0000

1.1276
0.0001

BPCL

1.2194
0.0000

0.9141
0.2418

1.5052
0.0037

1.3416
0.0000

GAIL

1.1071
0.0000

1.0879
0.2683

0.8699
0.0319

1.4587
0.0000

Glaxo

0.7555
0.0000

1.8620
0.0678

0.7162
0.0026

0.6542
0.0000

Grasim

1.2100
0.0000

1.6159
0.1486

1.2871
0.0004

1.1518
0.0000

HDFC

0.5153
0.1660

1.9240
0.5719

-0.0356
0.9213

0.8855
0.0000

HDFC Bank

0.6864
0.0000

0.6376
0.4888

0.2406
0.3029

0.8385
0.0000

Hero Honda

1.2072
0.0000

0.7217
0.3420

2.1222
0.0083

0.7162
0.0000

Hindalco

1.2690
0.0013

1.2744
0.1355

1.1059
0.3339

1.2445
0.0000

HPCL

1.0452
0.0000

0.3720
0.7024

1.7287
0.0000

1.2135
0.0000

11

ICICI Bank

1.0614
0.0000

1.5645
0.2572

0.4320
0.2379

1.1892
0.0000

IDBI

1.3410
0.0000

1.4440
0.0113

0.7111
0.1188

1.8204
0.0000

IFCI

1.2400
0.0001

-0.1333
0.8322

1.1827
0.0104

1.5863
0.0027

Indian Hotels

0.7412
0.0479

0.5532
0.3826

1.0718
0.0001

0.7949
0.2806

Infosys

0.9676
0.0011

2.2953
0.0720

1.5730
0.0002

0.3638
0.4333

ITC

0.9070
0.0109

1.3822
0.0466

0.5800
0.5758

0.7824
0.0000

L&T

1.1471
0.0000

1.6324
0.0027

1.4333
0.0002

0.7681
0.0541

M&M

0.2854
0.1204

-0.5639
0.3240

0.2281
0.5316

0.5529
0.0356

MTNL

1.1884
0.0000

2.2885
0.0059

0.8492
0.0324

1.1975
0.0000

Nicolas Piramal

0.9762
0.0010

1.1924
0.2267

0.2160
0.3696

1.4610
0.0078

ONGC

1.0159
0.0000

1.6557
0.0747

1.0033
0.0074

1.2172
0.0000

Reliance Capital

1.3700
0.0000

0.2490
0.8674

1.8900
0.0000

0.9453
0.0013

Reliance Industries

0.9252
0.0000

1.4753
0.0192

0.8263
0.0109

0.8375
0.0000

SAIL

1.5021
0.0000

0.8868
0.4567

1.6826
0.0012

1.6079
0.0000

Satyam

1.4637
0.0000

1.2431
0.4400

2.1978
0.0077

0.6319
0.0104

SBI

1.1463
0.0000

1.6352
0.0671

1.1607
0.0000

1.1920
0.0000

SCI

1.2349
0.0000

2.4408
0.0429

1.5251
0.0045

1.3469
0.0000

Sun Pharma

1.1941
0.0000

-1.7164
0.0710

1.4991
0.0263

1.2431
0.0000

Tata Chemicals

0.7927
0.0000

1.4357
0.0283

0.6935
0.0120

1.0000
0.0000

Tata Power

1.3876
0.0000

0.2104
0.7362

2.2440
0.0000

1.4455
0.0000

12

VSNL

1.3361
0.0000

Wipro

1.3919

0.9556
0.3609

1.1893
0.0482

1.7667
0.0003

1.0608
0.0003

2.2885
0.5219

0.7825
0.0000

0.0631

Highlighted figures are those which are significant at a 5% confidence level.

13

Appendix II: Estimates of regression equation using time as

a variable
rj,t = Bo + B1*mt + B2*(t*mt) + U
Stock

R-Sqr

Constant

B1

B2

ABB

0.13954

-0.00961
0.59220

0.34092
0.70630

0.29589
0.41090

ACC

0.10742

-0.01611
0.49685

-2.65051
0.02843

1.38067
0.00437

Apollo Tyres

0.07748

-0.02289
0.40997

1.89665
0.17729

-0.29916
0.59072

Asian Paints

0.07671

0.00619
0.52848

0.84708
0.08941

-0.18662
0.34375

Bajaj Auto

0.20620

0.00367
0.67622

-0.08267
0.85209

0.29624
0.09482

Bank of Baroda

0.21172

0.00088
0.94591

0.81907
0.21490

0.07737
0.76723

BEL

0.24134

0.02770
0.07578

3.01832
0.00019

-0.76840
0.01469

BHEL

0.25874

0.00078
0.95103

0.89179
0.16469

0.09165
0.71800

BPCL

0.27096

-0.01529
0.25670

1.00956
0.13881

0.08723
0.74619

GAIL

0.29780

-0.00467
0.69228

0.15978
0.78847

0.39376
0.09820

Glaxo

0.22513

-0.00581
0.54041

1.06875
0.02734

-0.13022
0.49375

Grasim Cements

0.32995

0.00920
0.42859

1.53030
0.01019

-0.13314
0.56753

HDFC

0.03798

-0.01099
0.65747

-1.18006
0.34652

0.70467
0.15814

HDFC Bank

0.19889

0.02058
0.02836

0.87476
0.06394

-0.07831
0.67381

Hero Honda

0.16703

-0.01585
0.38990

1.92933
0.03974

-0.30014
0.41643

Hindalco

0.09696

-0.03269
0.21039

1.15622
0.37909

0.04688
0.92832

HPCL

0.22013

-0.01632
0.22691

0.37286
0.58329

0.27943
0.30156

14

ICICI Bank

0.22528

0.02006
0.13694

1.67452
0.01482

-0.25483
0.34443

IDBI

0.24937

-0.01006
0.53822

0.00689
0.99333

0.55452
0.09255

IFCI

0.18670

-0.00628
0.74939

-0.89108
0.36992

0.88576
0.02636

Ind Hotel

0.03837

-0.02173
0.38714

0.45255
0.72076

0.11998
0.81139

Infosys

0.15085

-0.01889
0.32089

3.22776
0.00104

-0.93942
0.01499

ITC

0.06208

-0.02815
0.23631

1.05787
0.37712

-0.06272
0.89491

L&T

0.21296

0.00933
0.54015

2.04005
0.00901

-0.37115
0.22540

M&M

0.04869

-0.00869
0.47622

-0.67390
0.27472

0.39872
0.10497

MTNL

0.32338

-0.01999
0.08943

1.81120
0.00267

-0.25886
0.27051

Nicolas Piramal

0.10648

-0.02047
0.29445

0.24907
0.79992

0.30222
0.43939

ONGC

0.24572

0.00055
0.96342

0.86145
0.15545

0.06417
0.78892

Reliance Capital

0.26570

0.01437
0.35354

2.04189
0.01003

-0.27928
0.36833

Reliance Industries

0.32601

0.01370
0.13297

1.46427
0.00180

-0.22407
0.21948

SAIL

0.29687

0.00800
0.60973

0.80719
0.30863

0.28883
0.35881

Satyam

0.19343

-0.02662
0.22709

3.57982
0.00163

-0.87954
0.04783

SBI

0.39380

0.00435
0.64833

1.15598
0.01794

-0.00402
0.98322

SCI

0.21421

0.00244
0.87786

1.32354
0.10080

-0.03685
0.90781

Sun Pharma

0.16276

-0.00846
0.64464

0.66331
0.47421

0.22060
0.54888

Tata Chemicals

0.22697

-0.00335
0.74261

0.06432
0.90059

0.30275
0.14094

Tata Power

0.38272

-0.00382

0.40517

0.40833

15

0.75266

0.50759

0.09465

VSNL

0.20992

-0.02599
0.13962

1.81193
0.04227

-0.19779
0.57312

Wipro

0.14211

-0.03745
0.13485

3.29765
0.00988

-0.79209
0.11489

Highlighted figures are those which are significant at a 5% confidence level.

16

Appendix III: Estimates of regression equation using

dummy variables
rj,t = Bo + B1*mt + B2*D1*mt + B3*D2*mt + U
Stock

R-Sqr

Constant

B1

B2

B3

ABB

0.14234

-0.00580
0.76245

0.39158
0.58481

0.75267
0.39206

0.75996
0.33030

ACC

0.21191

0.01403
0.55676

-3.21100
0.00047

4.99635
0.00001

4.09258
0.00005

Apollo Tyres

0.08612

-0.03287
0.26804

2.24052
0.04469

-1.49689
0.27044

-1.03931
0.38788

Asian Paints

0.10099

0.00027
0.97907

1.04163
0.00827

-0.89661
0.06134

-0.63465
0.13426

Bajaj Auto

0.21903

0.00783
0.40294

-0.05410
0.87674

0.79483
0.06529

0.77606
0.04287

Bank Of Baroda

0.21225

-0.00037
0.97900

0.97708
0.06333

-0.07284
0.90930

0.09943
0.86088

BEL

0.25217

0.02082
0.20800

2.69293
0.00003

-1.59356
0.03658

-1.84061
0.00691

BHEL

0.25893

0.00153
0.91011

0.93486
0.06725

0.18214
0.76930

0.21662
0.69425

BPCL

0.27488

-0.01163
0.41902

0.86088
0.11089

0.52664
0.42401

0.33624
0.56476

GAIL

0.30083

-0.00755
0.54982

0.73921
0.11898

0.04791
0.93389

0.66018
0.19951

Glaxo

0.22811

-0.00800
0.43113

1.07949
0.00520

-0.39277
0.39841

-0.35711
0.38686

Grasim Cements

0.32996

0.00900
0.47025

1.41047
0.00299

-0.15795
0.78158

-0.27542
0.58600

HDFC

0.04226

-0.01714
0.51825

-0.07936
0.93610

-0.03299
0.97830

1.13775
0.29188

HDFC Bank

0.24067

0.01270
0.19144

1.30401
0.00047

-1.02371
0.02259

-0.50470
0.20105

Hero Honda

0.20441

-0.00135
0.94421

0.69551
0.33492

1.43897
0.10509

0.04004
0.95920

Hindalco

0.09716

-0.03411
0.22262

1.29471
0.21515

-0.12376
0.92270

0.03093
0.97819

HPCL

0.25487

-0.00575

-0.02823

1.54700

1.02556

17

0.68331

0.95724

0.01810

0.07558

ICICI Bank

0.27281

0.00770
0.58070

2.21587
0.00004

-1.73781
0.00745

-1.05567
0.06433

IDBI

0.26197

-0.01793
0.30291

1.06823
0.10162

-0.38951
0.62414

0.76146
0.28139

IFCI

0.19188

-0.00045
0.98307

-0.38107
0.62721

1.58565
0.10129

2.02921
0.01893

Ind Hotel

0.04120

-0.01667
0.53505

0.24656
0.80573

0.72715
0.55431

0.46351
0.67081

Infosys

0.15272

-0.01557
0.44426

2.07477
0.00727

-0.54159
0.56078

-1.73235
0.03787

ITC

0.06418

-0.03232
0.20441

1.26367
0.18406

-0.56289
0.62796

-0.30960
0.76377

L&T

0.21574

0.01269
0.43641

1.45237
0.01850

0.03215
0.96559

-0.59381
0.37012

M&M

0.04963

-0.00727
0.57804

-0.36691
0.45247

0.56959
0.34173

0.86035
0.10701

MTNL

0.34809

-0.02829
0.02311

2.08726
0.00001

-1.25525
0.02755

-0.88458
0.07872

Nicolas Piramal

0.13129

-0.03254
0.11611

1.32864
0.08612

-1.14572
0.22553

0.07133
0.93198

ONGC

0.24798

-0.00189
0.88274

1.08252
0.02529

-0.22806
0.69711

0.02075
0.96815

Reliance Capital

0.28715

0.02420
0.14046

1.12980
0.06610

0.89943
0.23034

-0.12457
0.85095

Reliance Industries

0.33208

0.01050
0.27927

1.44637
0.00012

-0.60810
0.17181

-0.58954
0.13576

SAIL

0.30154

0.01275
0.44680

0.79004
0.20811

0.85877
0.26388

0.78751
0.24826

Satyam

0.20522

-0.01675
0.47413

2.06438
0.01960

0.30491
0.77559

-1.32298
0.16523

SBI

0.39425

0.00339
0.74046

1.21420
0.00192

-0.11997
0.79774

-0.05074
0.90276

SCI

0.21430

0.00308
0.85648

1.24560
0.05216

0.03969
0.95936

-0.04552
0.94748

Sun Pharma

0.17858

0.00091
0.96256

0.27986
0.70048

1.34573
0.13331

0.85546
0.28079

Tata Chemicals

0.22804

-0.00476
0.66317

0.45795
0.26333

0.13347
0.78965

0.54317
0.22273

Tata Power

0.45823

0.01193

-0.20069

2.29739

1.51219

18

0.32745

0.65853

0.00007

0.00274

VSNL

0.20996

-0.02644
0.16070

1.64328
0.02063

-0.25206
0.76910

-0.41556
0.58560

Wipro

0.15160

-0.02771
0.29804

1.87792
0.06048

0.37698
0.75647

-1.15374
0.28598

Highlighted figures are those which are significant at a 5% confidence level.

19

Appendix IV: NIFTY performance over sample period

Nifty

6000

5000

4000

3000

Nifty

2000

1000

Graph showing performance on NSE Nifty over the sample period.

20

Appendix V: Cumulative Wealth Index for Nifty

Sub-Period
1
Feb-99
Mar-99
Apr-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99
Jan-00
Feb-00

Nifty 1+Return
Return
0.0051
1.0051
0.1078
1.1078
-0.0648
0.9352
0.1097
1.1097
0.0488
1.0488
0.1060
1.1060
0.0367
1.0367
0.0301
1.0301
0.0351
1.0351
-0.0496
0.9504
0.0511
1.0511
0.1128
1.1128
0.0478
1.0478

Cum
Return
1.0051
1.1134
1.0413
1.1555
1.2118
1.3403
1.3895
1.4313
1.4816
1.4080
1.4800
1.6469
1.7256

Sub-Period
2
Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03

Nifty 1+Return
Return
-0.0492
0.9508
-0.0889
0.9111
-0.1126
0.8874
0.1007
1.1007
-0.0045
0.9955
-0.0675
0.9325
0.0149
1.0149
-0.1321
0.8679
0.0319
1.0319
0.0402
1.0402
0.0196
1.0196
0.0409
1.0409
-0.1219
0.8781
-0.0842
0.9158
0.0378
1.0378
-0.0461
0.9539
-0.0267
0.9733
-0.0084
0.9916
-0.1186
0.8814
0.0047
1.0047
0.0783
1.0783
0.0420
1.0420
0.0105
1.0105
0.0458
1.0458
0.0184
1.0184
-0.0339
0.9661
-0.0372
0.9628
-0.0130
0.9870
-0.0297
0.9703
-0.0236
0.9764
-0.0481
0.9519
-0.0123
0.9877
0.0983
1.0983
0.0409
1.0409
-0.0484
0.9516
0.0205
1.0205
-0.0835
0.9165

Cum
Return
0.9508
0.8663
0.7688
0.8462
0.8424
0.7856
0.7973
0.6920
0.7141
0.7428
0.7573
0.7883
0.6922
0.6339
0.6579
0.6275
0.6108
0.6057
0.5338
0.5363
0.5783
0.6026
0.6089
0.6368
0.6486
0.6266
0.6033
0.5955
0.5778
0.5642
0.5370
0.5304
0.5826
0.6064
0.5771
0.5889
0.5397

21

Apr-03

Sub-Period
3
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07

-0.0462

0.9538

0.5148

Nifty 1+Return
Return
0.0750
1.0750
0.1191
1.1191
0.0446
1.0446
0.1345
1.1345
0.0437
1.0437
0.0934
1.0934
0.0374
1.0374
0.1516
1.1516
-0.0380
0.9620
-0.0052
0.9948
-0.0159
0.9841
0.0136
1.0136
-0.1911
0.8089
0.0147
1.0147
0.0808
1.0808
-0.0003
0.9997
0.0674
1.0674
0.0308
1.0308
0.0845
1.0845
0.0603
1.0603
-0.0111
0.9889
0.0219
1.0219
-0.0327
0.9673
-0.0676
0.9324
0.0928
1.0928
0.0618
1.0618
0.0405
1.0405
0.0308
1.0308
0.0870
1.0870
-0.0928
0.9072
0.1121
1.1121
0.0672
1.0672
0.0564
1.0564
0.0242
1.0242
0.1013
1.1013
0.0305
1.0305
-0.0965
0.9035
-0.0181
0.9819
0.0048
1.0048
0.0826
1.0826
0.0499
1.0499
0.0425
1.0425
0.0547
1.0547
0.0030
1.0030
0.0289
1.0289
-0.0863
0.9137
0.0202
1.0202
0.0674
1.0674
0.0496
1.0496
0.0052
1.0052
0.0476
1.0476
-0.0144
0.9856
0.1177
1.1177

Cum
Return
1.0750
1.2030
1.2567
1.4257
1.4879
1.6270
1.6879
1.9438
1.8701
1.8603
1.8307
1.8555
1.5009
1.5229
1.6460
1.6454
1.7563
1.8104
1.9634
2.0817
2.0587
2.1039
2.0351
1.8975
2.0736
2.2017
2.2908
2.3614
2.5668
2.3287
2.5898
2.7638
2.9196
2.9904
3.2934
3.3940
3.0664
3.0109
3.0253
3.2752
3.4385
3.5845
3.7805
3.7919
3.9015
3.5649
3.6368
3.8818
4.0744
4.0957
4.2906
4.2288
4.7263

22

References
Alexander, G., Sharpe, J., & Chervany, N. (1980). On the estimation and stability of
beta. Journal of financial and quantitative analysis , Vol XV No.1.
Baesel, J. (1971). On the assessment of risk: Some further considerations. Journal of
Finance .
Bildersee, J., & Roberts, G. (1981). Beta instability when the interest rate level
changes. Journal of finance and quantitative analysis .
Blume, M. (1971). On the assessment of risk. Journal of finance .
Chalwa, D. (2001). Testing the stability of beta in the Indian stock market. Decision ,
Vol 28, No.2.
Edward, A., & Bertrand, I. (1974). Comparative analysis of risk measures: France and
the United States. Journal of Finance .
Fabozzi, F., & Francis, J. (1977). Stability tests for alphas and betas over bull and
bear market conditions. Journal of Finance .
Gooding, A., & O-malley, F. (1977). Market phases and stationarity of beta. Journal
of finance and quantitative analysis .
Levy, R. (1971). Stationarity of beta coefficients. Financial analyst's journal .

23